Harmonic Patterns Part II Gartley and ABCD pattern

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Harmonic Patterns Part II: Gartley and ABCD pattern

I hope you had a profitable day. Only one trade for me today cause I had some work to do. It was an ITM call based on an effective pattern, ABCD pattern. In this article I will explain this pattern and the reasons I took my today trade and moreover I will talk about another harmonic pattern, the Gartley. For my introductory article on harmonic patterns please click here. My today trade.

Now let’s go to the first screenshot of the day which is my trade in EUR/JPY.

The yellow lines are fibonacci levels.I know there is a confusion but I will explain everything.Look at the four letters in the screenshot. We have three pairs of letters,A-B , B-C and C-D. The first pair A-B is a small down trend. The second pair B-C is a small up trend and a 78.6 fibonacci retracement of the leg A-B.It could be also 38.2 or 50 or 61.8 fib retracement but nothing over 78.6 fib retracement.Now,look at C-D leg which is a small down trend.If we have these retracements in the first two legs we should expect a reversal in letter D (which could be a 127 or 161.8 fib extension of the leg B-C) and the beginning of a new up trend.This is a ”bullish ABCD pattern”.

I was waiting the price to touch and close in the 161.8 fib extension and I took a call which was ITM.The price made a big reversal and after that we had the beginning of a new up trend as you can see in the screenshot.Now, let’s talk about the confirmation I had. The first confirmation is the 8 period RSI, like every trade of mine, which was in an oversold condition but when I trade ABCD or other harmonics I want more confirmation.You can’t see it in the screenshot but this 161.8 fib extension was a previous resistance which broke and now it acts like a support(change of polarity strategy). We have an ABCD pattern, oversold and last but not least a support area.Now, we have enough evidence to take a solid trade.Other confirmation you could have is a daily Pivot for support or a whole number or a previous support line.

The Gartley Pattern

If you are trading and looking for harmonic patterns the “Gartley” is the most often pattern you can see.Look at the screenshot.

We have four pairs of letters. X-A , A-B, B-C and last C-D. The leg A-B should be a 61.8 fibonacci retracement of the leg X-A. B-C should be a 38.2 or 88.6 fib retracement of the leg A-B and finally the leg C-D should be a 78.6 fib retracement of the leg X-A. If you have these retracements the Gartley Pattern is ready. We should expect a reversal in the letter D and maybe the beginning of a new trend. In our case 78.6 fib retracement is a past support(you can’t see it in the screenshot but you should always look for past price levels), our RSI is oversold and we have a crossover in the stochastic oscillator near level 20.

Gartley Harmonic Pattern Trading Strategy

The Gartley Harmonic pattern trading strategy will teach you how to trade the Gartley pattern and start making money with a new concept to technical analysis. The Gartley harmonic pattern is part of the Harmonic trading chart patterns.

Our team at Trading Strategy Guides is building the most comprehensive step-by-step guide into Harmonic trading, and we highly advise you to first start reading the introduction into the harmonic patterns which you can find here: Harmonic Pattern Trading Strategy- Easy Step By Step Guide.

It’s necessary to read the introductory article into the harmonic patterns as this will give you a better understanding of how to trade the Harmonic Gartley.

Over the years, many people have been looking at the market and seeing different things, but Scott Carney, who found the harmonic patterns, noticed that a certain pattern always appears to lead to good trading opportunities.

This chart pattern is called the Gartley chart pattern, also known as the Gartley 222.

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In financial markets, there is one primary high-probability reason to enter a trade: a good risk to reward ratio that can ensure you’re always going to win more than you lose. And the Gartley chart pattern can help you achieve your financial goals. We also have training on How to Trade with the Gartley Pattern.

Introduction to Gartley Pattern

Trade management of open orders or taking the last small position of the week are tasks we can still do. But usually speaking, if you do any trading at all at the end of the trading week, you would want to keep the trading light… especially if you are up in profit. Never give back what you earned in the first four days.

The focus of this article is on Gartley Patterns and trading the patterns. Also read about Trader’s Tech and Installing MT4 EAs with Indicators. The Gartley pattern was first introduced by H.M. Gartley in his book “Profits in the Stock Market” which was published in 1935. The pattern was named “The Gartley,” but in fact, many variations of the Gartley pattern have become common ever since the book’s release. Gartley patterns are chart patterns used in technical analysis and are known for their relationship using Fibonacci numbers and ratios. The Gartley pattern is a reversal pattern with clear rules and provides an excellent reward to risk.

