Harmonic Patterns

Harmonic Patterns are geometric price formations that derive from Fibonacci retracement. Established by H.M Gartley in 1932, Harmonic Patterns identify potential price changes or trend reversal levels.

These patterns consists of five different points marked by letters (X, A, B, C, D).

The types of Harmonic Patterns that we are going to analyse are:

The Gartley

The Bat

The Butterfly

The Cypher

The Crab

The Gartley Pattern

Gartley is arguably the most common harmonic chart pattern. Named after H.M. Gartley, who said that this pattern offers “one of the best trading opportunities.

As with every harmonic chart pattern, there are bullish and bearish versions of Gartley.

Gartley uses a combination of Fibonacci retracements to come up with a final level that generates a buy signal. The basic idea behind this chart pattern, as well as with other harmonic formations, is that the price action follows a specific pattern.

In essence, Gartley supporters believe that the price is likely to bounce from one Fibonacci specific level to the other until the final buy/sell signal is generated. This way, a geometric shape is formed, as illustrated in the photo below.

For Gartley to be verified as such, the following requirements must be fulfilled in the first place:

XA – This is where the pattern starts initiates an uptrend or a downtrend.
AB – This is the first step that has clear and concise requirements. In theory, point B should end around the 0.618 Fibonacci retracement. Of course, it is highly unrealistic to expect that the price action ends at 0.618 exactly; it is allowed to offer variations to a certain degree.
BC – The BC move should follow the direction of the overall trend. The point C is expected to end at the .0382 Fibonacci level, near to the 0.886 Fibonacci level of the AB move.
CD – The price action then takes another turn and reverses the BC leg to a certain point. If the BC leg ended at 0.382 of AB, then CD should finish at the 1.272 extension of BC. Or, if BC leg ended at 0.886 of AB, then CD should be the 1.618 extension of BC.
XD – Once the CD leg is over, the final step assumes measuring the XD retracement, which should end at 0.786.

Ultimately, the point D signals a potential buy/sell trade.

The bearish Gartley follows the same guidelines, with the XA move being to the downside and the point D generating a sell signal.

The Bat Pattern

A Bat pattern looks very similar to Gartley, but it has different measurements. It is also considered to be a continuation pattern as the overall trend extends and the last point (D) ends within the initial XA move. The entire structure looks more symmetric compared to the Gartley formation.

These are the guidelines to recognize a Bat pattern:

XA – Any bullish or bearish move that starts the trend classifies as the XA leg.
AB – The first retracement of the initial XA move is shorter in the Bat pattern, compared to Gartley. The AB leg should end between 0.382 and 0.5, signaling a strong initial trend.
BC – The point BC should be 0.382 or 0.886 of the AB move. Hence it is reversing the trend direction of the AB leg.
CD – This leg should either be the 1.618 extension of the BC leg if we had a 0.382 retracement in the previous move, or a 2.618 extension of BC if the prior leg retraced 0.886
XD – In addition to CD, point D should be the 0.886 retracement of the initial XA leg.

The Butterfly Pattern

Unlike the first two harmonic patterns, point D in the Butterfly chart pattern ends outside of the initial XA move.

The following guidelines are in place for the Butterfly patterns:

XA – Any bullish or bearish move that starts the trend classifies as the XA leg.
AB – The first retracement of the initial XA move is longer than in Gartley and Bat, as the price action pulls back all the way to 0.786 Fibonacci retracement.
BC – The point BC remains the same (0.382 or 0.886 Fibonacci retracement of the AB move).
CD – The leg also remains the same as in the Bat pattern. If the BC retracement is 0.382, then the CD leg should end at the 1.618 extension. If the BC leg has its end at 0.886 of the AB leg, then the point D comes at 2.618.
XD – The point D should also correspond to the 1.27 or 1.618 Fibonacci extension of the initial XA leg.

The Cypher Pattern

The Cypher pattern is similar to Gartley, except that the BC correction should go beyond point A. Therefore, the BC is an extension of the AB move, rather than a retracement.

These are the guidelines to spot a Cypher pattern:

XA – Any bullish or bearish move that starts the trend classifies as the XA leg. As with the other harmonic patterns, there are no specific requirements for the XA leg.
AB – The point AB is expected to be either 0.382 or 0.618 of the XA leg.
BC – As said, point C extends above/below point A. Hence, we are drawing a Fibonacci extension, looking for a level anywhere between 1.133 and 1.414 of the AB move.
CD and XD – In the Cypher pattern, the CD and XD merge into a single point. Hence, the D point should be at around 0.786 of the initial XA move.

The Crab Pattern

Extremely long extensions characterize the Crab pattern.

The following guidelines are in place for the Crab pattern:

XA – Again, any bullish or bearish move that starts the trend classifies as the XA leg.
AB – This leg is entirely the same as in the Cypher pattern and the XA retracement should end either at 0.382 or 0.618.
BC –The BC leg reverses the AB move by correcting either 0.382 or 0.886 of the prior leg.
CD – The CD leg is similar to XA – although it occurs in the opposite direction, it is a long wave that follows the period of consolidation. If the BC leg is 0.382 then CD is expected to end near the 2.24 extension mark, while if BC is 0.886 of the AB leg, then CD should be 3.618 of BC.
XD – Finally, the D point should come at around 1.618 Fibonacci extension of the initial XA leg.