(Newswire.net — May 18, 2018) — Forex Trading in simpler terms is defined as the process of buying and selling currencies for the purpose of making a profit or for trade and tourism. The trading is generally carried out in pairs with one being called the base and the other called the quote currency. Value of the currency is generally influenced by various factors like the political environment and the economy of the country. The trading is conducted by making use of the over the counter markets called the forex markets that work 24 hours a day and five days a week. It’s a global market where the investors, institutions and banks, exchange speculate on, buy and sell world currencies. There are various methodologies used while trading in the forex markets and one of them is called harmonic trading. It is a method of forex trading that makes use of specific price patterns to predict the future movements of the currency.
What are Harmonic Patterns?
The harmonic patterns are referred to an as advanced version of trading patterns that can help you lead to highly profitable trading opportunities if analyzed correctly. These type of patterns are known to have an integral relationship with the Fibonacci number series thereby conforming to the crucial Fibonacci levels. Hence while indulging in harmonic trading it is important to analyze the harmonic chart patterns by using the Fibonacci Retracement and Extensions tools. Off late there have also been a number of software programs that have been developed which help in automatically detecting various harmonic trading patterns.
What are the various types of harmonic patterns?
The various types of harmonic patterns include the Bat Patterns, Butterfly Pattern, the Crab Pattern, the Gartley Pattern, and the Cypher Pattern.
Gartley Harmonic Pattern: It was initially introduced by HM Gartley and is known to be one of the oldest recognized harmonic patterns. The pattern exhibits two retracement legs and two impulse swing legs that form a 5 point pattern. All the swings in the pattern are associated with the Fibonacci ratios. The Gartley pattern forms the basis for all the other harmonic patterns as they are mere modifications of the above.
Bat Harmonic Pattern: This was discovered by Scott Carney and as discussed above is a modification of the Gartley harmonic pattern. The only difference between the two is that the Bat pattern has a bit more symmetric lines and also the difference in the Fibonacci ratios between the swing points. This pattern provides more accuracy thereby resulting in more success rates as well.
Butterfly Harmonic Pattern: This is another modification of the Gartley harmonic pattern depicting the same four price movements. But the advantage it has over the Gartley pattern is that one can sell or buy at new highs and lows. The trading pattern has not only proved to be a success in forex markets but also across other asset classes like commodities, stocks and cryptocurrencies as well.
Crab Harmonic Pattern: Discovered in the year 2001 by Scott Carney the crab pattern like the other harmonic patterns is a reversal pattern. Like Gartley, the pattern is also generally denoted by 5 swing points X, A, B, C and D. The sharp movement in the CD leg makes it different from the other trading patterns. This pattern is generally considered to be very volatile as there are no fixed stop loss levels.
Cypher Pattern: The pattern was discovered by Darren Oglesbee. It is one of the unique harmonic patterns and is not very commonly used. The pattern is generally depicted as an inverse of the common Butterfly Pattern and is governed by distinct and strict rules. The pattern is known to work on every time frame but it is always advisable to avoid the same on lower time frames.
Trading Using Harmonic Price Patterns
Harmonic trading involves the buying or selling or foreign exchange by spotting the perfect patterns and price movements in order to make a profit. There are 3 basic steps to be followed in order to spot the perfect trend. The first and the very important step includes locating a potential harmonic price pattern. Next step is to measure the pattern using a Fibonacci tool and then lastly buy or sell on completion of the harmonic price pattern. The harmonic patterns generally are quite difficult to spot and requires a lot of skill in doing so. Also, another rule of thumb is that while doing harmonic trading it is important that one must wait for the pattern to be completed. Any kind of harmonic trading requires the identification of impulse leg. But the problem arises when there are more than one in the chart. How do we know the accurate one? One of the disadvantages of harmonic trading is that it is quite subjective? The solution is to choose the one that coincides with a structural support or resistance.
Advantages and Disadvantages of the Harmonic Trading
Trading using the harmonic price patterns has its own set of advantages as well as disadvantages. The list of benefits include
- It is one of the best methods that offers excellent rewards to risk ratio and predicts the future price movements well in advance. This makes them one of the leading indicators for forex trading.
- These can be used on any forex pairs and also any time frame. They are also said to be news independent.
- The harmonic trading makes use of a set of standardized rules by using the Fibonacci ratios. Also, these consist of well-defined price patterns and structures.
- The patterns are known to create tight potential trade areas facilitating the trader to buy low and sell high.
- The patterns are also known to be frequent repeatable and reliable.
- Another important advantage is that other indicators like RSI and CCI also can be used with them.
The disadvantages of the pattern include
- One of the biggest disadvantages of the harmonic patterns is that they are quite complex and requires a high level of technical skills to understand and master them.
- The risk and reward factors both are pretty low with a asymmetric pattern.
- If there is a conflicting Fibonacci projection then it is quite difficult to identify reversal or projection zones.
- There are too many Fibonacci ratios and locating the ideal one is a tedious job.
- With harmonic trading, there is also a possibility of having conflicting signals from different time frames.
It is always advisable to trade wisely keeping all the pros and cons of the harmonic trading patterns in mind.