Harmonic pattern Detail Study
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To fully understand how harmonic pattern works? how to trade them effectively There are a few prerequisites that are going to review first.
The main thing is how Fibonacci works? If you know how Fibonacci ratios work. Fibonacci sequences begin with the first two numbers 0 and 1. The next number in the sequence is always the sum of the last two numbers. For example, the third number in the sequence is the sum of the first and second numbers. Forth number in the sequence is the sum of the second and third numbers and so on. That is all the construction of the Fibonacci sequence. The Fibonacci ratio appears when we divide the number in the sequence by another number. For example, if we look at the first four numbers in the sequence we get the simplest Fibonacci ratio. For example, equivalent 1 divided by 1 gives us 1 which is equivalent to a 100 percent ratio. If we divide 2 by 1 we get a 200% ratio. If we divide 1/2 we get 0.5 which is equivalent to a 50 percent ratio. However, the most interesting thing about the Fibonacci sequence is that if we look at a larger number and beyond the ratios between two numbers are consistent across the sequence.
The Golden Ratio
If we divide one number by another number we will get the famous golden ratio which is 161.8%.
If we divide one number in the sequence by the next number we get 61.8%. We can find ratios between numbers that are now adjacent to one another in the sequence. For instance, If we divide one number by another number two positions behind we get the 261.8% ratio.
If we divide one number by another number two positions front we get the 38.2% ratio.
An interesting fact about Fibonacci ratios is that they are constant across the whole sequence.
For the study of harmonic patterns, you observed that the most used ratios are 38.2 percent 50%, 61.8%, 161.8% , 261.8%, 361.8%. You will observe the ratios 78.6%, and 127.2% which are square roots of 61.8.
Why do traders use the Fibonacci ratio?
Because Fibonacci ratios are found the all-around nature and culture In the financial market are not an exception. There is certain mathematical harmony in the Fibonacci sequence that can be applied to many different places. The main way traders apply the Fibonacci ratio in the financial market is by measuring the ratios between different price movements in the vertical axis of the price chart which is the way to calculate the size of one price movement in relation to another.
What is the harmonic pattern?
Harmonic patterns are price action patterns where the sequence of price movement respects well-defined ranges of Fibonacci ratios. When consecutive price movement respects these ratios. Price enters the price reversal zone which is the zone of higher probability of reversal Due to the convergence of several Fibonacci ratios.
Very much like candlestick patterns and chart patterns we can divide harmonic patterns into bullish and bearish patterns. The bullish pattern will point to a reversal to the upside whereas the bearish pattern will point to a reversal to the downside.
There are many different types of harmonic patterns like bats, butterflies, garlics, ciphers, and sharks. so we will discuss each type and show the bullish and bearish variations of each one.
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