Harmonic patterns are a popular technical analysis tool used by traders to identify potential price reversals in financial markets. These patterns are based on the idea that the price movements of an asset follow specific geometric patterns, which can be identified and used to predict future price movements.
The most common harmonic patterns are the Gartley, Butterfly, Crab, and Bat patterns. These patterns are named after the animals they resemble on a price chart.
The Gartley pattern is a bullish pattern that occurs after a downtrend. It is characterised by a price retracement that ends at a Fibonacci level of 61.8% and is followed by a price rally. The pattern is completed when the price reaches a specific level, which is a Fibonacci extension level of the initial price move.
The Butterfly pattern is a bullish pattern that occurs after a downtrend. It is characterized by a price retracement that ends at a Fibonacci level of 78.6% and is followed by a price rally. The pattern is completed when the price reaches a specific level, which is a Fibonacci extension level of the initial price move.
The Crab pattern is a bearish pattern that occurs after an uptrend. It is characterised by a price retracement that ends at a Fibonacci level of 38.2% and is followed by a price decline. The pattern is completed when the price reaches a specific level, which is a Fibonacci extension level of the initial price move.
The Bat pattern is a bearish pattern that occurs after an uptrend. It is characterised by a price retracement that ends at a Fibonacci level of 88.6% and is followed by a price decline. The pattern is completed when the price reaches a specific level, which is a Fibonacci extension level of the initial price move.
Traders use harmonic patterns to identify potential price reversals and enter trades in the direction of the expected price movement. However, it is important to note that not all harmonic patterns result in a successful trade, and traders must use other technical indicators and risk management strategies to ensure profitable trades.
In conclusion, harmonic patterns are a useful technical analysis tool that traders can use to identify potential price reversals and enter trades in the direction of the expected price movement. While these patterns are not foolproof, they can be a valuable addition to a trader's toolkit when used in combination with other technical indicators and risk management strategies.
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