“Classical” chart patterns are considered to be: flag, pennant, wedge pattern, triangle, range, rectangle, flat, head and shoulders, inverted head and shoulders, double top and bottom, trip top and bottom, gap, cup and handle, broadening top. Some of these patterns are reversal signals, others are continuation patterns. Most of the classical charts patterns use Fibonacci levels as well. A flag will typically find support levels at the various Fibonacci points (such as 23.6% and 38.2%) of various swing highs and lows but they are not so prominently used as in Gartley. Read more here.

5 Gartley Letters

The Gartley is using 5 letters to distinguish the 5 separate moves/waves/impulses. Here is an introduction:

  • The letter X is the start of the trend;
  • The letter A is the end of the trend;
  • The letter B is the first pullback of the trend;
  • The letter C is the pullback of the pullback (not breaking point A);
  • The letter D is the target of the letter C.

The various Fibonacci relationships between XA and AB have a value when calculating targets for B, C and D. Depending on the type of Fibonacci level the pattern is commonly named differently. The pattern is valid for both a down and an uptrend. In general, though, there is also a close link to the Elliott Wave Theory. The AB, BC, and CD legs are also known in EW as an ABC correction of XA and a continuation of the XA direction can be expected at point D.

Gartley and The Animals: Types of Gartley Patterns

GARTLEY

This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 61.8% Fibonacci retracement level. The target of point D is, in fact, using the same XA swing high swing low and is aiming for the 78.6% Fibonacci retracement level of XA. The CD leg is therefore often equal to the AB leg.

Other modern variations that have become popular are listed here below.

BAT PATTERN

This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 38.2% or 50% Fibonacci retracement levels (but not more than 61.8%). The target of point D is, in fact, using the same XA swing high swing low and is aiming for the 88.6% Fibonacci retracement level of XA. The CD leg is, therefore, longer than the AB leg.

ALTERNATE BAT PATTERN

This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 38.2% Fibonacci retracement level. The target of point D is beyond the origin of XA and is 1.13 of XA.

BUTTERFLY

This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 78.6% Fibonacci retracement level. The target of point D is beyond the origin of XA and is 1.27 – 1.618 of XA.

This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 38.2%-61.8% Fibonacci retracement levels. The target of point D is beyond the origin of XA and is 1.618 of XA.

DEEP CRAB

This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 88.6% Fibonacci retracement level. The target of point D is beyond the origin of XA and is 1.618 of XA.

AB=CD, 5-0, DRIVERS

Here are the remainder of the popularized patterns. An example of 5-0:

EXAMPLE OF AB=CD:

EXAMPLE OF DRIVERS:

SIMPLIFY: SPLIT OF LEVELS

When analyzing the patterns, it becomes obvious that different patterns play out depending on where letter B stops in relationship with XA. This is my attempt to make the patterns easier to interpret (drivers and 5-0 excluded).

PART I: Let us break it down into Fibonacci levels.

  • 38.2% – Bat / Alternate Bat / Crab
  • 50% – Bat / Crab
  • 61.8% – (Bat) / Crab / Gartley / ab=cd
  • 78.6% – Butterfly
  • 88.6% – Deep Crab

This means if the currency bounces up at the 38.2% for instance, then there could 3 Gartley patterns in play.

PART II: Let us continue with this breakdown and analyze the likely Fibs where letter C can stop when Fibbing AB and the answer is simple: C can stop at any Fib of AB, which is 38.2%, 50%, 61.8%, 78.6%, 88.6%.

PART III: The last but not least, the target D.

  • Bat – 88.6% Fib of XA OR 2.618 of BC
  • Alternate Bat – 113% Fib of XA (below X) OR 2.0 of BC
  • Crab – 161.8% Fib (below X) OR 3.14 of BC
  • Gartley – 78.6% Fib of XA OR 1.27 of BC
  • Butterfly – 161.8% Fib (below X) OR 1.618 of BC
  • Deep Crab – 161.8% Fib (below X) OR 2.618 of BC

Trading The Patterns

Trading the patterns forex is as always a matter of entry methodology. We discussed entry techniques in a previous article: please read the entire article here. In general, it boils down to either entering upon a direct level, a confirmation or a momentum break.

For the Gartley patterns mentioned here, a direct level entry means a pending entry order at a specific Fibonacci level. A confirmation would be to wait for a candlestick reversal pattern at the Fib. And the break out would occur when the price bounces off the Fib and breaks a trend line in the anticipated direction. We also have training on how to use Japanese Candlesticks.

