Harmonic Price Model Discover how to use it and apply it in trading -

Harmonic Price Model Discover how to use it and apply it in trading

Author: Michael view: 24 Update: 21/11/2023 Downloads: 0

Harmonic price patterns are a technical analysis tool used to identify price patterns that predict trend reversals or continuations. Developed by HM Gartley in the 1930s, this model has proven effective in helping traders identify profitable trading opportunities.

What is a Harmonic price pattern?

Harmonic price pattern is a price pattern made up of five points, connected together according to Fibonacci ratios. These points are named after letters of the Greek alphabet, as follows:

  • X: Starting point of the model
  • A: The highest or lowest point of the first wave
  • B: The lowest or highest point of the second wave
  • C: Highest or lowest point of the third wave
  • D: Highest or lowest point of the fourth wave

Fibonacci ratios used in Harmonic price patterns include:

  • 0.382: Most popular Fibonacci retracement ratio
  • 0.618: The most popular second Fibonacci retracement ratio
  • 0.786: The most popular third Fibonacci retracement ratio
  • 1.27: Most popular Fibonacci extension ratio
  • 1.618: The second most popular Fibonacci extension ratio
  • 2.24: The third most popular Fibonacci extension ratio
  • 3,618: The fourth most popular Fibonacci extension ratio

Components of the Harmonic price pattern

Harmonic price model is made up of the following main components:

Point X:

Point X is the starting point of the pattern, it can be a reversal point or trend continuation point. This point is determined using other technical analysis tools such as moving averages, trend lines or other indicators.

Grade A:

Point A is the highest or lowest point of the first wave. It is determined by using technical analysis tools to find the highest or lowest point in the first wave.

Point B:

Point B is the lowest or highest point of the second wave. It is also determined using technical analysis tools to find the lowest or highest point in the second wave.

Point C:

Point C is the highest or lowest point of the third wave. It is also determined using technical analysis tools to find the highest or lowest point in the third wave.

Point D:

Point D is the highest or lowest point of the fourth wave. It is also determined using technical analysis tools to find the highest or lowest point in the fourth wave.

How to use the Harmonic price model

Harmonic price patterns can be used to determine entry and exit points. It is important to accurately determine points A, B, C, D and apply Fibonacci ratios to determine entry and exit points.

The basic steps to use the Harmonic price model are:

  1. Determine point X: This point can be determined using other technical analysis tools such as moving averages, trend lines or other indicators.
  2. Identify point A: This point can be determined by using technical analysis tools to find the highest or lowest point in the first wave.
  3. Use the Fibonacci ratio to determine point B: The 0.618 ratio is the most common ratio to determine point B.
  4. Use the Fibonacci ratio to determine point C: The ratio 0.382 is the most common ratio to determine point C.
  5. Use the Fibonacci ratio to determine point D: The ratio 0.786 is the most common ratio to determine point D.
  6. Determine entry and exit points: Entry points can be determined by using Fibonacci ratios to determine entry points. The entry point can be determined using Fibonacci retracement levels or Fibonacci extension levels.

Advantages of Harmonic price model

Harmonic price patterns have many advantages when used in trading, including:

  • Easily identify entry and exit points: With clearly defined points A, B, C, D, it becomes easier to identify entry and exit points.
  • Able to predict trend reversals or continuations: Harmonic price patterns can help traders identify market trend reversals or continuations.
  • Highly accurate: When applied properly, the Harmonic price model is highly accurate in predicting entry and exit points.

Disadvantages of Harmonic price model

Although it has many advantages, the Harmonic pricing model also has some disadvantages such as:

  • Requires skill and experience: Identifying points A, B, C, D and applying Fibonacci ratios requires skill and experience in technical analysis.
  • Not suitable for all markets: the Harmonic pricing model is not suitable for all markets and needs to be applied properly to be effective.
  • Not suitable for all timeframes: the Harmonic price pattern is also not suitable for all timeframes and needs to be used in larger timeframes to be effective.

Types of Harmonic price patterns

There are many different types of Harmonic price patterns , but in this article we will focus on the two most popular types, Gartley and Butterfly.

Gartley model

The Gartley pattern is a Harmonic price pattern with a structure similar to the AB=CD pattern. It is determined by points A, B, C, D and applies Fibonacci ratios to determine entry and exit points.

