Harmonic trading Syllabus/Advanced Trainning

1. FIBONNACCI RETRACEMENT & EXTENSIONS, TRENDLINES

2. POTENTIAL REVERSAL ZONES, PRICE ACTION, WARNING SIGNS

3. DIVERGENCE AT PRZ FOR CONFIRMATION OF ENTRIES

4. HARMONIC PATTERNS, 1-2-3, A-B-C, BAT, GATLEY, CRAB, BUTTERFLY

5. ELLIOTT WAVE BASICS

6. RISK, MONEY &TRADE MANAGEMENT

7. EMOTIONS & PSYCHOLOGY

8. RULES
Harmonics Patterns/Trading
The Gatley,

the Gartley is a Retracement pattern. That means the X point has some significance. Namely,
the X-point can be a significant Support/Resistance (Demand/Supply) level - and also the
pattern is invalidated if the D point exceeds the X point.

Key features to watch out for:

Must have an AB=CD pattern that converges in the same area as the .786 Fibonacci on the XA,
and also the 1.27BC (for 0.886 retracement of AB) or 1.618BC (for 0.382 retracement of AB)

Pattern Symmetry - ideally the number of bars in the AB leg should be the same as the number
of bars on the CD leg.

The B point retracement ideally at .618 of the XA leg

Generally, Fibonacci retracement ratios for the B point are .382 (for a small small correction),
.618 (the preferred retracement) and .786 (large correction).

However, Scott Carney, in his book "Harmonic Trading - Vol 1", specifies that the precise XA
retracements (Fibonacci retracement level from X to A) should be .618 to point B, and .786 to
point D, for the most reliable results. As illustrated in the above picture.

Gartley Pattern Trading Tips

The nice thing about the Gartley is that you don't need to try to identify the top or bottom of a
trend.

That's because the Gartley is used to trade tests of highs and lows in the direction of a trend. So
the ideal place to find a Gartley pattern is in a bullish or bearish channel.
When not to trade a Gartley

I never trade Gartlies if they are not in a channel. And also, I very rarely trade a Gartley pattern
if it is the first one in a channel.

I prefer to let the channel trend get established with 3 or more touch points off the top and
bottom trend lines of the channel first. (That's just in case it's a false start and not really the
start of a trend).

And, of course, I would not trade a bearish Gartley in a bullish channel - that just would not
make sense at all.

Pattern Failure

If the pattern fails, i.e. when price continues through the PRZ, it may push through Resistance at
the X-level - in which case a new pattern is a possibility.

Be sure to watch out for another pattern to form - such as a Crab Pattern with the D point at a
new Support/Resistance level.

After all, a failed Gartley pattern is an opportunity for another pattern to develop.

The Butterfly
The Butterfly Pattern is an extension harmonic pattern (that is - the D point exceeds the X
point) and is used to trade highs and lows at key reversal points.

As an extension pattern, the CD leg extends towards a 1.272 to 1.618 Fibonacci extension of the
XA leg. Note, that Fibonacci extension can even be as far as 2.618 - but beyond that then the
pattern is invalid
  B point must be a .786 Fibonacci extension of the XA leg
 D point should ideally be a 1.27 Fibonacci extension of the XA leg (for an early reversal )
or a 1.618. Scott Carney maintains the most critical number is the 1.27 XA leg.
 D point must not exceed the 2.618 extension of the XA leg.
 The Butterfly pattern must contain an AB=CD

 Move AB should be the .786 retracement of move XA.

 Move BC can be either .382 or .886 retracement of move AB.

 If the retracement of move BC is .382 of move AB, then CD should be 1.618 extension of move BC.
Consquently, if move BC is .886 of move AB, then CD should extend 2.618 of move BC.

 CD should be 1.27 or 1.618 extension of move XA

The great thing about this pattern is that, because it indicates a high probability of a reversal at
the end of a trend, you can get into a new trend much earlier than most other traders.

In fact it's quite likely that most other traders will still be trading the continuation in the CD
direction, while you are taking a "contrarian" view, and taking the opposite trade.

