When it comes to harmonic patterns, there will be some assortment. And some of these are more popular than the other.
Originally, the Gartley came from H.M. Gartley in his book ‘Profits in the Stock Market,’ and Scott Carney later added the Fibonacci levels in his book ‘The Harmonic Trader.’
As years go on, several traders have come up with some other common ratios. And when they are relevant, those are being mentioned as well.
In addition to that, the bullish pattern is, most of the time, seen early in a trend. Also, it is a sign that the corrective waves are ending, and an upward move will ensure the following point. Every pattern might be within the context of a broader trend or range, and traders must be vigilant of that.
This might be a lot of information to sink in, but this is how to read the chart. The price will move up to A, then corrects. And B is a 0.618 retracement of AB. After that, the next move is down via BC and is a 0.382 and 0.886 retracement of AB. The following step is down via CD, and it is an extension of 1.13 to 1.618 of AB. And point D is a 0.786 retracement of XA. A lot of traders look for CD to extend 1.27 to 1.618 of AB.
Area D is known as the potential reversal zone. And this is traders van enter long positions. But waiting for several confirmations of the price starting to increase is encouraged. Then, they place the stop-loss not far under entry.
Now, for bearish pattern, traders may look to short trade near D, with a stop-loss not far above.
Meanwhile, the butterfly pattern is different than the Gartley in that the butterfly has point D extending beyond point x.
Here, traders can see that the price is dropping to A. And the up wave of AB is a 0.786 retracement of XA. Then, BC is a 0.382 to 0.886 retracement of AB. And CD is a 1.618 to 2.24 extension of AB. D is at a 1.27 extension of the XA wave. For a short trade, D is the perfect area to consider. But waiting for a few confirmations of the price starting to move lower is encouraged. Thus, place a stop-loss not far above.
With this many patterns, several traders seek a ratio between the numbers mentioned. And others look for one or the other. For instance, as mentioned that CD is a 1.618 to 2.24 extension of AB. A number of traders will only look for 1.618 or 2.24. Then, they will disregard the numbers in between unless they are too close to these exact numbers.