Harmonic Pattern The Golden Section A simple line can illustrate the relationships of the golden ratio or golden mean in the golden secti ectio on. Begin with drawing wing a line and then hen divide it into segments where the ratio of one part to the entire line is the same as the ratio of the smaller part to the larger. The example of the golden section is illustrated in the following table: Whole Line A = 1 inch ( __________ ) Section B = 0.618 inche ( ______ ) Section ! = 0."8# inche ( ___ ) A$B=!%B=A &'''''''''''''''''''&'''''''''''''''&'''''''''' &'''''''''''''''''''&'''''''''''''''&''''''''''''''''&''''''''''''& ''''''&''''''''''''& 1 ' 0.618 = 0."8# % 0.618 = 1 These line segments can be divided in various combinations to manifest phi (0.61! ratios. atio o* A to B = 1+0.618 = 1.618 atio o* A to ! = 1+0."8# = #.618 (1%1.618) atio o* B to A = 0.618+1 = 0.618 atio o* B to ! = 0.618+0."8# = 1.618 atio o* ! to A = 0.618+1 = 0.618 atio o* ! to B = 0."8#+0.618 = 0.618 The golden section is closel" related to the golden ratio ra tio since the ratios have a relationship to one another that is e#ual to phi (0.61! or the inverse$ %hi (1.61!. The concept of a %otential &eversal 'one (%&'! was originall" outlined in The armonic Trader Trader:: ,Hi ,Hito torr- ha ha ro/ ro/en en that that a con/ con/er ere enc nce e o* i2o i2ona nacc ccii n3m2er and rice attern ro/ide a hihl- ro2a2le area *or a re/eral.4 Thi area o* con/erence i called the otential re/eral 5one.
When three *o3r or e/en 7/e n3m2er come toether ithin a eci7c area -o3 m3t reect the hih ro2a2ilit- *or ome t-e o* re/eral.9 (The armonic Trader$ )*evada: armonicTrader.com$ +.+.,.$ 1---! /pecic price structures that possess three or more numbers within a dened area are the basis for dening these harmonic ones. 2t is called 3%otential4 because the dened area must be anal"ed as the price action tests the pro5ected 3&eversal 'one.4 Although this concept will be covered extensivel" later in this material$ it is imperative to understand that patterns are dened b" specic price structures that contain combinations of distinct and consecutive ibonacci retracements and pro5ections. B" calculating the various ibonacci aspects of a specic price structure$ harmonic patterns can indicate a specic area to examine for potential turning points in price action. Again$ this area is called the %otential &eversal 'one (%&'!. 2n essence$ a %&' represents the critical areas where the 7ow of bu"ing and selling is potentiall" changing. These harmonic ones attempt to identif" the price levels where imbalanced overbought and oversold situations are reversing8at a minimum 8bac9 to their respective e#uilibrium level. An" trading s"stem attempts to be on the 3right side4 of the mar9et8bu"ing low and selling high. armonic Trading techni#ues #uantif" these areas and generate bu" and sell signals based on the price action at these turning points. urthermore$ these techni#ues inherentl" dene and direct trading behavior as a means of anticipating these potential changes in price action. Harmonic Tradin atio Primar- atio:
(irectl" derived from the ibonacci *umber /e#uence! ; 0.61 < %rimar" &atio ; 1.61 < %rimar" %ro5ection Primar- ;eri/ed atio: ; 0.=6 < /#uare root of the 0.61 ( ! ; 0.6 < ourth root of 0.61 or /#uare root of the 0.=6 ( ! ; 1.1> < ourth root of 1.61 or /#uare root of the 1.?= ( ! ; 1.?= < /#uare root of the 1.61 ( ! !omlementar- ;eri/ed atio: ; 0.>? < (
[email protected]! or 0.61? ; 0.0 < 0.=0=? ; 0.=0= < /#uare root of 0.0 ( ! ; 1.1 < /#uare root of ?.0 ( ! ; ?.0 < (1C1! ; ?.? < /#uare root of ( ! ; ?.61 < 1.61? ; >.1 < %i (/ee later section 3The 2mportance of %i (>.1! in armonic Trading4! ; >.61 < (1C?.61!