Please note that trading letter B is a with the trend setup but with a limited target (target is letter C). Trading letter C is a reversal trade but with good reward to risk (target is letter D). Trading letter D could be seen as with the trend trade (very close to support and resistance in any case) and good reward to risk as well (target can be the top in uptrend example, bottom in downtrend example OR any Fib from C to D).

What is your opinion on the Gartley Pattern? Do you like trading these patterns? Do you want to use them? Do you like it? Do you already use Fibs? Has this helped your trade management? We gave a practical example of Gartley this week in the GBPAUD reversal article. Here is part 1 and part 2 (part 2 has the pattern) of the GBPAUD reversal.

Update 1: the bat screenshot was changed on October 13th.

Update 2: our reader Russell had good advice: read Scott M. Carney’s book Harmonic Trading books for an in-depth understanding of Gartley pattern trading.
Learn about Our Best Trend Trading Strategy.

Before we delve deeper into the Gartley trading strategy, let’s look at what indicators we need to successfully trade this strategy.

Harmonic Trading Patterns – Indicator

The advance in technology and the multitude of trading platforms available for traders has made the process of identifying the Harmonic Gartley quite easy.

Many platforms have built-in automated indicators that will draw the Gartley chart pattern and will help you have a better visualization of the pattern while at the same time making sure that it‘s following the Fibonacci ratios as per the rules.

You can find the Harmonic Patterns Indicator on most popular Forex trading platforms (TradingView and MT4) in the indicator section. There is also some harmonic pattern software that can spot automatically the Gartley.

Now, let’s see how to trade the Gartley chart pattern.

How to Trade the Gartley Chart Pattern

The Gartley market strategy like any other harmonic pattern is a four-leg reversal pattern that follows specific Fibonacci ratios. A proper Gartley chart pattern needs to fulfill the following three Fibonacci rules:

  • AB= retrace to 0.618 Fibonacci Retracement of XA leg;
  • BC= minimum 38.2% and maximum 78.6% Fibonacci retracement of AB leg;
  • CD= Poses a target between 1.27 – 1.618 Fibonacci extensions of the AB leg or an ideal target of 0.786 of XA leg. The Gartley harmonic shares some similarities with the Butterfly Harmonic Pattern.

*Note: The Fibonacci retracement and ratios are at the core of harmonic trading. Make sure the above rules are satisfied before you trade the Gartley harmonic pattern.

We have a five-points set up with the Gartley pattern labeled XABCD which are following the Fibonacci ratios. The key ratio involved in the harmonic trading Scott Carney PDF is 38.2%, 61.8%, 78.6%, and 100%.

Gartley chart patterns that lead to the double tops and double bottoms can be great areas for reversals in the market. Also, you can use Gartley in directional trades in the direction of the market.

The key Fibonacci ratio that makes the Gartley apart from the other harmonic chart patterns is the shallow retracement of the AB swing leg which is only 61.8% of the XA leg.

Another characteristic of the Gartley 222 pattern is the symmetry that can be found inside the A through D swing wave. The AB swing leg can be equal to the CD swing leg to offer us an ideal low-risk high reward entry point.

Let’s take one step forward and see how you can make money applying the Gartley trading rules.

Gartley Harmonic Pattern Trading Strategy

The Gartley chart pattern is only giving us a possible entry point without telling much about where to place our protective stop loss and where to take the profits. Now, we can keep things simple and use the Gartley price structure to our advantage.

The Gartley Market Strategy has been tested across different asset classes (currencies, commodities, stocks, and cryptocurrencies).

We recommend that you take the time and backtest the harmonic bat patterns strategy before attempting to use this advanced pattern in your trading strategy.


Step #1: How to Draw Gartley Pattern

To learn how to draw Gartley pattern simply follow step by step guide – see figure below for a better understanding of the process:

  • First, click on the harmonic pattern indicator which can be located on the right-hand side toolbar of the TradingView platform.
  • Identify on the chart the starting point X, which can be any swing high or low point on the chart.
  • Once you’ve located your first swing high/low point you simply have to follow the market swing wave movements.
  • You need to have 4 points or 4 swings high/low points that bind together and form the harmonic bat pattern strategy. Every swing leg must be validated and abide by the Gartley forex Fibonacci ratios presented above.

Now, we’re going to lay down the Gartley trading rules.

*Note: For the purpose of this article, we’re going to use the case for a bullish Gartley harmonic.

Step #2: How to Trade Gartley Chart Pattern

BUY at Point D which should satisfy the requirement CD = 1.272 – 1.618 of AB leg.

Ideally, any trades taken using the Gartley harmonic are taken near point D.