The key thing to bear in mind about the butterfly is when it fails, it can fail quite dramatically in
a continuation of the trend in the CD direction So careful risk management in terms of a tight
stop-loss is required.

Here is a good example why a close Stop-Loss is absolutely necessary. This is a bullish butterfly
pattern on the Eur-Gbp 30M chart. Price has just touched a Support zone at 0.8180.
The 1.618 XA leg is at the same level - and the 2.628 of the BC leg is just a few pips lower.

This is how I traded it:

 Entry at 0.8183
 Stop at 0.8163 - 20 pips away - placing it below the Support (0.8180), and 8 pips below
the bottom of the PRZ. This is also below the 1.618 XA extension of the leg and the
2.618 Fibonacci extension of the BC leg.
 Target at 0.8230
 As the Butterfly is a test of an end of a trend, it's important to notice the momentum of
price action on the CD leg, and watch out for strong momentum that could push through
the PRZ and make the pattern invalid.
 How the CD leg develops sometimes gives us a clue. If the CD leg is steeper than the AB
leg, then a 1.618 XA extension is more likely than a 1.27 XA extension. Similarly, if
there is a gap or unusually long candles in the CD leg we can also expect a 1.618 of the
XA leg.
 Generally speaking I only trade a butterfly pattern if there is a significant Support or
Resistance zone near to the 1.27 or 1.618 Fibonacci XA extensions that I can use for
placing a Stop.
 Taking note of Price Action momentum and any close by Support/Resistance areas will
help determine if we are dealing with a 1.27 extension of the XA leg or a 1.618
extension.
 I don't trade a Butterfly pattern if price is already past the 1.618 XA extension. If that
happens it's likely to be a continuation of the trend in the CD direction, and therefore a
reduced probability of a reversal.

The Bat
Carney maintains it is one of the most accurate patterns, and requires a smaller stop loss than
most other patterns.

This is one of the retracement patterns (along with the Gartley Pattern) - and is a deep retest of
Support (in the case of a bullish Bat) or Resistance (for a bearish bat) around the X level. The D
level reversal will be at the .886 XA retracement in the PRZ.

If a Bat fails - it can often "morph" into a Crab Pattern where the D point exceeds the X point.

This pattern usually has an extended CD leg which is 1.27 Fibonacci extension of the AB -
providing a favourable risk/reward.
Key features to look out for are:

 A .886 XA retracement to the D point is necessary. The D point cannot exceed the X
point - if it does, then the pattern is invalid.
 Other Fibonacci levels should be closely grouped in the PRZ
 An extended AB=CD where the CD leg is 1.27 of the AB leg. Although, an AB=CD where
AB and CD are the same length is acceptable, but is a minimum for the pattern to be
valid.
 Minimum 1.618 BC extension to the PRZ. Its preferable if the BC extension is 2.0. Could
also be as much as 2.618.
 The B point retracement must be less than .618 to be a valid pattern. e.g. B could be
0.5 or .382 retracement of the XA.
In this example, price reversed at the .886 of the XA leg precisely.

Scaling into the trade will ensure all the Fibonacci levels are tested in the PRZ. Once price has
tested all the Fib levels in the PRZ, you can often expect a fast reversal, as happened in this
example.

Put your Stop just above the 0.886 retracement level of the XA, for a minimum risk trade. In the
example trade above, that would have worked out perfectly.

Alternatively you could place your stops above the X level, if your risk management rules
permit. Above the X point will usually be a strong Support zone (for a bullish Bat) or strong
Resistance zone (for a bearish Bat) - being top of a range.

I trade harmonic patterns in conjunction with strong Support and Resistance levels - and so I
would look out for Bat patterns to develop near the top or bottom of a range of a higher
timeframe like the H1 or H4 - since that would offer a higher probability.

The Crab
The Crab pattern was discovered by Scott Carney in 2000. Carney describes this pattern as one
of the most precise of all Harmonic Patterns.
The Crab is one of the extension patterns, (the other one being the Butterfly Pattern), so, the D
point exceeds the X point.