Harmonic Price Model Discover how to use it and apply it in trading

Butterfly pattern

The Butterfly pattern is a Harmonic price pattern with the same structure as the Gartley pattern, however it has an additional E point. The E point is determined using the 0.786 Fibonacci retracement level of the CD wave.

Harmonic Price Model Discover how to use it and apply it in trading

Steps to Identify Harmonic Price Patterns

To identify the Harmonic price pattern , we need to follow these steps:

  1. Determine point X: This point can be determined using other technical analysis tools such as moving averages, trend lines or other indicators.
  2. Identify point A: This point can be determined by using technical analysis tools to find the highest or lowest point in the first wave.
  3. Use the Fibonacci ratio to determine point B: The 0.618 ratio is the most common ratio to determine point B.
  4. Use the Fibonacci ratio to determine point C: The ratio 0.382 is the most common ratio to determine point C.
  5. Use the Fibonacci ratio to determine point D: The ratio 0.786 is the most common ratio to determine point D.
  6. Determine point E (if applicable): This point only applies to the Butterfly pattern and is determined using the 0.786 Fibonacci retracement level of the CD wave.
  7. Determine entry and exit points: Entry points can be determined by using Fibonacci ratios to determine entry points. The entry point can be determined using Fibonacci retracement levels or Fibonacci extension levels.

Support tools for Harmonic price models

To apply the Harmonic price model , we can use the following technical analysis tools:

  • Moving average: This is a popular tool in technical analysis and can help identify entry and exit points.
  • RSI (Relative Strength Index): This indicator can help determine entry and exit points based on overbought or oversold market conditions.
  • MACD indicator (Moving Average Convergence Divergence): This indicator can help identify the transition between the market’s uptrend and downtrend.
  • Fibonacci levels: Fibonacci levels are an important tool in determining points A, B, C, D and E of the Harmonic price pattern .

Real-life examples of Harmonic price patterns

To better understand how to apply the Harmonic price model in trading, we will look at the following two real-life examples:

Example 1: Gartley pattern on EUR/USD chart

In this example, we will look at a Gartley pattern on the EUR/USD chart with a 4-hour timeframe.

Harmonic Price Model Discover how to use it and apply it in trading

As you can see, the Gartley pattern is defined by points A, B, C, D and applies Fibonacci ratios to determine entry and exit points. In this example, the entry point is determined using the 0.618 Fibonacci retracement level of the CD wave and the exit point is determined using the 1.272 Fibonacci extension level of the CD wave.

Example 2: Butterfly pattern on XAU/USD chart

In this example, we will look at a Butterfly pattern on the XAU/USD chart with a 1-hour timeframe.

Harmonic Price Model Discover how to use it and apply it in trading

In this example, we can see the Butterfly pattern is defined by points A, B, C, D and E. The entry point is determined using the 0.618 Fibonacci retracement of wave CD and the point The order is determined using the 1.272 Fibonacci extension of the CD wave.

How to apply the Harmonic price model in trading?

To apply the Harmonic price model in trading, we need to follow these steps:

  1. Determine point X: This point can be determined using other technical analysis tools such as moving averages, trend lines or other indicators.
  2. Identify point A: This point can be determined by using technical analysis tools to find the highest or lowest point in the first wave.
  3. Use the Fibonacci ratio to determine point B: The 0.618 ratio is the most common ratio to determine point B.
  4. Use the Fibonacci ratio to determine point C: The ratio 0.382 is the most common ratio to determine point C.
  5. Use the Fibonacci ratio to determine point D: The ratio 0.786 is the most common ratio to determine point D.
  6. Determine point E (if applicable): This point only applies to the Butterfly pattern and is determined using the 0.786 Fibonacci retracement level of the CD wave.
  7. Determine entry and exit points: Entry points can be determined by using Fibonacci ratios to determine entry points. The entry point can be determined using Fibonacci retracement levels or Fibonacci extension levels.
  8. Apply support tools: We can use technical analysis tools such as moving averages, RSI and MACD indicators to determine entry and exit points.
  9. Risk management: In trading, it is always necessary to manage risk by setting stop loss and take profit to minimize possible risks.

Conclude

Harmonic price patterns are a popular technical analysis tool in trading and can help traders identify entry and exit points with high accuracy. However, applying this model requires skill and experience in technical analysis and is not suitable for all markets and time frames. Therefore, mastering the basic steps and using the tools

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