Once a bullish Gartley price action has been identified and subsequently, the swing D leg in price has been formed thus generating a buy signal we can go one step forward and define a good location for our protective stop loss and an ideal target.

In the above chart, we can spot a bullish Gartley price pattern on the NZD/USD weekly chart, which is a signal to buy. You can sell anywhere between the 1.272 and 1.618 Fibonacci retracements, but for better timing your entry you can also use our price action guide – harmonic trading patterns or simply enter as soon as we hit 1.272.

It’s also worth to note that the Gartleylooks the same like a mirrored Cypher harmonic pattern.

The next important thing we need to establish is where to place our protective stop loss.

Step #3: Place the Protective Stop Loss below wave X

Usually, you want to place your protective stop loss below wave X. That’s the logical place to hide your stop loss because any break below will automatically invalidate the Fibonacci requirements for a Gartley harmonic.

The harmonic pattern success rate is solely dependent on these Fibonacci ratios. As a harmonic trader, you want to make sure Gartley satisfy these ratios.

The next logical thing we need to establish for the Gartley harmonic pattern trading strategy is where to take profits.

Step #4: Take profit equals the same price distance of the XA swing leg as projected from the D point

Since the price is fractal in nature and repeats itself on different scales and different time frames we can make the best out of the Fibonacci ratios by looking for a move that starts from the point D and which is equal in price distance to the swing XA for our take profit target.

Now, there are many take profit strategies take can be applied here. We encourage everyone to experiment with different take profit strategies.

We’re not implying this is the best approach because we believe each harmonic Gartley can be unique depending on the Fibonacci ratios

*Note: Above was an example of a BUY trade using the Bullish Gartley harmonic pattern trading strategy. Use the same rules for a SELL trade. In the figure below you can see an actual SELL trade example.

Conclusion – Harmonic Trading Patterns

Harmonic trading patterns solve one big puzzle for every trader because it gives you a reason as to when to buy and what currency pair to buy. This is a 77-year-old trading pattern that has stood the test of time and can provide great trading opportunities in terms of risk to reward ratio.

The Gartley pattern occurs very frequently and if you want to take advantage of this powerful pattern you can follow the rules of the Gartley Harmonic pattern trading strategy.

Please leave a comment below if you have any questions about this strategy!

Also, please give this strategy a 5 star if you enjoyed it!

Please Share this Trading Strategy Below and keep it for your own personal use! Thanks, Traders!

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Part III – Gartley’s Patterns

Commander in Pips: Let’s continue to deal with Gartley patterns. We’ve already discussed how to trade them on the example of AB=CD pattern. Such kind of approach acceptable to any Gartley pattern, but still we will give some more clarification when it is really needed. Most content we will spend on describing patterns and noting crucial moment in their formation.

Gartley “222” pattern

This pattern is easy to understand, because it consists of AB=CD pattern and another swing – look at picture:


Commander in Pips:
This is an interesting story – name “222” has linked to it, because Gartley told about this pattern on 221 – 222 pages of his book in 1935.

So, as you can see here – while AB=CD pattern consists of just 3 legs, “222” consists of four. There is another swing that anchors the AB-CD pattern. Also, to be valid, a “222” pattern has to have AB-CD as its part.

This initial swing marked as X to A. As AB=CD as “222” pattern could be found on any market and any timeframe. This pattern is widely spread and could be met very often. This is continuation pattern, and it’s major idea that we should buy/sell the initial AB-CD retracement after trend shifting. So, we act as with simple AB=CD in direction of previous X-swing, that we suppose was the initial thrust after trend reversal.

As with others patterns “222” patterns have some crucial moments:

1. D completion point can’t exceed X;

2. The C point can’t exceed A, although it can be equal to it, so that after the initial X-A swing market forms double top or double bottom, when AB equals BC;

3. Point B can’t exceed X also;

Here are all the warning signs applicable to this pattern as well as to AB=CD, so I just repeat them:

1. If right after the C point, a gap takes place in the direction of the D point or somewhere on the way to the D point, it could be an early warning sign that probably the CD leg will be extension of AB;

2. If right after the C point, a long ranged bar (twice normal size) takes place in the direction of the D point or somewhere on the way to the D point, it could be an early warning sign that probably the CD leg will be extension of AB;

3. If a Gap and/or long ranged bar occurs right near the D point (assuming that AB=CD) this is also a sign that CD could be extension of AB;

4. Ideally AB should be equal to CD in price and in time. So, if the AB leg forms in 10 bars so the CD leg also should form in 10 bars. This gives the AB=CD pattern strength and increase the odds that the market could show reversal at the D point – temporal or permanent;

5. If the CD leg has greater slope than AB, then probably it could be a 1.27, 1.618 or even greater extension of AB leg;

6. Also keep an eye on BC depth not as itself but in comparing it with the AB move. If, say, the AB up move takes 20 bars and BC takes 10 and has reached only 0.382 of AB – it tells us that the market is absorbing the sell-off at high price and when sellers pressure will weaken – the market could show solid up thrust – the CD leg could be extended leg.

