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Here’s one thing about the forex market: it snaps in different directions, and it happens ALL. THE. TIME.
Let’s say your position is currently riding the upward market trend; it’s putting some cash in your account. But the moment you leave your trading device to lift some bars, the market reversal happens. You come back to your device welcomed by losses.
Remember, a market reversal can always happen – and it may drag your position to losses if this catches you off guard. But don’t sweat; there is a technical tool to use in predicting future price movement, the Harmonic Price Patterns.
Harmonic price patterns are powerful (and prettyyy famous!) tools used by technical analysts. These patterns are best used in identifying potential price reversals and trading opportunities.
As the name suggests, harmonic price patterns rely on the notion that market trends occur harmonically. It supports the idea that primary trends are subdivided into smaller price swings (or “Waves”), showing the potential price direction.
Here’s the question: how can you identify these harmonic patterns?
Before that, let’s review our past lesson about the Fibonacci ratio. During that lesson, you’ve learned that applying this ratio is effective in identifying the support and resistance levels of the market, right?
One thing you need to keep in mind is that harmonic patterns are the consolidated price actions that follow the Fibonacci pattern.
So, applying the Fibo ratio to see the support/resistance (R/L) level is the first step in seeing the harmonic price patterns. The moment you’ve identified the R/L levels, the harmonic price patterns of the price movement follow suit.
The commonly used harmonic patterns in the forex market are the ABCD pattern, Three-Drive Pattern, and Gartley Pattern.
Each pattern has its own quirks to help you identify potential trading opportunities.
Let’s start off with the simplest harmonic pattern among the three, the ABCD pattern. As you can tell (and for sure, you’re hoping), identifying these patterns will be as easy as singing the alphabet song!
Since it shows the harmonic price patterns, using these would help you identify and describe the potential market reversal.
In its most basic form, the ABCD patterns show the natural market movement by reflecting equal A-B legs and C-D legs. This harmonic pattern consists of price movements called Leg Up or Leg Down.
When you spot an ABCD pattern, you’ll notice that it starts with an initial leg up or Leg down, followed by a short period of consolidation, and then another leg up or Leg down that follows its original movement.
The D points are either the buy or sell signal for you. If it’s a bearish ABCD, the market will reverse from bullish to bearish once it reaches the D point. Meanwhile, the D point for the Bullish ABCD signals that the market will trend from bearish to bullish, signaling a buy position.
Sounds like an easy spot, right? It really is! But there are two cardinal rules when you spot ABCD patterns:
The Three-Dive patterns have a lot of similarities with the ABCD patterns. The only key difference is that the Three-Dives signal high chances of market reversals.
When you’re analyzing Three-Dives, you’re looking at the three price movements (called drives) and two retracements (called corrections).
How is it somehow the same with the ABCD patterns?
Well, if you notice that the market seems to follow an ABCD pattern, but there’s a retracement instead of a reversal, then that might be a three-dive pattern.
However, you must know that this price pattern is somehow rare in the market. In this pattern, you see three consecutive and symmetrical upward or downward price movements called drives.
When the market is bullish, it will make three downward final drives and the trends upward. Meanwhile, in a bearish market, it will trend three upward drives before it depreciates. Essentially, the market reaches its peak (whether bullish or bearish) before it bulls or bears.
Like the ABCD patterns, spotting three drives also has its own rules:
This harmonic pattern is mostly used by technical traders who want to identify and describe the price highs and lows.
If you monitor this pattern, you concern yourself with either the retracement or continuation patterns that occur in market reversal prior to its primary direction.
Like the Three-Drives, Gartley includes the ABCD pattern, but here, you are more focused on the price’s significant highs and lows. Also, don’t be confused the moment you see an M and W here—these are simply the representation of either a bullish or bearish market. Essentially,
Overall, the Gartley patterns are used by traders who are looking for good entry points to join the overall trend.
Got the hype behind these harmonic patterns? While these provide you with a clear future price movement like reversals, using other technical indicators in conjunction with these harmonic patterns will bring you financial success.