Most Reliable Harmonic Patterns for Investors To Use

When you want to get serious with investing and identify opportunities that can make you profitable, it is important to include advanced techniques in your strategy. Using harmonic patterns is one way to do so. Harmonic patterns are geometric patterns identified through the use of Fibonacci numbers and today we’ll present the most reliable ones.

They form when the price of an asset reaches specific Fibonacci markers in a way that can predict price breakouts. Most harmonic patterns include four price points, but there are exceptions to this.

However, there are several harmonic patterns to choose from, and here are the most reliable patterns any investor can use.

Most Reliable Harmonic Patterns for Investors

The top harmonic patterns used by investors are:

1. BAT pattern

Scott Carney first discovered the BAT pattern in 2001, and it has four legs or points- XA, AB, BC, and CD legs.

A bullish BAT formation looks like the letter M with the first leg XA moving upward. On the other hand, a bearish BAT formation looks like a W, and the first leg XA moves downward to indicate the fall in prices.

Despite the change in appearance, the Fibonacci ratios for both remain the same.

Identifying the Pattern

The BAT pattern has these measurements:

There is a rise from Point X to A to form the XA leg.

The AB leg retraces 0.382 to 0.50 of XA. If it goes beyond 0.50, then it is no longer a BAT pattern, and the formation that appears becomes a cypher pattern.

For the BC leg, the price moves back up and retraces 0.382 to 0.886 of the AB leg.

CD is an extension of AB by 1.618 to 2.618. The D leg is more of a zone and is a 0.886 retracement of XA. This zone is referred to as the potential reversal zone, and investors wait to see if the price will rise further before entering the market.

Investors can set up stop-loss orders below X or close to the recent swing low near the D leg when entering a long position. You can scale out of the long position by setting up three exit targets in different areas of the pattern.

The first exit targets can be set below the recent swing low near point B. The second and third exit targets can be set at the recent swing highs of point A and point C. When traded properly, the BAT pattern can be a trend reversal or continuation pattern with a good risk-to-reward ratio. With proper confirmation and use of the pattern, investors can ensure long-term profitability in any financial market.

2. Three Drives Pattern

The three drives pattern is a series of higher highs and higher lows in the bullish variation and vice versa for the bearish three drives pattern. It is a trend reversal pattern that is quite similar to the ABCD pattern.

The major difference is that the three drives formation has three legs while the ABCD pattern has four.

How to Identify

To identify the three drives pattern, determine the existing trend and look for three consecutive directional price movements. Recent swing points are essential in identifying a valid three drives because they are used as the price points for the application of the Fibonacci retracements and extensions.

For the pattern to be the three drives pattern, it should meet these requirements:

Drive 1 is a 61.8% of point A

Drive 2 is at 127% to 161.8% of point A

Drive 3 is a 127% to 161.8% Fibonacci extension of Point B

Once it has been validated, the three drives can be used as a buy or sell signal for investors, and market entry or exit occurs after the third drive is formed.

The placement of stop loss orders depends on the variation of the pattern that appears on the chart. For instance, investors can place a stop loss at the lower part of Drive 3 in a bullish three drives, and it can be located above Drive 3 in a bearish three drives pattern.

3. Butterfly pattern

The Butterfly pattern is a price reversal pattern that mostly occurs at the end of extended trends. It is a popular pattern among investors because it can be used at any time.

It helps traders to enter long or short positions at new lows or highs as the last leg terminates past the starting point. Plus, it is easy to identify on a chart and understand, which is great for new investors. The pattern has four legs and can either be bullish or bearish, depending on the existing trend.

Identifying the Pattern

For a butterfly pattern to be valid and complete, it should meet these requirements:

AB is a 0.786 Fibonacci retracement of XA

BC is a retracement of AB by 0.382 to 0.886

CD is a Fibonacci extension of AB by 1.618 to 2.24.

Point D is a 1.27 extension of XA.

The measurements must be precise when using the butterfly pattern because it reduces mistakes and makes it easier to execute successful investing decisions.

Also, due to its rigid structure, the butterfly pattern should be combined with other indicators to provide further validation and increase the accuracy of the insight provided.

4. The Crab pattern

Also discovered by Scott Carney, the crab pattern is a 4-leg pattern that enables investors to enter the market at extreme highs and lows. Like other harmonic patterns, it is a trend reversal pattern and looks similar to the butterfly pattern, but its measurements are different.

A crab pattern has these Fibonacci levels:

AB retraces XA by 0.382 to 0.618

BC is a 0.382 to 0.886 retracement of AB.

CD is at a 2.618 to 3.618 retracement of AB.

Point D is at a 1.618 Fibonacci extension of XA.

The crab pattern is one of the most precise harmonic patterns, but price action tends to be volatile when it reaches Point D, which is the Potential Reversal Zone. Also, all trades using the crab pattern usually happen near point D.

However, before trading with it in any financial market like the crypto market, it is advisable to go long or short only when it is 2.618 to 3.618 of AB.

For investors using multiple stop loss, the first stop loss order can be placed at the 3.618 extension and can later be moved depending on price action.

5. The AB=CD pattern

This is one of the most common and consistent harmonic patterns available to investors. It is easy to identify because it only has two legs, and it gives good insight into the next price movement.

When it forms, the AB=CD creates a zigzag pattern on the chart showing the possible price reversal. The AB=CD pattern can either be bullish or bearish depending on the prevailing trend and offers a favorable risk-to-reward ratio.

Identifying the pattern

For this pattern, BC is at a 0.618 to 0.786 retracement of AB, while the CD leg is at a 0.27 to 1.618 extension of BC. In a bearish ABCD, point D should be higher than point B, but in a bullish pattern, point D is lower than point B.

After the pattern has been established, an investor can enter the market from point D and set a stop loss order just below this point.

There are several trading platforms today that come with software for identifying the harmonic pattern. You can also find harmonic pattern indicators that do the job quickly and effectively. But when starting out, it is advisable to do it manually by using different Fibonacci tools to determine the pattern in place.

Doing this helps you to become more familiar with the patterns and the requirements for using them and maximizes your potential when investing or trading.

Conclusion

Once you identify any of these patterns in a chart, they can influence your next trading decisions. But before you rely on any harmonic pattern to act, you should be able to perform technical analysis effectively so that you can use the information they provide to make the best decisions.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.