How to Trade with Harmonic Patterns — Part. 2

In a previous article, I talked briefly about harmonic patterns, introducing the AB = CD pattern, and the Gartley pattern.

Today, I’ll introduce the other patterns:

• The Butterfly
• The Bat
• The Crab
• The Cypher

I’ll also talk about some tips to adjust your entry and to place your stop loss.

The Butterfly

The Butterfly looks a lot like the Gartley but has a point D extending beyond point X.

It means the ratios remain the same, at least for the first waves. A quick reminder:

• AB should be at least 61.8% of wave XA.
• BC should be either 38.2% or 88.6% of wave AB.

And the new rules now:

• CD is a 161.8% to 224% extension of AB.
• D is at around 127% extension of the XA wave.

As for each pattern, you’ll never find a perfect pattern, so don’t be too perfectionist with these ratios else you will never open any trade.

Let’s look at an example:

As you can see, it’s a lot like the Gartley. Here, it’s a bearish butterfly. A bullish one would just be the opposite.

The stop loss can be placed where the pattern would be not valid. For example, I would place it near the point where the extension of wave CD would be something like 300% of wave AB.

About the take profit, the best is to place it according to your risk management rules. For example, for me, I want my trades to have a risk-reward ratio of 2.

The Bat

The Bat also looks like the Gartley (spoiler: the Crab too will look like it, and the Cypher too).

But ratios are not the same:

• AB should be between 38.2% and 50% of wave XA.
• BC should be either 38.2% or 88.6% of wave AB.
• CD should be a 161.8% to 261.8% extension of AB.
• D should be an 88.6% retracement of XA.

Here is a bullish Bat pattern:

It’s always the same for the stop loss and the take profit. I’ll talk about another way to find a target at the end of this story.

The Crab

The Crab looks like a stretched Bat.

Here are the rules:

• AB should be between 38.2% and 61.8% of wave XA.
• BC should be either 38.2% or 88.6% of wave AB.
• CD should be a 261.8% to 361.8% extension of AB.
• D should be a 161.8% extension of XA.

Now I’ll try to find a Crab pattern for you! Here it is:

Here, it’s a bad Crab, but a Crab nonetheless. The ratios are too far away from the theory, so honestly, with such a Crab I don’t open any trade. It’s up to you to define your own rules when trading these patterns.

The Cypher

The ratios for the Cypher are:

• AB should be between 38.2% and 61.8% of wave XA.
• BC should be either 127.2% or 141.4% of wave AB.
• D should be at least a 78.6% retracement of XC.

The Cypher looks like this:

As you can see, we don’t need many bars to identify a pattern. About this one, I consider it a failure. According to my rules, the price would have hit my stop loss. Of course, nothing is reliable at a 100% rate!

How to Enter a Trade with Harmonic Patterns

To enter a trade, you first have to calculate a potential reversal zone (PRZ). Indeed, when trading live, there is a zone where D may be but you don’t know exactly its price.

It means, maybe D already has been found, and the price will reverse, but you can’t know it. So you have to use other things to confirm the price reversal, such as price action or indicators.

Another thing you can do is give a score to the pattern according to its accuracy. For example, if the ratios you find when trading live are close to the theory, the pattern may have a score of 95%. If they’re not close, it may have a score of 80%. And you can say if the pattern has a score of 90% or better, I enter. Else, I don’t.

How to Place your Stop Loss

The stop loss can be placed outside the further projection of D. It’s the point beyond which the pattern would be considered not valid.

Another way to place your stop loss is to first calculate a target, and place the stop loss depending on it. For example, at 75% of your target.

How to Place your Take Profit

You have many ways to calculate a target. You have to backtest different things.

A way that seems to work is to place your target depending on the AD wave. For example, I like to place a first target at 61.8% of AD for most patterns. I also like to place a second target at 127.2% of AD.

But for this part, it’s up to you.

Final Note

You know have a new weapon to your trading arsenal. Just don’t forget that like for everything in trading, you can’t rely on just one thing. The more weapons you use, the more you increase your chances to make a winning trade.

You can combine harmonic patterns with many things: supports, resistances, technical indicators, volume, etc…

If you have any questions feel free to leave a comment!

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