Harmonic Trading Patterns: What Are They?
Monday, March 11, 2019, 6:00 PM | Leave Comment
Harmonics come with many advantages for traders. Not only do they give you the benefit of utilizing the power of high probability and price action, but they also have great accuracy. They are great options when using Fibonacci.
With a nearly 70% rate of prediction accuracy, the trading patterns present a great opportunity for traders who want to properly manage their assets without risk.
The following is a guide to understanding the trading patterns and how they are relevant in the trading business.
We will start by looking at the Fibonacci trading strategy.
Image Source Pixabay
The Fibonacci
For harmonic trading patterns to work as they should, they must be accompanied by the Fibonacci. The usability of the harmonics depends on how they are calculated with a reference to the various numbers in the Fibonacci sequence. Fibonacci levels can range anything from 23.6% to 261.8% or more. By calculating the difference in various Fibonacci numbers, it is possible to know the support and resistance mechanisms that define the market. Harmonics take the same approach of utilizing the sequence to establish the reversal rates in the market. This is possible because of the many different patterns that are available for use.
The types of patterns
The great thing about harmonics is that they come in different patterns. All these patterns have their own unique benefits which they bring to the trade. These patterns indicate the nature of the market in reference to the direction of the price. The patterns you will find include the Bat, Butterfly, Shark, Gartley, Crab, 50, AB=CD and Three Drives.
In order to understand each of the patterns, it is important to analyze how they are used in the market.
We will do this by looking at the various advantages of each.
Image Source Pixabay
Key Advantages
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High probability
It is quite challenging to find a strategy that uses logic and works in the market. Harmonics bring both these features and this is why they are preferred by all kinds of traders. There is a very high probability that is presented by various patterns including the Crab, Gartley, AB=CD, and Shark.
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Forecasting trend reversals
Harmonics are also great when it comes to forecasting reversals. This is possible because they trend reversals are clearly indicated via the price movement. This can be observed either at the start or at the end of the movement. The harmonic pattern chosen is key to this process though.
Key Disadvantages
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They are complex
Harmonics are rather complex. Not only do they rely on the Fibonacci but they also come with another layer of mathematical calculations. All these are territories that the average trader would not consider venturing in just to observe the trend in the markets.
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They come with high risks
Secondly, harmonics also come with great risks especially when they are used improperly. The patterns can often come very early in the trend and this can mislead traders. There is thus high risk associated with the patterns.
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Curve fitting results
While curve fitting is not a bad thing, it can be problematic with harmonics. The curve fitting can sometimes be evident for a while but still fail to show up in the backtest. Such risks often come when there is insufficient data. Expanding the data ranges can remove the issue.
How to Chart the Patterns?
Considering the complexities that come with harmonic patterns, it is important to chart them properly. Charting the patterns is not a simple task either as it involves a lot of insight. Most traders who are not accustomed to the patterns are better off involving an expert who knows the process of defining the different patterns. If you want to try the process by yourself though, you can use a setup that puts the time and execution aspects as the priority. Doing this will ensure that the patterns are not misleading.
Managing Risks in the Trade
Up to 96% of traders leave the market shortly after they venture because of difficulties. When using harmonics for trade, a number of risk management strategies are necessary. The most popular and sound risk management option is to use the 1 to 2 risk reward strategy. This strategy is necessary because of the volatile nature of harmonics. Considering that automation is part of using harmonics, losses can be colossal. The strategy is thus recommended for use at all times.
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