Key features to watch out for:

 D point defined by a 1.618 Fibonacci extension of the XA

 A deep BC Fibonacci extension between 2.24-3.618.
 B point retracement to be .618 or less

This pattern can display rapid price action movement, often resulting in fast reversals at the
PRZ.

The 1.618 of the XA leg and the BC extension (anywhere between 2.24-3.618)should form a
reasonably tight cluster in the PRZ.

This pattern has a high reward-to-risk ratio because you can put a very tight stop loss. The
"perfect" crab pattern must have the following aspects:

1. Move AB should be the .382 or .618 retracement of move XA.

2. Move BC can be either .382 or .886 retracement of move AB.
3. If the retracement of move BC is .382 of move AB, then CD should be 2.24 of move BC.
Consquently, if move BC is .886 of move AB, then CD should be 3.618 extension of move BC.
4. CD should be 1.618 extension of move XA.
In this example the 2.618 of the BC leg and the 1.618 of the XA leg are just 47 pips from each
other. Price crossed through the 2.618 of the BC leg and got within 10-11 pips of the 1.618 of
the XA leg, before reversing.

I always look for the PRZ to form near a significant Support or Resistance Area. And then use it
if possible to place a Stop, which should also be the other side of the 1.618 of the XA leg.

In this example, there happens to be a significant Resistance level (not drawn on the chart
above) at the 3.618 of the BC leg - 70 pips above current price - which would be a reasonable
place to put a stop, if it fits with your trading rules for risk, of course.

Using a scaling-in entry strategy I would place limit orders in the PRZ, either side of the 1.618
with Stops 8-11 pips on the the other side of Resistance at the 3.618 extension level of the BC
leg.

In this example, risk would be 72 for a reward of 200 - just under 1:3 risk/reward ratio
Find Good Trade Entry Opportunities
As a harmonics trader I particularly look for trade entry opportunities that offer a high
probability of a reversal occurring.

Statistics show that most markets are actually in a trend only about 30% of the time. Which
means markets must be in a range about 70% of the time

It makes sense, then, to look for patterns with a PRZ at the top or bottom of a range. In
particular, I look for Bat Patterns, Crab Patterns and Butterfly Patterns in horizontal ranges.

The following chart (AUD-CAD Daily) is an example of a possible bearish pattern forming, with
the CD leg in the process of being formed.

If the AB=CD completes at the 0.886 Fibonacci retracement of the XA leg, the resulting Bat
Pattern will be a possible trade. (I drew on the yellow lines and the pale blue rectangle, just to
show what the Bat pattern could look like.)
Being a daily chart - this pattern will take a few days to form, if in fact it makes a pattern at all.
But that's ok, I would just wait to see how it works out. Meanwhile, there'll be plenty of other
harmonic trade-entry opportunities to think about.

Channels are a kind of range too. And that's where I would look for Gartley Patterns to form. In
fact, I don't trade Gartley patterns unless they are in a channel

When entering the trade, stop-losses ideally need to be positioned the other side of the
Support/Resistance line. However, bear in mind that orders tend to group around obvious
Support/Resistance and popular Fibonacci levels. So it's best to place stops a bit wider - away
from "the crowd"
MY HARMONIC PATTERN RULES

1. For identification of a Bat, Gartley & Crab they must occur in a trending channel
before I take action and my position at ‘D’ must be in the direction of the trend.
2. I must trade only the CD leg among the four legs of the pattern and this can only be
done when the other legs have unfolded. Otherwise I will trade after D is completed.
3. For any trade I must take there must be divergence to confirm it and may wait for
price action confirmation as well
4. For butterfly, I must make sure I identify it at extended wave 3 or 5 tops/bottoms or
extended C wave in a correction with the D leg having a divergence to my oscillator
before I take action.
5. At my entry there must be convergence of Fibonacci levels of the XA and extended
BC leg to confirm completion of D