Harmonic Patterns in Forex Trading

Certain chart patterns can serve as the foundation for advanced strategies. While not necessarily difficult to understand, these patterns are prone to false signals, making experience valuable. This lesson covers four advanced chart patterns:

• ABCD pattern
• Gartley pattern
• Crab pattern
• Butterfly pattern

ABCD Pattern The ABCD pattern consists of three consecutive price swings, forming a lightning bolt shape on your chart. It is named ABCD due to the four points identified.

This pattern can signal bullish or bearish trends based on the direction of the swings:

• Bearish Signal: Points B and D are higher than A and C.
• Bullish Signal: Points B and D are lower than A and C.

The ABCD pattern reflects a balance between price and time, known as measured moves, with three guidelines:

1. Price and Time: Distance and time from A to B and C to D are equal.
2. Classic ABCD: Retracement between B and C is 61.8% or 78.6% of AB, and CD extends 127.2% or 161.8% of BC.
3. ABCD Extension: CD extends 127.2% to 161.8% of AB.

   These figures correspond to Fibonacci ratios, used to confirm the ABCD pattern’s range. Each leg usually spans 3-13 periods on any timeframe. Longer patterns may suggest switching to a larger timeframe for trend/Fibonacci convergence. The ABCD pattern is a leading indicator, useful for predicting movements but susceptible to false signals.

   Gartley Pattern Identified by H.M. Gartley and found on page 222 of his book, the Gartley pattern is an ABCD pattern preceded by a high or low, indicating a correction before the overall trend continues.

   

   • Bearish Gartley: A high (X) followed by a sell ABCD pattern, with D as the sell signal.
   • Bullish Gartley: A low (X) followed by a buy ABCD pattern, with D as the buy signal.

   Characteristics:

   • Move A to B is a 61.8% retracement of XA.
   • Move B to C is 61.8% or 78.6% retracement of AB.
   • If BC is 38.2% of AB, CD retraces 127.2% of BC. If BC is 88.6% of AB, CD extends 161.8% of BC.
   • Move C to D is a 78.6% retracement of XA.

   Point D signals the resumption of the original trend. The Gartley pattern forms the basis for other advanced patterns, like the crab and butterfly.

   Crab Pattern Identified by Scott Carney in 2000, the crab pattern is considered highly accurate among harmonic patterns.

   

   Characteristics:

   • Move A to B is a 38.2% or 61.8% retracement of XA.
   • Move B to C is a 38.2% or 61.8% retracement of AB.
   • If BC is 38.2% of AB, CD extends 224% of BC. If BC is 61.8% of AB, CD extends 361% of BC.
   • CD extends 161.8% of XA.

   Point D signals the trend’s resumption.

   Butterfly Pattern The butterfly pattern, a type of Gartley pattern, occurs when AB is a 78.6% retracement of XA.

   

   Setup:

   • AB is a 78.6% retracement of XA.
   • BC is 38.2% or 88.6% retracement of AB.
   • If BC is 38.2% of AB, CD extends 161.8% of BC. If BC is 88.6% of AB, CD extends 261.8% of BC.
   • CD extends 127% or 161.8% of XA.

   Point D signals the trend’s resumption.

   Harmonic patterns, while advanced and prone to false signals, can be powerful tools for experienced traders to predict market movements and optimize trading strategies.