Forex Trading Strategy: The Key to Successful Harmonic Pattern (4)
For those of you who have read the previous articles about harmonic patterns , perhaps wondering how to apply them in real forex trading .In other words, how to apply the Fibonacci ratios presented in the pictures / illustrations of existing patterns. This is also a question that often arises from traders who are just starting to learn harmonic patterns.
For example, we will discuss the application of the ABCD pattern ( ABCD pattern ) on the candlestick chart. This pattern is the simplest pattern in the family harmonic pattern. Nevertheless, this pattern is actually the basis of all the development of harmonic patterns. Thus, if you have been able to apply this pattern to your forex trading analysis , it is expected that it will be easier for you to do an analysis using the derivative harmonic pattern .
Fine, we just start.
The example I present is the application of the ABCD Bearish pattern. Just a memory refresher, there are two types of ABCD patterns, namely Bullish ABCD and Bearish ABCD .
The usual question arises – as mentioned at the beginning of this paper – usually is, “What do you mean by 618 and 1,272?
Both numbers are Fibonacci ratios. In the Fibonacci retracement tool we usually use, .618 is the 61.8% retracement level while 1,272 is the 127.2% expansion level.
OK, but how to use it? Let’s read this article until it’s finished because then I’ll discuss the application.
THE FIRST STEP
The first step you need to do is identify the trend (of course!). After that you apply the Fibonacci retracement on the last significant swing. See the picture below:
If you notice, point A is a swing low while point B is swing high which is used as an interesting reference to Fibonacci retracement. As a first step to identifying this ABCD pattern, you should see a correction that occurs to the 61.8% retracement area . If there is a correction referred to, then you can then set point C.
Thus you already have the first leg (leg) of the ABCD pattern, which is the A to B movement (then we use the AB movement term). You also have a retracement that is a BC movement .
Step 2 is to identify the potential location of point D, aka 2nd leg . How to? Try to look at the following picture:
You already have a retracement CD from the first step above. Now, to find out where the point D is, you need to draw the Fibonacci retracement from point B to C. The location of point D is in the extension as far as 127.2% (1,272) from BC.
Congratulations, you’ve found the 2nd leg ! As you already know, you can open short positions at point D. In the example above, indeed point D is not exactly at the level of 127.2%. But remember the level below is actually a resistance level. A slight break up of the level is not a problem as long as the breakout is not significant.
In addition, remember that in the ABCD pattern, the first leg length (AB) is approximately equal to the length of the 2nd leg (CD). So, besides level 127.2%, pay attention to the length of the CD.
Unfortunately, at the Fibonacci retracement standard commonly used in forex trading we cannot find 127.2% level. For that you need to add the level yourself.
The next question is usually, “OK, I’ve sold at point D. Then what about the SL (Stop Loss) and TP (Take Profit)?”
You can use point D as a reference for placing SL. In this example, you open a short position, so that SL can be placed above point D. Calculations that are commonly used are two to three times the spread, or given a distance of 100-200 pips (5 decimal places).
Or, you can use the TP area as a reference to take into account the risk-to-reward ratio . Give a rational ratio between risk and your profit target.
Speaking of TP, you need to do the third step, which is to draw Fibonacci retracement once again. This time, drag the Fibonacci retracement from C to D. The rational TP area based on our experience is the 38.2-61.8% area. Why? Because the area has the potential to rebound again.
If you notice, from the first step to the third there are three Fibonacci retracement drawings. If there are three Fibonacci retracements overlapping then it will most likely confuse you. So it’s better after entering the next step, just delete the Fibonacci retracement that has been drawn in the previous step.
Then, to really be able to take advantage of the harmonic pattern , you must have the foresight in observing the market plus an understanding of an adequate Fibonacci retracement. In fact, harmonic pattern is a pattern that is quite rare to find, especially if you are less observant and lack of mastery of the Fibonacci retracement technique.
So from that it’s good to strengthen your understanding of Fibonacci retracement first.