Forex Trading Strategy: The Key to Successful Harmonic Pattern (1)
You may have learned some patterns of price patterns on the education page . In forex trading pattern recognition can help traders to find opportunities without even needing the help of other technical indicators.
This article will discuss one type of contemporary pattern , in a different sense from the conventional pattern that you may often encounter such as double top, head and shoulders and others. The name of the pattern is ” harmonic pattern “. This pattern is relatively more difficult to understand, but if you have mastered it can be useful to find hidden opportunities.
The basic idea of a harmonic pattern is to recognize the potential for correction of a trend. It could be said is a way to “steal the opportunity” by looking for the right time to do “defiance” towards the direction of the major trend . Now, because this technique is a “violation of trading law” alias violates the main rules of trading (ie: the trend is your friend ), then you must be very careful in applying it even if you have mastered the theory.
Even so, in its development the harmonic pattern can be used to identify the potential continuation of the trend.
Before you continue reading this article, you should have mastered the use of Fibonacci Retracement.
In this article we will study two types of harmonic patterns , namely:
- ABCD Pattern
- Three-Drive Pattern
There is one thing you need to remember. For ALL harmonic patterns , you MUST WAIT until the pattern is formed before opening a sell or buy position. Patience is something that you absolutely must have if you want to do an analysis based on harmonic patterns.
This is the simplest harmonic pattern . But still, to be able to recognize this pattern you must have a fairly sharp vision and observant observations. You also need to be able to use Fibonacci well.
There are two versions of the ABCD pattern: bullish and bearish. Line AB and CD are called “legs” ( leg ) while BC is called “correction” or ” retracement”. If we use the Fibonacci Retracement by using the foot as a reference, the BC line movement must reach the correction area of 61.8% (0.618). Furthermore, CD movement is an extension of 127.2% (1,272) based on BC movement.
Simple enough. All you need to do is wait until this pattern is complete (it has reached point D) before opening a sell or buy position.
For the record, the CD length must be the same as the AB length. It does not have to be exactly the same, but the difference is not significant.
Three-drive pattern is similar to ABCD pattern , it’s just that it has three legs and two corrections. The three legs are then called “drives” .
If you are observant, you can find the similarity of this pattern with the Elliott pattern. It is said that this pattern is indeed the “ancestor” of the Elliott Wave theory.
From the picture above you can see that point A must be a correction as far as 61.8% of Drive 1. Likewise point B must be a correction as far as 61.8% of Drive 2. Then Drive 2 itself must be an extension of 127.2% from the first correction (1 to A).
When Drive 3 is formed, you can consider opening a sell or buy position.
It is important for you to pay attention, before deciding to open a sell or buy position, try to check whether these requirements are met:
- The time needed for the formation of Drive 2 must be the same as the time required for the formation of Drive 3.
- The time needed to form correction A must equal the time needed to form correction B.
It’s a good idea to try this technique in simulation before deciding to apply it in a real account. You can do simulations using a demo account.
In the next article we will discuss another harmonic pattern, namely Gartley.
See you later.