Harmonic Price Patterns, ABCD and the Three-Drive, Gartely Pattern

In this chapter, we will discuss everything you need to know about harmonic price patterns. After finishing the chapter, you will know the ABCD patterns, three drive patterns, Gartley pattern, crab pattern, and bat pattern.

What is the Harmonic Price Pattern?

Harmonic Price Patterns are a popular and effective trading tool forex traders use to identify potential trading opportunities based on market price movements. These patterns are based on the principles of Fibonacci ratios and can provide valuable insights into the future price direction of a currency pair. The Fibonacci ratios include Fibonacci retracements and Fibonacci extensions.

Overall, the Harmonic patterns help traders spot probable retracements of recent trends.

The following part will explore the concept of Harmonic Price Patterns and their types.

Common Harmonic Price Patterns

There are several common Harmonic Price Patterns that traders look for in the forex market. These patterns include ABCD patterns, three-drive patterns, Gartley patterns, crab patterns, and bat patterns.

ABCD Patterns

The ABCD harmonic pattern is a popular trading pattern in the forex market. Traders identify the pattern based on a sequence of price movements that follow specific ratios. The pattern comprises four points: A, B, C, and D.

Point A marks the beginning of the pattern, followed by a retracement to point B, which traders typically consider as a 61.8% Fibonacci retracement of the initial move.

From point B, the market moves in the direction of the initial move to point C, which often represents a 61.8% Fibonacci extension of the retracement.

Finally, from point C to point D, the market completes another retracement of the initial move, typically around the 127.2% or 1.272 Fibonacci retracement level.

Traders use the ABCD harmonic pattern as a tool to identify potential trend reversals and trade opportunities. This aim to enter and exit the market at strategic points for maximum profit potential. Properly identifying and trading the ABCD harmonic pattern requires technical analysis skills and careful consideration of risk management. Overall, the ABCD harmonic pattern is a powerful tool for traders in the forex market.

Three Drive Pattern

The three-drive pattern has three legs and two corrections or retracements. Other than that, it is similar to the ABCD pattern. It is considered that the Elliott Wave pattern was derived from the three-drive pattern.

Further, you require tools such as Fibonacci and hawk eyes to understand the 3 drive patterns.

To understand the three drive patterns, let’s look at the chart above. You can see that point A should be the 61.8% retracement of drive 1 while the B should be 0.618 retracements of drive 2.

As the chart progresses, drive 2 should have a 1.272 extension of correction A. On the other hand, drive 3 should be a 1.272 extension of correction B.

Once the entire three-drive pattern has fully formed, it is the opportune moment to execute your long or short trade. It is common practice to set your short or long orders at the 1.272 extensions when the price reaches point B in order to ensure that you do not miss out on potential trading opportunities.

Before proceeding, it would be beneficial to confirm if these rules also apply:

• The duration of drive 2 should be the same as drive 3.
• The duration of retracements A and B should also be equal

Gartley Pattern

The Gartley Pattern is a popular harmonic pattern used in forex trading that can signal potential trend reversals. It is named after H.M. Gartley, who first introduced it in his book “Profits in the Stock Market” in 1935.

The pattern is formed by a series of price swings and retracements that create a distinctive structure. The Gartley pattern consists of four legs labeled as XA, AB, BC, and CD. The pattern typically starts with a strong price move, labeled as XA, followed by a retracement labeled as AB, which is typically a 61.8% or .618 Fibonacci retracement of XA.

From AB, the market resumes the original trend direction and forms BC, which is typically a 38.2% (.382) to 88.6% (.886) Fibonacci retracement of AB.

Finally, the CD is formed, which is typically a 78.6% Fibonacci retracement of XA. The Gartley Pattern can be either bullish or bearish, signaling potential buying or selling opportunities, respectively. Traders use this pattern to identify potential entry and exit points, as well as to gauge the strength of a trend reversal.

Gartley Mutants: The Animals

There are several variations of the Gartley Pattern, known as Gartley Mutants, which were developed by other traders. These variations are often named after animals, hence their common reference as “the animals.” These animal-named patterns include the crab, bat, and butterfly, among others.

The Crab

Scott Carney, a strong advocate of harmonic price patterns, founded the “Crab” in 2000. According to Scott, among all harmonic price patterns, this is the most perfect since the Potential Reversal Zone is extreme from the XA move.

The “Crab” has a high reward-to-risk percentage because there is a possibility of putting a close stop loss.

Characteristics of the Crab Pattern

The AB move should be the 0.618 or 0.382 retracements of the XA move, while the BC move should either be 0.886 or 0.382 retracements of the AB move. In the event the retracement of the BC move is 0.382 of the AB move, then the CD move will likely be 2.24 of the BC move. Therefore if the BC move is 0.866 of the AB move, then the CD should extend by 3.618 of the BC move. The CD has to be a 1.618 extension of the XA move.

The Bat

In 2001 Scott Carnet discovered a harmonic price pattern that he referred to as the “Bat.” The 0.886 retracement of the XA characterizes the pattern moves as the Potential Reverse Zone.

Aspects of the Bat Pattern

The AB move has to be 0.500 or 0.382 retracement of move XA, and the BC move should either be 0.886 or 0.382 retracements of the AB move. If the BC move retracement is 0.382 of the AB move, then CD is supposed to extend 1.618 of the BC move. Similarly, if the BC move is 0.866 of the AB move, then the extension of the CD move should be 2.618 of BC. Therefore the CD retracement should be 0.886 of XA move.

The Butterfly Pattern

If you spot the butterfly, then you will have hit the jackpot in terms of pips. It was coined by Bryce Gilmore, and a perfect pattern is characterized by the 0.786 retracements of the AB move relative to the XA move.

Features of the Butterfly pattern

The retracement of the AB move should be 0.786 of the XA move, while that of BC should be either 0.886 or 0.382 of the AB move. If the BC move retracement is 0.382 of the AB move, then the CD move should extend by 1.618 of the BC. However, in the event the BC move retracement is 0.866 of the AB move, then the CD move is supposed to be a 2.618 extension of the BC move. The CD should always extend by 1.618 or 1.27 of the XA move.