MARKETCALLS.

IN

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

VIJAY KARANAM
 No-one really knows why 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 pattern M 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 action
0.618 0.618 retracement is the defining
element of many harmonic structures
Example: Point B of Gartley & Crab
• Harmonic Trading techniques identify
price action that reacts to these defined
1.618 levels of support or resistance
1.618 projection signifies either an
oversold state or overbought state 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) +
(PRZ IS 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 PATTERN Retracement pattern
Deep Crab pattern elements:
• 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)
 UNIQUE - Can be either Extension or
THE SHARK PATTERN 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 &
(CONFLUENCE OF HIGHER TF & LOWER TF MOVEMENT OF OSCILLATORS)
7. READ THE MARKET & SECTOR ENVIRONMENT
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 LEVELS)
INITIAL 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