To trade any pattern, you need to first know how it looks like and what makes it that specific pattern. The same thing goes for harmonic patterns.
Harmonic patterns are hard to spot with your own eyes but once you have understood the trick, it becomes so easy for you to identify and trade them
The following 3 steps will help you step by step to learn how to trade harmonic patterns.
1. Locating the potential harmonic pattern.
These harmonic patterns tend to look the same by their formations. So just looking at it, you may not be able to tell which one is a Butterfly or Gartley or any.
But once you have spotted it, then you are one step to trading it. The next step will help you learn how to differentiate the different patterns.
Let’s use an example, Suppose you have spotted the pattern below on USDCHF, 4-Hour chart.
2. Identify the potential pattern
Harmonic patterns are differentiated by their Fibonacci measurements. Using the Fibonacci levels you can tell whether the pattern you have spotted is a Crab or A-B-C drive or may be a Bat.
Now let’s use the Fibonacci retracement and extension to take measurements for the above pattern, so that we get to know what it is.
From the above chart, XA and AB retracement levels are represented by broken line in black and blue respectively and extension levels are marked by the pink lines.
- Move AB is 61.8% retracement of XA.
- Move BC is 50.0% retracement of AB
- Move CD is 224% extension of move BC
- CD is 161.8% retracement of move XA.
With these measurements, according to our previous lessons, guess what animal we have. It is a Crab!
Ready to go to the next step.
3. Taking a position/entry
All harmonic patterns are traded the same way. What is important is to wait for the pattern to complete formation and then you take either a buy or sell position depending on the pattern you want to trade.
Now that we have identified the exact pattern, we are ready to take a buy position since it is a Bullish crab. All you need is to wait for the pattern to complete at D and you buy.
Now, the interesting part, taking the trade, setting stop-loss and targets.
Let’s take a look once more on our example on how this would be done;
From our example above, the Buy entry signal is at D after Hammer formation. The stop loss is placed below the Hammer. The safe target lies within 38.2-61.8% of AD move as shown above. The most important point to ensure is to have a favorable risk reward ratio.
NB. While trading these patterns, it’s important to recognize the areas of support and resistance and set clear stop and target levels.
Other wise once you have learnt how to spot the real harmonic pattern you have high chances of your target profits being hit. It may seem hard at the beginning but with Practice you will be able to grasp them.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...