Advanced Price Action Techniques to Detect Market Reactions.
By: Sofien Kaabar
Tags: Trading, Finance, Investing, Stock Market, Data Science

Advanced Harmonic Patterns

THE GARTLEY PATTERN

This pattern is probably the first and the most famous complex harmonic configuration. Its ratios are easy to memorize and it is more common than the ones to come. Here is how to detect a Gartley pattern:

The first leg should retrace back 61.8%.

The second leg should also retrace back 61.8%.

The third leg should retrace back 161.8% which is a simple ABCD pattern.

The whole retracement from the beginning to the top should be 78.6%.

An example of the Gartley pattern. (Image by Author)

The example above shows an example on the Gartley, the one where all the ratios are perfect. The next chart shows a bearish Gartley on the EURUSD. Even though the pandemic was mostly controlling the sever volatility, we have managed to get a reaction around the Gartley levels.

An example of the Gartley pattern. (Image by Author)

THE BAT PATTERN

This is one of the good patterns found by Scott Carney. It is similar to the Gartley but has different ratios. To detect a Bat pattern, we should have the following conditions:

The first leg should retrace back 50.0%.

The second leg should also retrace back 50.0%.

The third leg should retrace back 200.0% which is a simple ABCD pattern.

The whole retracement from the beginning to the top should be 88.6%.

An example of the Bat pattern. (Image by Author)

An example of the Bat pattern. (Image by Author)

The figure above shows a nice reaction after prices reached 88.6%. The Bat pattern has a very good success ratio in my own personal experience. It is not that easy to detect nor is it common but when it occurs, it definitely adds value to our trading.

THE CRAB PATTERN

The Crab pattern is an interesting configuration that takes advantage of extended moves to detect an imminent reversal level. It is defined as:

The first leg should retrace back 61.8%.

The second leg should also retrace back 61.8%.

The third leg should retrace back 261.8%.

The whole retracement from the beginning to the top should retrace 161.8%.

An example of the Crab pattern. (Image by Author)

Here is another example of a bearish Crab that has provided a reaction. Sometimes, harmonic patterns do provide reversals, but we are not supposed to expect that from them. They are merely used for reactions just like the one in the below chart.

An example of the Crab pattern. (Image by Author)

THE BUTTERFLY PATTERN

The Butterfly pattern is another complex harmonic configuration that is similar to the above but has one distinct difference. The third leg breaks the edge of the second leg. That is, a bullish Butterfly pattern will have an M shape with the second leg lower than the first leg. Here are the conditions for a perfect Butterfly pattern:

The first leg should retrace back 78.6%.

The second leg should also retrace back 50.0%.

The third leg should retrace back 161.8% which is a simple ABCD pattern.

The whole retracement from the beginning to the top should retrace 127.2%.

An example of the Butterfly pattern. (Image by Author)

An example of the Butterfly pattern. (Image by Author)

THE MODIFIED SHARK PATTERN

This pattern is not really a discovery for me, it is merely an attempt to find a confluence of perfect ratios. I have found out that many patterns have intervals of ratios, this makes them vague and have overlapping nature. My attempt was to find a pattern with exact ratios.

Sure, it is rare to find this pattern but in my personal experience, it works well. It is also the only complex pattern that uses solely the perfect ratio with the first leg retracing 61.8%, the second leg retracing back 161.8%, the third leg retracing also 161.8% and the final retracement is a 224.0% which is the sum of the golden ratio (161.8%) and its reciprocal (61.8%). I like to use this ratio in combination with technical indicators or long-term moving averages to really have a strong conviction on the trade.

An example of the Modified Shark pattern. (Image by Author)

The beauty of this pattern is that it signals often stronger reversals than the rest of the patterns. It should not however be the expectation as with harmonic patterns, we only want to play reactions and not full trend reversals. Nevertheless, it is interesting to know that the reaction can be strong. I have called it a Modified Shark pattern because It resembles the original Shark pattern.

An example of the Modified Shark pattern. (Image by Author)

THE ARROW HARMONIC PATTERN

I have found this pattern after searching for extended moves that occur after extreme reversals. The pattern is fairly easy and comes from the ABCD family. The ABCD is simply a symmetrical configuration where the AB leg equals the CD leg. The Arrow harmonic pattern is when the CD leg equals 2.24x of the AB leg and thus it captures distant reversals. The below is an example of the Arrow pattern.

An example of the Arrow pattern. (Image by Author)

Why have I chosen the name Arrow? Well, it was not due to some sophisticated reason other than the fact that the length of the pattern resembles an arrow. The next graph shows an ABCD pattern followed by the Arrow pattern. Another variation of the ABCD is where the CD leg equals 1.618x of the AB leg.

An example of the Arrow pattern. (Image by Author)

The below pattern is simply an ABCD with the CD being 1.618 the AB, thus extending it.

An example of the extended ABCD pattern. (Image by Author)

An example of the Arrow pattern. (Image by Author)

Sometimes we can combine the patterns with technical indicators such as the RSI to confirm the reaction. In the below example we can see a bullish divergence around the time the Arrow pattern has completed.

An example of the Arrow pattern. (Image by Author)

The next section will discuss how to trade the patterns and where to place stops and profit orders. It is a relatively straightforward method that is quite versatile and changeable by the trader.