Top Harmonic Patterns Every Trader Should Know to Predict Market Reversals"

Irion Dekov
Jun 16
5 min read

I. Introduction

When discussing harmonic patterns, it is important to note that they are advanced chart patterns that dynamically combine geometric structures with Fibonacci ratios to predict potential market reversals. Traders use these patterns to identify entry and exit points with good probabilities, making them one of the most powerful tools in technical analysis.

Harmonic patterns, unlike traditional patterns, are based on precise Fibonacci retracement and extension levels, increasing their effectiveness. By mastering these patterns, traders can optimize their ability to anticipate trend reversals and capitalize on profitable trading opportunities.

II. What Are Harmonic Patterns?

As we discussed in the introduction, harmonic patterns are geometric price structures that repeat over time, indicating potential trend reversals. They are based on the algorithm that market movements follow natural cycles influenced by Fibonacci ratios (e.g., 0.618, 1.618).

Getting a little more technical, harmonic patterns consist of specific swing points (X, A, B, C, D) that form distinct patterns, such as the Gartley, Bat, Butterfly, Crab, and Shark patterns. Good traders try to use Fibonacci tools to measure retracements and extensions. This way they ensure that the pattern meets the harmonic criteria before executing trades.

III. Top Harmonic Patterns Explained

1. Gartley Pattern

The basic principle is as follows: Starting from point AX to point AB (recursion of XA). Then we move to BC (recursion of AB) and then we reach the last point CD (recursion of AB).

Quantitatively this whole theory is supported by these numbers known as key ratios: AB = 61.8% of XA, CD = 78.6% of XA.

Trading Strategy: Buying is recommended at point D when there is a bullish Gartley and selling is recommended at a bearish Gartley.

2. Bat Pattern

This particular structure is very similar to the previous one (Gartley), but the difference is that it is subject to stricter Fibonacci levels. Here the numbers follow a different approach. That is, we have AB = 38.2-50% of XA and CD = 88.6% retracement of XA. As we can see, the Bat structure has a deeper retracement at point D.

3. Butterfly Pattern

Speaking about this pattern, we must mention its basic structure. It starts from the point XA with a depression of AB (recovery). The path follows towards BC (recovery) and ends at CD (expansion beyond XA).

Speaking in numbers and percentages, it is stated that the basic indicators consist of: AB = 78.6% of XA, CD = 127-161.8% expansion. Taking into account transactions with the reversal at point D, entry and exit points arise.

4. Crab Pattern

The crab pattern is nothing more than a better version of the butterfly, with more and deeper retracements. The interesting fact about key ratios is that the CD point is equal to 161.8% extension of XA. The large numerical ratio heralds’ high rewards. More specifically, it offers strong reversal signals due to deep retracements where traders can exploit them and increase their money.

5. Shark Pattern

The shark pattern presents an emerging pattern. It is a newer and more harmonious formation with aggressive reversals.

The Key Ratio that you create in this pattern and follows a different strategy from the others is the fact that it uses a retracement of 0.886 for entry.

Traders resort to it as it is effective in identifying sharp trend reversals.

IV. Historical Effectiveness of Harmonic Patterns

To give you a brief historical overview, harmonic patterns were first introduced in the 1930s by H.M. Gartley. He first introduced the Gartley pattern in his book "Profits in the Stock Market". Over time and with the advancement of technology, traders like Scott Carney have refined these patterns by incorporating precise Fibonacci levels.

Why They Work: Like all things in life, markets move in cycles. In this repeating loop, harmonic patterns align with the Fibonacci ratios found in natural price movements.

Institutional traders often use these patterns to create rational predictions when retail traders follow them.

Statistical Backtesting: A notable fact is that according to studies, harmonic patterns and more specifically (the Bat and Gartley patterns) have shown a success rate of close to 75%, when all Fibonacci levels are correctly aligned.

The Crab pattern is definitely worth listening to. Which, due to its extreme retracements, can record high reward-to-risk ratios of 5:1, when of course there is confirmation of the pattern.

V. How to Identify These Patterns on Charts

To identify these patterns, Fibonacci retracement/extension tools, harmonic pattern scanners (e.g., TradingView, MT4 indicators) are essential. First of all, you need to look to see if there are any and if so note the swing points (X, A, B, C, D). The next step is to use the Fibonacci strategy, applying the Fibonacci ratios to validate the pattern. For greater security and more complete work, it is necessary to confirm using candlestick patterns or RSI divergence. Finally, make sure that all Fibonacci points are aligned before trading, to minimize false signals.

VI. Combining Harmonic Patterns with Other Indicators

As we mentioned before, the best strategy is when there is a combination of harmonic patterns with other indicators. Traders aim to achieve high accuracy for this and use them together:

RSI (Relative Strength Index): Traders look for divergence (with the price making a new high or low). Confirmation with RSI that does not do the same.

Example: A bullish Gartley + oversold RSI = Strong buy signal.

MACD (Moving Average Convergence Divergence): When the chart reaches a bullish crossover near point D, then it means the trend reversal is confirmed.

Moving Averages (50 EMA, 200 EMA): If there is an alignment between a basic moving average and point D, then it implies a strengthening of the signal.

Volume Analysis: When increased volume movement is observed at point D, then the reversal is considered certain and confirmed.

VII. Common Mistakes to Avoid

Traders should control their emotions and be patient. If for example the ABCD moves do not meet the criteria to be considered a harmonic pattern, then they should ignore the Fibonacci ratios. Additionally, if the strategy structure you have chosen does not fit, do not try to trade it. Always, always place your stop loss, usually above point X (for an uptrend) or below point X (for a downtrend). Be patient! Wait as long as it takes for perfect setups. Don’t try to make a lot of trades just for the sake of it. Not all charts have a harmonic pattern.

VIII. Real-World Examples

Example 1: Bullish Gartley pattern on EUR/USD 2023.

Let's look at an example based on what we have discussed in this article. Let's assume that Bitcoin formed a perfect harmonic pattern, a perfect Gartley at $25,000. Therefore, according to the Gartley pattern, the entry point would be to buy at point D ($25,000). The result of this action / strategy is that the price shot up to $30,000 (20% profit).

Example 2: Bearish Bat pattern on Bitcoin on EUR/USD 2024.

In this example, it was observed that a Bat pattern was formed at 1.0950. If we look back at the previous points in the text, we will see that the best strategy is to sell at point D. The result of this action is that the price fell to 1.0750, therefore it is a successful move with profit.

VII. Conclusion

When a trader becomes trained in harmonic patterns, they increase and enhance their ability to accurately detect reversals in a timely manner. Although these patterns take time and practice, their accuracy makes them invaluable. For optimal results, traders should backtest strategies and combine harmonic patterns with other technical tools.