Harmonic Price Patterns
Harmonic patterns are formations based on geometry and mathematical fractals. The basic concept behind harmonic trading is primary ratio and its derivatives (1.618, 0.618, etc.). Harmonic patterns work as powerful signs of potential trend reversals and can be either bullish or bearish.
Which are the Basic Harmonic Patterns?
There are six (6) basic harmonic patterns. These formations are more reliable when trading in M30 and higher timeframes. The general win / lose ration of harmonic trading strategies is above 70%.
- ABCD Pattern
- Three-Drive Pattern
- Gartley 222 Pattern
- Harmonic Bat Pattern
- Harmonic Crab Pattern
- Harmonic Butterfly Pattern
Key Issues for trading with Harmonic Patterns
These are some key issues when trading with harmonic patterns:
- Traders should open their Long or their Short Positions by the time a harmonic pattern is near to completion
- It is more reliable to identify harmonic patterns in longer timeframes (above M30)
- Harmonic Patterns in higher time frames should not conflict with each other
- In general, Risk / Reward ratio must be above 1:3
- Each harmonic pattern shows different behavior according to the market movement
Key questions when trading with Harmonic Patterns
- Does the price action indicates the existence of a potential pattern?
- What is this pattern?
- Is it a basic ABCD pattern or another harmonic pattern?
- Are there any other harmonic patterns in other timeframes that can confirm or can cancel this pattern?
- Do time cycles confirm the existence of this pattern? (Time symmetry)
- At what point this pattern will come to completion?
- At what price the pattern will not be longer valid? (Close to this price you may place your Stop-Loss order)
- What is the optimal price for taking my profits (Take-Profit order)
- What is the Risk/Reward of that trade? (Risk/Reward must be above 1:2 or even better 1:3)
- How much of my capital should I risk in this trade? (Choosing Capital Leverage)
■ What are Harmonic Patterns
Technical Analysis Map
What is Technical Analysis?
Technical Analysis aims to forecast the future price movement of all financial traded assets. This forecast is based on historic price movement and focuses on two aspects: (i) current price and (ii) past price behavior. Actually, technical analysis can not forecast the future but it can help investors draw a probability table consisting probable future price scenarios. More specifically technical analysis may:
(1) Help investors to optimize their investing decisions by buying oversold assets and by selling overbought assets
(2) Help investors optimize their entry / exit levels in every position they open / close
Technical analysis is applicable to all financial traded assets (Forex, commodities, stocks, indices, bonds, etc). Technical analysis combined with fundamental analysis form a complete framework of investing analysis.
Technical Analysis Basics
Technical analysis which is based on the old Dow Theory consist two basic assumptions:
- The Price discounts everything
- The Price Movement of financial traded assets is not Random
Tony Plummer, in his book: “The Psychology of Technical Analysis” wrote that ‘Technical analysts know the price of everything, but the value of nothing’. This is partly true and that is why technical analysis should always be used along with fundamental analysis.
Technical Analysis Map
Here is a map with almost all important technical analysis tools.
What are Round Numbers?
Round numbers are numbers that end in zero numbers. For example in EURUSD some zero-number prices are 1.2810, 1.2920, 1.3030 etc. In another example the zero-number prices of GBPUSD are 1.5020, 1.5030, 1.5040 etc. Historically, zero-ending quotes had played a major psychological effect on Forex Traders. People have the tendency to give orders in round (zero-ending) numbers. The total effect is great and thus Round Numbers constantly offer some important Support & Resistance Levels. This phenomenon can be seen in every Financial Market and especially as concerns Forex. A simple explanation is that as humans we have the tendency to seek for simplicity in our actions.
What are Whole Numbers?
Whole numbers in Forex Trading involve double-zero ending quotes. For example some whole numbers in EURUSD are 1.2100, 1.2200, 1.2300 etc. Whole or double-zero numbers play a huge role in Forex Trading. Massive orders are placed before pairs reach whole numbers. Usually, when currency pairs are reaching round-numbers, their volume activity booms.
Whole Numbers Effect -An Example on Forex Trading
Day-Traders are highly respecting Whole Numbers. For example let’s suppose that a Trader has opened a long position on EURUSD at 1.2850 and targets 1.2910. As the whole number EURUSD price of 1.2900 is close, he will not probably wait until 1.2910. He will alter his take-profit order to 1.2898-1.2900, in a way that he can be sure that if EURUSD reaches 1.2900 his profit will be assured. Maybe if EURUSD brakes for some minutes 1.2900 and moves higher he may open a new position again by keeping a stop-loss at 1.2898.