7. If BC reaches 0.618 or 0.786 then probably there is a good chances that AB and CD will be equal.

Pipruit: But here we also have a limitation that the D point couldn’t be outside X, right?​

Commander in Pips: Yes. Still, the CD leg easily could be an extension of AB in a “222” pattern, if, say, the AB leg is small and the initial X-A move is solid.

Commander in Pips: Not necessary. Simple observation will help us. First, the X point will be the high or low point of the swing and the starting point of the pattern itself. Sometimes it could be some significant low or high on daily and higher timeframes. But sometimes, it could be even intermediate low or high that appeared after retracement on a long-term trend.

On non-24/5 markets, as on the stock market, these swings could form on daily basis, when the trading session is opened and the X point becomes an anchor price for X-A initial swing starting to form.

Commander in Pips: Its major value is that it allows us to join to some move that has started recently. Most traders rarely buy or sell right on the bottom or top, so they need some retracement to join the move – and “222” pattern allows us to do it. Also, it allows us to place a tight and reasonable stop – generally speaking make our entry and position as comfortable as possible.

Commander in Pips: I’m afraid not. This is a natural process. All that you can do is to wait when AB=CD retracement will start. Besides, if you’ll see gaps, long bars, tail closes in the direction of the X-A move then possibly you will have to wait some time. Very often this XA leg shows breaks of previous classical support or resistance lines. But the only way to determine that this initial move has finished – is to see the start of the AB leg. From time to time near A point could be formed some candlestick patterns that we know already – doji, engulfing or tweezers.

Commander in Pips: Right. Then time has come to watch the AB leg. Here we should look at:

1. Fib retracement level from initial X-A swing that will be reached by AB leg;

2. The number of bars in the AB leg.

This will give us initial information about possible retracement of total AB-CD pattern. Say, if the AB pattern forms more than 8-10 bars, then probably whole AB-CD will reach 0.618-0.88 of initial swing – i.e. AB-CD move will be deep.

The next crucial moment is watching over the BC leg. Remember, it should stay inside the X-A move.

Commander in Pips: Absolutely, we not just can do it, but we have to do it. It’s very well that you’ve remembered about that. Nice work.


Commander in Pips:
Oh, yes, I’ve not told you that:

1. All the same numbers for retracement: 0.382; 0.5; 0.618; 0.786, maybe 0.88 and 1.0. This is for depth of AB-CD move inside X-A swing;

2. Speaking about AB-CD itself – apply all rules that we’ve noted in the previous part. The only limitation – the D point has to be inside X-A and can’t exceed the X point. Say, if the CD leg is some extension of AB (1.27; 1.618…) watch it.

At the end of this brief discussion we make a description of so-called “perfect” “222” pattern:

1. Move AB should be 0.618 of XA;

2. Move BC should be 0.382 or 0.886 of AB;

3. If BC is 0.382 of AB, then CD should be 1.272 of AB. If BC is 0.886 of AB, then CD should be 1.618 of AB.

4. Move CD should reach 0.786 of XA.

But as you understand a “perfect” pattern could be met only very rarely.

Trading Gartley “222” pattern

Ok let’s start from an example directly, since we’ve studied all of the “222” properties. On chart #1 we can clearly see this pattern – the initial X-A swing down and AB-CD retracement. Here the AB move has reached the 0.5 level and the AD move – almost 0.786. Also take a look that AB=CD is rather harmonic, so that AB equals CD.

To enter the market due harmonic patterns you may act differently. You may enter, say, blindly – just around the target of AB-CD at 1.4325-1.4330. But here you have to be sure that the CD leg will not be extended compared to AB. Existence of Agreement could give you more confidence with that, but this is not the case in our example. I do not want to say that this method is bad – sometimes you may even get excellent entry points, but another one exists also.

Trading Gartley “222” pattern continued

The second way to enter is a bit conservative, that could lead to skipping some trades, or even getting a worse entry that from the first one. This method is based on getting some confirmation from the market that the AB-CD move has completed. Chart #1 shows one of the possible ways how market could do that. Precisely around 1.0 AB-CD target, the market has formed a Bearish engulfing pattern that gives us more confidence and assume that probability is on our side. But here you will enter on a worse price. So the choice is up to you how to act. This links to your personality also, as with other aspects.

