MARKETCALLS.

IN

TRADING WITH
HARMONIC PATTERNS
Defines critical turning points in the
markets.

VIJAY KARANAM
 No-one really knowswhy Harmonic Patterns work.

But its recognised that they do work

based on empirical and STATISTICAL
evidence.
HARMONIC PATTERN VIS-À-VIS ELLIOT WAVES

START OF NEW EW
CYCLE
HARMONIC PATTERN VIS-À-VIS ELLIOT WAVES
W
pattern
M
pattern
W M
pattern pattern
 PRICE PATTERN RECOGNITION
+
HARMONIC TRADING = FIBONACCI MEASUREMENT
(define potential trading opportunities) +
ANALYSIS OF MARKET STRUCTURE

The Harmonic Trading approach offers pertinent technical information regarding the state of
potential future price, trends and specific levels of support and resistance.
By FIBONACCI measurements, best relationships of consecutive swing moves were identified,
that
worked to identify future prices and trends.
Best harmonic pattern structures are those which have nearly exact combination of Price
structures and Fibonacci ratio alignments.
SUCCESS RATES FOR HARMONIC PATTERNS
 FIBONACCI NUMBERS & RATIOS
Fibonacci numbers is as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,144, 233, 377… ∞ (infinity)

1.618 is known as the golden ratio or Phi.

Primary Ratios • Primary & Derived Ratios define the
potential areas of change in price
0.618 0.618 retracement is the defining
element of many harmonic
structures
Example: Point B of Gartley & Crab
action

1.618 • Harmonic Trading techniques identify

price action that reacts to these
defined levels of support or
1.618 projection signifies either an
oversold state or overbought state
resistance
of price action.
FIBONACCI MEASUREMENTS
METHODS
1. INTERNAL PRICE RETRACEMENTS

2. EXTERNAL PRICE RETRACEMENTS

3. PRICE EXPANSIONS/ PRICE EXTENSIONS

4. PRICE PROJECTIONS/ ALTERNATIVE PRICE PROJECTIONS

CONFLUENCE OF RATIOS
Every LEVEL works,
but what makes CONFLUENCE OF LEVELS UNIQUE is the large
participation by market participants at that price zone
PRICE RETRACEMENTS
+
FIBONACCI CONFLUENCE = PRICE PROJECTIONS
(ALSO CALLED FIB CLUSTER, PRZ) +
(PRZIS POTENTIAL REVERSAL ZONE ) PRICE EXTENSIONS

The closer and more lines from different measurements, the stronger PRZ -
meaning higher probability that the cluster will work as support or resistance
level and will allow a trader to enter into low risk and high probability trade.
HARMONIC PATTERN IDENTIFICATION
Price structures may appear similar, they simply are not. Each pattern is unique

Within M or W pattern, 2 types of price patterns:

 Retracement Patterns

 Extension Patterns

These are further differentiated by specific Fibbonacci ratio for each price move
TYPES OF HARMONIC PATTERNS BASED ON PRICE STRUCTURE
1. 4-POINT HARMONIC PATTERNS
 AB=CD PATTERN
 ALTERNATE AB=CD PATTERN

2. 5-POINT PATTERNS

 GARTLEY PATTERN
 BUTTERFLY PATTERN
 BAT PATTERN
 CRAB PATTERN
 SHARK PATTERN

3. 6-POINT PATTERNS
 5-0 PATTERN
5-POINT PATTERNS 6-POINT PATTERNS
AB=CD PATTERN WITH PRICE & TIME SYMMETRY
C point is defining level for the completion of the pattern as it indicates strength of the current
trend
BEARISH AB=CD
BULLISH AB=CD
The reciprocal ratios that complement
the AB=CD structure:

AB=CD completion point is the most

important number of the pattern.

In fact, the completion point of AB=CD

pattern should serve as a mandatory
requirement before executing a trade.

The 1.618 BC projection should

complement
the completion point area to validate the
pattern.
4 POINT HARMONIC PATTERN

VALIDITY:
BC = 0.382- 0.886
AB
EXAMPLE
No variations permitted from the prescribed alignments of the harmonic patterns

Retracement pattern
GARTLEY PATTERN

Perfect structure has precise

alignment of the required three
Fibonacci ratios in a tight range
BULLISH GARTLEY
 Retracement pattern

