Harmonic Patterns: Basics of Analysis

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Good day, dear colleagues! Starting today we are starting a series of articles devoted to harmonic Gartley patterns. Probably, all traders, especially experienced ones, have ever heard, used or are practicing this method of market analysis. For those who are only getting acquainted with this tool, I offer a brief excursus into the history and theory of the harmonic patterns.

What are harmonic patterns?

Harmonic pattern models were described by stock theorists Harold M. Gartley, Scott M. Carney and Larry Pasavento. But Gartley was their discoverer, having published his work "Profits In The Stock Market" in 1935. In this work, the author mentions a chart model which can be confused with the famous Elliott wave. Of course, there is a similarity, but it is not the same. Where Elliott waves use numeric notations for impulse waves and alphabetic notations for correction waves, Gartley model uses only alphabetic notations to determine the turning or main points of the chart. And this is only one of the differences that immediately catches the eye. However, due to some similarities, traders accustomed to Elliott Waves are often confused.

The work of H.M. Gartley was further continued and supplemented by S.M. Carney and L. Pasavento. They consider Gartley's harmonic patterns as natural market fluctuations. The patterns help to find market reversal points.

Larry Pasavento began applying Fibonacci ratios to improve the accuracy of Gartley's patterns. Scott Carney has also put his work into this endeavor, describing new patterns models and additional Fibonacci ratios. Today, the following variations of harmonic patterns are distinguished:

What is the principle of harmonic analysis for successful trading?

The principle of Gartley tools is that harmonic patterns, which periodically repeat on the charts, allow the trader to confidently predict the further direction of the price movement. Such a graphical system works in absolutely all markets, including Forex currency market. When a pattern is as close to its ideal proportions as possible, the probability of it working out tends to the maximum. These patterns can be formed on any timeframe, from one-minute to one-year.

Naturally, the best variant of trade will be the work with the patterns closest to the textbook, but in practice, patterns with some deviations from the classics are often formed. Therefore, I suggest that you pay special attention to the market manifestations of these graphical schemes.

Basic concepts and principles of Gartley harmonic patterns

One of the most important factors for successful trading in harmonic patterns is the use of Fibonacci ratios. Such ratios of the main legs of the patterns are called retracement. The most frequent values are: 2.618, 1.618, 1.27, 1, 0.886, 0.786, 0.5, 0.618, 0.382. Many of them are widely known. But there are also those that are absent from the classical Fibonacci levelsbut are derived quite recently. They are 0.786 and 1.27, which are the result of the extraction of the square root of 0.618 and 1.618, respectively.

We will pay special attention to the rather new retracement 0.886, the author of which is D. Kane. Similarly to the retracement 0.786, 0.886 is also a Fibonacci derivative, but it is the result of extraction of the fourth degree root from 0.618. This retracement showed itself well in various harmonic models, especially in such ones as "Crab" and "Bat".

To strengthen the trading system, it would be logical to use a third-party strategy to filter signals by patterns, because this is the market and nothing is ever perfectly accurate.

As Scott Carney noted in his writings, "By combining the harmonic trading technique with standard indicators, we get an effective means of measuring price behavior and identifying potential trading opportunities".

Have a great trade!

Articles about Gartley harmonic patterns