It doesn’t matter how, but let’s assume that we intend to enter short. The first question that we have to answer is where to place stop-loss order. I strongly recommend think about the stop order prior to thinking about entry level. Because there is a risk, that since you’ve decide to enter you will try to force the stop level so, that it will be in a row with your risk management. Here you may deceive yourself, because in this case your stop could be illogical and just driven to your wishes but not by common sense.

Here we have three possibilities to place stop loss order:

1. Based on confirmation pattern around AB-CD target;

2. Based on overall “222” pattern;

3. Based on harmonic swing value.

Only the second way is suitable to trade this pattern absolutely flawlessly. And it assumes placing stop beyond the X-A swing. In our case it’s above 1.4413 level. This stop placement comes from the major rule that states – “D point can’t stay beyond X-A swing”. If that happens the pattern is treated as failed one. That’s why placing stop beyond the X-point makes it reasonable. If market will trigger it, then it will cancel the “222” pattern.

Commander in Pips: The major problem with such stop placement is that distance between D point and X point could be very significant. Imagine that you trade this pattern on weekly or even monthly time frames.

Also this could happen due to a shallow AB-CD retracement inside X-A swing. Say, only till 0.618 or even 0.5 level. That’s why we should have some reserve ways to place stops.

On chart #1, for instance, we can apply the first way that is based on some confirmation pattern, since this pattern has appeared at D point. Where we should place stop for bearish engulfing, a?

Commander in Pips: That’s right. In our example it has worked perfectly. Although you have a worse entry, you also have a tighter stop.

And the third way to place stop – use harmonic swing value. I will not write a lot about it – the principle is the same as with AB-CD pattern. Also you can use money stop, but in this case you have to be ready to re-enter and may be not just one time. Because while market will stand below X point, “222” pattern will hold valid and your stop could be triggered just by extension of the CD leg, that lasts for 1.272 instead of just 1.0, for instance.

Pipruit: I see. And what about targets?​

Commander in Pips: The major idea of trading is the same – create double position with risk no more than 2% of total assets. Close the first half with profit equal to stop-loss value, close the second half at some other level as it shown at chart #2:

Let’s assume that we’ve placed stop based on harmonic swing – 40 pips above completion of AB-CD retracement. Our first exit will be at 1.4290 – and profit is equal to potential loss. Then we move our stop loss to breakeven and turn the second half into a riskless trade. As you can see from the picture, there are a lot of potential targets where you can take a profit. Which one you will choose depends on your experience and market action. Most probably that we will take rest of profit at 0.618 or 0.786 level. Still, we have another couple of targets. First one is 0.618 extension of greater ABC Fib extension pattern, where AB is our initial XA swing, BC is total AB-CD retracement and CD is continuation of “222” pattern. Also you can see that market is forming a greater AB=CD pattern and it’s rather harmonic, so you can wait the target at D-point around 1.4030 area. AB=CD retracement of “222” pattern is a BC leg of this large AB=CD.

We do not tell about that, but in general, harmonic patterns also are some kind of fractals. They are just another view on the structure of the market that is used in EW theory. The major difference is that harmonic patterns are treated as a separate, self-sufficient tool for trading, while EW theory tries to link them into waves.

Here, on chart # 3 you can see a lot of AB=CD’s and “222” patterns that include each other:

You’re absolutely right. Besides, since CD is extended leg, it’s very often take the shape of a “222” pattern. Treating classical patterns in such way allows you to trade them even during the time when they are forming. Also it gives you huge advantage in terms of stop placement.

H&S pattern, by the way, very often includes a Gartley Butterfly, as well as AB=CD and “222”. Particularly the Butterfly and other animals we will talk below.

Bat pattern

This pattern is just a sub-case of “222” pattern. Bat assumes a potential reversal point at 0.886 Fib retracement level of the X-A swing. In fact, we could not speak about it, because there is no any difference with “222”, but since this name you can see very often, and to avoid any confusion from your side, it’s better to make mention of it here:

1. A-B move usually 0.382-0.50 of X-A;

2. BC could be any – as 0.382 as 0.886 of A-B;

3. Since BC could show any retracement of AB, hence CD leg also could have different extension from 1.618 to 2.168 of AB.

The major condition of Bat is that reversal happens around 0.886 Fib retracement level of X-A swing.