Ideally possesses 1.27 AB=CD

calculation
BULLISH BAT
BEARISH BAT
Crab pattern elements:
THE CRAB PATTERN Extension pattern
• B point that is a 0.618 retracement of XA or less.
• Extreme BC projection that is typically a 2.618, 3.14, or 3.618.
• Alternate 1.27 or 1.618 AB=CD pattern required. (It is important to note that the
alternate AB=CD pattern within the Crab is the least important number in the PRZ.)
• 1.618 XA projection as the defining limit with the structure.
• C point with range between 0.382 and 0.886.
 THE DEEP CRAB Retracement pattern
Deep Crab pattern elements:
PATTERN
• B point is around 0.886 retracement of XA or less than point X.
• Extreme BC projection that is typically a 2.24, 2.618, 3.14, or 3.618.
• Alternate 1.27 or 1.618 AB=CD pattern required.
• 1.618 XA projection as the defining limit with the structure.
• C point with range between 0.382 and 0.886.
4.26 BC retracement is an extreme case, but it worked.
 THE BUTTERFLY PATTERN Extension pattern
• Precise 78.6% B point retracement of XA leg.
• BC projection must be at least a 1.618.
• Equivalent AB=CD pattern is minimum requirement, but the Alternate 1.27 AB=CD is the most
common.
• 1.27 XA projection most critical number in the Potential Reversal Zone (PRZ).
• No 1.618 XA projection in IDEAL case, but is adopted by some as a variant.
• C point within range of 0.382–0.886 retracement
BULLISH BUTTERFLY
AT D = 1.27 XA (MIN)
BEARISH BUTTERFLY
AT D = 1.27 XA (MIN)
 THE SHARK PATTERN UNIQUE - Can be either Extension or
Retracement pattern
• Look for initial impulsive reversal at X, A, B points that possesses a 1.13-1.618 extension.
• The AB projection must possess a minimum 1.618 extension at the C point but not exceed 2.24.
• Alternate AB=CD pattern completion
Some literatures suggest XA shall retrace from 0.382 to 0.618 of OX
BEARISH SHARK IN NIFTY SPOT
 THE 5-0 PATTERN Extension pattern
• Look for initial impulsive reversal at X, A, B points that possesses a 1.13-1.618 extension.
• The AB projection must possess a minimum 1.618 extension at the C point but not exceed 2.24.
• The D point is defined by the 50% BC retracement and the Reciprocal AB=CD pattern completion
5-0 Pattern is the failed wave 3 or wave 5—in Elliott Wave terms—that establishes the rest of the
structure. The Five-Zero pattern is a 6-point retracement harmonic pattern which usually precedes
big market movements.
 IDENTIFYING HIGH PROBABILITY REVERSALS AT PRZ – THE
CONFLUENCE OF LEVELS (MOST IMPORTANT ASPECT OF HARMONIC
TRADING)
1. TOP DOWN APPROACH FROM HIGHER TIME FRAME TO LOWER TIME FRAME

(ENSURE THAT SETUP IS NOT AGAINST THE LARGER TREND – R:R BETTER
FOR
BULLISH PATTERNS IN UPTRENDS & BEARISH PATTERNS IN DOWN TRENDS)
2. SUPPORTS/ RESISTANCE ZONES (TRENDLINES, MA, GAPS, PIVOTS, ROUND
NOS)
3. SUPPLY/ DEMAND ZONES
4. REVERSAL CANDLESTICKS
5. VSA (Volume Spread Analysis)
(UPTHRUSTS/ PSEUDO-UPTHRUSTS/ STOPPING VOLUME/ REVERSE
UPTHRUST)
6. OSCILLATORS (DIVERGENCES, OVERSOLD/ OVERBOUGHT) – MFI, RSI &
IDENTIFYING HIGH PROBABILITY REVERSALS
 1/0.69 = 1.45
IDENTIFYING HIGH PROBABILITY REVERSALS 1.442AB=CD
IDENTIFYING HIGH PROBABILITY REVERSALS
FAILED GARTLEY BUT A VALID ABCD EXT PATTERN
Specific measurements for each point in
the pattern will result in better
performance & higher probability of
success
Specific measurements for each point in the pattern will
result in better performance & higher probability of
success
PRICE TARGETS (ALWAYS CHECK FOR BLOWOUTS & EXHAUSTIONS AT IMPORTANT
INITIAL
LEVELS) OBJECTIVE
• 0.382 FROM EXTREME POINT OF COMPLETION OF PATTERN
• 0.618 FROM EXTREME POINT OF COMPLETION OF PATTERN
• POINT B OF THE PATTERN
• REVERSAL TRENDLINES/ MAXIMUM REACTION LINE
FINAL OBJECTIVE
• 0.886 FROM EXTREME POINT OF COMPLETION OF PATTERN
• 1.13 FROM EXTREME POINT OF COMPLETION OF PATTERN
• 1.618 FROM EXTREME POINT OF COMPLETION OF PATTERN
NOTE: RATIOS ARE MEASURED FOR LEG FROM POINT “A” TO POINT “D”
INTERESTING FACTS FROM STUDIES
• GARTLEY PATTERN FAILS MORE THAN OTHERS SPECIALLY IN SHORTER TIME
FRAMES. BETTER SUCCESS IN HIGHER TIME FRAMES
• BAT PATTERN HAS HIGH SUCCESS RATE. QUICK REVERSALS FROM BAT PATTERN
PRZs ARE COMMON
• BUTTERFLY IS MORE FREQUENTLY FORMED/ FOUND
• A PATTERN HAS A POOR STRUCTURE IF IT HAS LESS THAN 30 BARS
• IF A SMALL PATTERN FORMS WITH IN A BIGGER PATTERN, IT IS ALWAYS
THEBIGGER PATTERN THAT IS MORE SIGNIFICANT
• FIBBONACCI NUMBER THAT IS CALCULATED FROM THE LARGEST PRICE LEG IS
MOST SIGNIFICANT AS AN ENTRY POINT FOR A TRADE IN REVERSAL ZONE
• THE ALTERNATE AB=CD PATTERN TYPICALLY DEVELOPS IN PATTERNS LIKE THE
CRAB AND THE BUTTERFLY IN EXTENDED SELL-OFFS.
• BAT STRUCTURE TYPICALLY EXPERIENCES AN ALTERNATE 1.27 AB=CD PATTERN.
BAT REQUIRES A SMALLER STOP LOSS THAN MOST OTHER PATTERNS
• THE AB=CD PATTERN TYPICALLY DEVELOPS IN GARTLEY PATTERNS
Key to Harmonic trading:
1. Execute trades within
PRZ
2. Use small SL limit