Unveiling the "Harmonic Patterns": A Technical Analysis Tool Favored by Top Traders

In the field of Crypto Assets trading, harmonic pattern analysis has become a secret weapon for many seasoned traders. This Technical Analysis method not only offers a win rate of up to 78.7%, but also helps identify potential trading opportunities. Let's dive deeper into this fascinating trading strategy.

Overview of Common Waveforms

The most well-known patterns in harmonic trading include:

1. ABCD Pattern
2. Butterfly Pattern
3. Bat Structure
4. Crab Layout
5. Gatley Model
6. Shark Pattern

These patterns are used by many top traders to uncover potential trading opportunities. Due to the steep learning curve, ordinary investors often find it difficult to master them. Today, we will delve into the numerical characteristics of these harmonic patterns.

Detailed Explanation of ABCD Pattern

The ABCD pattern is the most basic member of the harmonic family, consisting of three segments and four key points.

First is the advance wave AB, followed by the corrective wave BC, and finally the advance wave CD that is consistent with the direction of AB. Use the Fibonacci retracement tool to measure the AB segment; the BC segment usually reaches the 0.618 level precisely. The length of the CD segment should be comparable to AB, and the time required for AB and CD should be roughly the same.

Traders can choose to place orders near point C (known as the potential reversal zone) or wait until the entire formation is complete to establish long or short positions at point D.

Bat Pattern Analysis

The Bat Pattern is named for its final shape resembling a bat, first proposed by Scott Carney in 2001. This pattern can accurately identify potential reversal zones (PRZ).

Compared to the ABCD pattern, the bat pattern has an extra wave segment and a point, which we call point X. The XA segment triggers the BC retracement wave. If the retracement at point B happens to stop at the 50% level of the XA segment, it is very likely that a bat pattern has formed.

The extension of CD must reach at least 1.618 times the length of BC, and can extend up to a maximum of 2.618 times. The extension of CD cannot be smaller than BC, otherwise, the pattern will fail. The formation of point D creates a Potential Reversal Zone (PRZ), providing traders with an opportunity to enter in line with the price reversal trend.

Butterfly Pattern Analysis

The butterfly pattern was discovered by Bryce Gilmore, who used different combinations of Fibonacci ratios to predict potential reversal points.

This is a reversal pattern composed of four segments: XA, AB, BC, and CD. The most critical ratio is the 0.786 retracement level of segment XA, which helps to determine the position of point B, thereby assisting traders in identifying potential reversal zones (PRZ).

Discussion on Crab Morphology

The crab pattern was also discovered by Scott Carney, following the XA, AB, BC, and CD patterns, allowing traders to enter at extremely high or low levels.

The most significant feature of this pattern is the 1.618 extension level of the XA segment, which determines the location of the potential reversal zone. In a bullish crab pattern, the price quickly rises from point X to point A to form the first segment. The AB segment retraces between 38.2% and 61.8% of XA. Subsequently, the projection of the extreme point of the BC segment (2.618-3.14-3.618) determines the valid area for the completion of the pattern and where the current trend may reverse.

The bearish crab pattern tracks the price movement from point X down to point A, then slowly rises, dips slightly, and finally rises sharply to point D.

Deep Sea Crab Morphology

The morphology of deep sea crabs is slightly different from that of standard crabs. The main difference lies in the retracement position of point B, which must be 0.886 of the XA segment and not exceed point X.

The projection range of the BC segment may be between 2.24 and 3.618.

Gateley Pattern Interpretation

The Gartley pattern founded by HM Gartley has two core rules:

1. The B point pullback must be 0.618 of XA.
2. The D point correction must be 0.786 of the XA wave segment.

The Gartley pattern is similar to the Bat pattern, both triggered by the BC retracement from the XA segment, but the retracement point B must be precise to 0.618 of XA. Typically, the stop loss is set at point X, and the take profit is set at point C.

Shark Pattern Exploration

The shark pattern is also a discovery by Scott Carney and has some similarities with the crab pattern. It is a reversal pattern composed of five segments, with key points marked as O, X, A, B, and C.

The shark pattern must satisfy three Fibonacci rules:

1. The AB segment should pull back to the range of 1.13 to 1.618 of the XA segment.
2. The BC section should reach 113% of the OX section.
3. The target of the CD segment is the 50% Fibonacci retracement of the BC segment.

All shark pattern trades are based on entering at point C, with point D as the preset take profit position.

Three Driving Modes

The three-drive pattern is relatively rare because it requires symmetry in price and time. This pattern consists of a series of driving waves and retracement lines, with a total of 5 key points. The three points (1, 2, 3) represent the endpoints of the three driving waves in the direction of the trend, while the two points (A, C) mark the endpoints of the two retracements between the driving waves.

The core idea of this pattern is that after the third driving wave (in line with the current trend) ends, the price will reverse. The pattern can be bullish or bearish; below are the parameters for the bullish setup, while the bearish setup is the opposite:

• The symmetry of price and time is crucial.
• The driving waves 2 and 3 should be the 127.2% or 161.8% extension of the A and C retracement.
• The A and C retracements are usually 61.8% or 78.6% of the previous fluctuation.
• In a strong trending market, pullbacks may only be 38.2% or 50%.
• The pullback time (horizontal distance) of A and C should be as symmetrical as possible, and the extension wave should be the same.

It is worth noting that this special formation is not common. Traders should not force the formation onto the chart. If the formation contains price gaps or is not symmetrical enough (allowing for slight variations), it is best to abandon the formation and continue looking for other opportunities.

Harmonic Pattern Trading Guide

If you want to start trading with harmonic patterns, please follow the steps below:

1. Deeply learn the theoretical knowledge behind harmonic patterns.
2. Determine whether to adopt a bearish or bullish strategy
3. Open a trading account on Gate, and then look for harmonic patterns in the selected market.

Summary of Harmonic Patterns

1. Traders use harmonic patterns to predict future market trends.
2. Harmonic patterns can be divided into two categories: bearish and bullish.
3. The bearish harmonic pattern suggests that the market may decline.

It is recommended that you combine chart analysis with actual trading to gain a more comprehensive market insight.

Wishing you successful trades!