Gartley Butterfly and Crab

Commander in Pips: Although our primary object here is the Butterfly pattern, we will say a couple of words about the Crab first. Crab is the same sub-case of Butterfly as Bat is a sub-case of the “222” pattern. So, Crab and Butterfly are the same pattern, with only difference that Crab has some specific demand for retracement/extensions parameters, and if you see that these parameters are accomplished, then you call it Crab instead of Butterfly. Still if you call Crab as Butterfly – you always will not be wrong. We’re speaking about that again only for clarification, so that you will not be surprised with the unknown when you see or hear somewhere Crab name of harmonic pattern.

Butterfly pattern is rightly seen as favorite reversal pattern among most traders, because particularly this pattern very often forms at a top or bottom. Trading Butterfly can get you an opportunity to enter right at the extreme. Sometimes the market could form Butterfly at different time frames that point on the same target level. And you can see this pattern in any market and on any timeframe as with other harmonic pattern. Trading Butterfly gives you excellent risk/reward ratio, but as with any pattern in could fail, so using stop-loss order is must here as well. Concerning Butterfly there is a proverb that exists: “If Butterfly works – it works perfectly, but if it fails – it fails miserably”. This is based on the quality of Butterfly. The point is if this pattern works – it precisely shows reversal point, so that market reverses almost at theoretical target of butterfly. But if it fails and market goes beyond its target – then this move could be very significant. This is also gives excellent possibilities sometimes.

While “222” is a continuation pattern in direction of initial X-A swing, Butterfly and Crab are reversal patterns and in general they are failed “222”, when AB-CD move comes beyond initial X-A swing. Let’s see, how they look theoretically:

Commander in Pips: Right, but let’s put lyrics aside and speak about major issues of this pattern. Since Butterfly is a reversal pattern it’s also an extension one. As “222” as Butterfly patterns start similarly – initial swing and AB-CD retracement. But when we see that “222” has failed and the market moves beyond the X point – this could be start of Butterfly.

Although we’ve said that Butterfly is a reversal pattern, but total reversal happens relatively rarely. Most of the time, potential targets of butterfly are Fib retracement levels from the CD leg or AD leg. The target of Butterfly could be estimated by applying Fib ratios – 1.272; 1.618; 2.0; 2.618. The most common are first couple of ratios. If market continues its move outside 2.618 level, then Butterfly treated as failed. But I have to say that the most crucial level for Butterfly is 1.618. If market moves further then risk of the pattern’s failure increases significantly. Hence, it’s better to use as targets 1.272 or 1.618 extensions and treat movement outside 1.618 as failure.

1. Butterfly starts when price action has begun as “222” but then D point moves outside X point and tends to 1.272 or 1.618 extension of X-A swing;

2. AB leg of pattern will usually reach 0.618 or 0.786 Fib retracement of XA initial swing;

3. Although pattern will be valid even if AB will reach just 0.382 or 0.5 – in this case it mostly will turn to Crab;

4. AB could go even above 0.786, to 0.88 or even 1.0. The major condition is B point should be inside XA leg;

5. Early clue that probably Butterfly is forming is that AB leg has reached 0.786 of XA.

Pattern has to be treated as invalid, if:

1. AB-CD pattern is absent on AD swing;

2. Extension move is beyond 2.618 of XA leg. Most common 1.618 is treated as maximum risk;

3. B point outside XA swing;

4. C point outside XA swing;

5. D point remains inside XA, i.e. « 222 » pattern .

So, there are a lot of rules, but in general, you can remember just one – all swings, except extension to the D point should stay inside of XA.

Also take a note that it’s very common to see smaller patterns, say ab=cd as a part of some leg – for instance, BC or CD. Most welcome is if both patterns give the same target. This gives more confidence that market will meet support/resistance in that area and chances to get profit increase.

Commander in Pips: Well, yes, in general they are the same as AB-CD pattern:

1. Look for CD move. If it shows signs of a solid thrust – long-ranged bars, gaps through 0.618-0.88 XA retracement levels – this will mean that some shifting in market’s sentiment is happening. If market shows acceleration near 1.272 target then most probable target will be 1.618;

2. Symmetry is also important here. If slope of CD is much greater than AB, then the 1.618 target is more probable. Otherwise, if the AB and CD moves are quite harmonic in terms of time and number of bars near the 1.272 target – then possibly the market could reverse here.

3. Watch for the 1.618 target – moving outside it will tell that this trend has solid odds to continue further.

Commander in Pips: Sure. Look at the picture – here is a perfect example of Butterfly “Sell” pattern at 4-hour USD/CHF. We’ve traded it in real time by the way on the FPA forum.

Initially we see strong upside bars close to 1.272 reversal Butterfly’s point, but then all has turned as it had to be. Take a look how sharply the market has touched 1.27 target of whole Butterfly first and shown shallow retracement and then accelerated to the 1.618 target and even further.

How do you think – had we to hold position at 1.272 target or not?

Commander in Pips: You’re absolutely right. Besides right the top we see strong acceleration to the downside – this is an early confirmation that Butterfly probably will work. But we could even imagine that it will reach 2.5 target of AD swing! Still this level is not very typical for Butterflies. Although this could happen, better to found your position on 1.272 or 1.618 targets as maximum. But in most cases target will be much smaller – some retracement level from the AD swing.

See – they quite the same, Crab just assumes 1.618 target, at minimum and extreme extension of CD leg, compares to AB. This is just a version of Butterfly.

Here is how it looks like on real market:

Chart #5 | EUR/USD 4-hour Crab… But looks like it will fail…

Trading Butterfly and Crab patterns

We will pass through the trading process on an example of this nice Butterfly. Many steps in trading are very similar to trading AB=CD pattern. In general these steps are common to any harmonic pattern trading process.

If you’re attentive trader you will notice one important issue that tells – reversal from the 1.272 target has more chances to come compares to 1.618… Look at the chart – here is a clue.

Commander in Pips: Right you are. Hence we intend to enter at 1.272 extension target and not at 1.618. Now major question is where to place stop. The common approach here is to place stop above the 1.618 extension, since we will treat the butterfly as failed if the market will move above it. Second, it will mean that market could reach at least the 2-2.24 extension target.

Commander in Pips: And what the problem with 200 pips? Enter with 0.1 lot and your loss will be just 200$, or even 0.05 lot. Just be sure that your loss does not exceed 2% of total assets. You always want something different!

Pipruit: Trade such a good pattern just with 0.05 lot …

Commander in Pips: Ok. There is couple other ways. The first alternative way is to not trade at all, if your stop is too large for your account and to wait:

1. Try to enter when and if market will reach 1.618 target (that’s has not happened in our example);

2. Try to enter on retracement when the down move has already started, using some retracement up.

Commander in Pips: Trading is not funny stuff at all. I tell you – if you have not much money – wait, maybe the market will reach 1.618. This is an excellent strategy.

Commander in Pips: Enter first from 1.272 with harmonic stop 40 pips. If you will be stopped out – you will have to enter again from the 1.618 level. Using such strategy here could give you excellent entry point right at the high, because our Butterfly has been accomplished pips to pips.

Commander in Pips: Ok, now we have to estimate potential targets. AS with AB=CD it’s a better entry with a lot size that is divisible by 2.

Suppose we’ve entered with 0.2 lot at 1.4280. Our initial stop loss – 1.618 target + 40 pips = 1.4480 area.

Our potential targets are: retracement levels of AD move, ultimate targets of Butterfly – 1.272 or 1.618.

220 pips. This is equal to initial risk. Stop loss on the second half of

Approach to second target could be twofold.

1. Use any other Fib retracement level of the AD swing or ultimate target of Butterfly. Here we can see that all of them have been reached after some time. The major clue here is the nature of this market move. We can see that right to 0.618 Fib support level market shows thrusting black candles, telling us that move could continue. But then, this aggressive move is from time to time was interrupted by retracements. In such environment, it looks logical to take profit around 0.786 – 1.0 level of A-D move. Although, as we see – market has reached 1.272 and shown solid pullback, then finally reached 1.618. But it is very difficult to see it in advance.

2. Use support levels of larger swing as potential targets – take a look at chart #8:

Here is how our Butterfly looks on daily time frame. See – 0.382 and 0.618 support levels from larger swing on daily time frame could be used as potential targets. Besides, they stay very close to ultimate targets of Butterfly.

Choosing the targets is more an art rather than straight algorithm. In the beginning you will take retracements from AD swing, but later when your experience will become greater, you will be able to recognize what extended target to choose, depending on nature and strength on move.

Pipruit: I see. Thanks Commander. This lesson was very interesting and useful. I’ll go home and try to find some Butterflies.

Commander in Pips: Don’t forget your butterfly net. And here is nice example of 1.27 Butterfly “Buy” as a parting gift, since we didn’t talk about it:

And another one on monthly USD/CHF that is not finished yet:

Here is by the way a perfect example, how general Butterfly target at 1.618 coincides with 1.618 Fib expansion target of inner AB=CD. See – both target (green and blue lines at the bottom) stand in very tight range.

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