The AB=!; Pattern S3mmarAlthough the basic AB<, structure ma" possess a variet" of ibonacci ratios$ the concept of support or resistance at the completion of two distinct and consecutive price legs is the essence of all harmonic patterns. Alternate AB<, patterns underscore the importance of using the basic structure to dene the completion of specic patterns. 2n either AB<,$ the B, pro5ection should complement the completion point of the pattern. 2t is important to remember the reciprocal relationships of the , point to the B, pro5ection. A perfect AB<, utilies the 0.61 retracement and 1.61 extension$ as the most harmonic alignment of ibonacci ratios for the pattern. 2 believe that this
pattern should possess specic characteristics to be a valid harmonic structure and to dene a trading opportunit": 1.
ection can /ar- *rom 1.1" to ".618 and deend 3on the ! oint retracement. ?. Alternate AB=!; attern e@it. 2t is important to mention that man" ibonacci@related anal"sts have oversimplied this pattern in recent "ears. The idea of trading ever" AB<, that completes is absurd. Dan" people who present this pattern as the 3end@all@be@all4 price structure fail to understand that AB<,s re#uire man" other considerations to conrm and complement the completion point. %referabl"$ the structure should possess other ibonacci retracements or pro5ections. owever$ the most important concept is that the AB<, is the basic structure of all harmonic patterns.
The Bat Pattern S3mmar The Bat pattern is a precise harmonic pattern that fre#uentl" "ields exact and sharp reversals. The 0.6 retracement is a powerful completion point and the dening limit within the %&'. Although a 0.0 or 0.>? retracement is preferred$ an" B point that is less than a 0.61 will dene a valid Bat structure. The Bat pattern incorporates a minimum AB<, completion to validate the structure$ as well. owever$ an Alternate 1.?= AB<, is most common and is a dening element in the %erfect Bat structure. urthermore$ the B, pro5ection should
complement the other numbers in the %&'$ and it must be at least a 1.61 extension. 1. B oint retracement o* the A le m3t 2e le than 0.618 ith a 0.0 or 0."8# retracement re*erred. #. Precie 0.886 ; oint retracement o* the A le a the de7nin limit ithin the PC. ". ection ith e@treme e@tenion (#.0$#.618) oi2le. ?.
Gartle- Pattern S3mmar The Fartle" pattern is a controversial pattern. espite the var"ing interpretations within The Freat Fartle" ,ontrovers"$ the most harmonic Fartle" pattern possesses distinct characteristics at all points within the structural rules were originall" outlined in 3The armonic Trader.4 The 0.61 B point retracement is critical in dening a valid Fartle" structure. Although the 0.=6 GA retracement is an important element of the structure$ the e#uivalent AB<, within the pattern is the most critical completion point in the %otential &eversal 'one (%&'!.
urthermore$ the AB<, completion is a mandator" minimum re#uirement for all valid Fartle" patterns. 1. Precie 0.618 B oint retracement o* the A le. #. Precie 0.D86 ; oint retracement o* the A le in the PC. ". 1.#D or 1.618 B! ro>ection. ?. E3i/alent AB=!;. . ! oint retracement can /ar- 2eteen a 0."8# to a 0.886. The Fartle" pattern must include these specic conditions to dene the best harmonic structures. Although the Fartle" ma" resemble a Bat$ the ibonacci ratios utilied in the setup are uni#ue to this pattern. 2n addition$ the pattern should be #uite distinct and possess ideal s"mmetr".
The !ra2 Pattern S3mmarAlthough the structural variations of the ,rab ma" seem to dene the same pattern$ the alignment of ibonacci ratios clearl" diHerentiates each t"pe as a uni#ue situation. The ,rab t"picall" denes extreme overbought and oversold situations$ as the 1.61 GA leg is the most important ibonacci measurement of the pattern and it represents the most critical number in the %otential &eversal 'one (%&'!. Inli9e the other patterns within the armonic Trading approach$ the AB<, is not as critical at the completion point. Although it is important to diHerentiate the AB<, possibilities for each variation$ the Alternate 1.61 AB<, pattern is the preferred structure in most ,rab patterns. owever$ the 1.?= AB<, pattern is t"picall" found in the original version$ while it is not unusual for the eep ,rab to possess an e#uivalent AB<,. The extreme B, pro5ection8usuall" a ?.61$ >.1$ or >.61 extension8underscores the
nature of this structure. Although the eep ,rab permits a wider range of B, possibilities$ this pro5ection should converge closel" with the 1.61 GA. 1. Precie 0.618 B oint retracement or le o* the A le. (."8# and 0.0 are common B oint in the tr3ct3re.) #. E@treme #.618 ".1? or ".618B! ro>ection. (Sometime #.#? B! ro>ection *orm in the tr3ct3re.) ".
The B3tter- Pattern S3mmar The Butter7" is a specic @point extension structure that possesses a distinct alignment of ibonacci ratios to validate the pattern. The primar" determining element of the pattern is a
precise 0.=6 B point retracement of the GA leg. The Butter7" utilies onl" a 1.?= GA pro5ection as the most critical number in the %&'. urthermore$ the e#uivalent AB<, pattern serves as a minimum re#uirement for the patternJs completion. But$ the Alternate 1.?= AB<, pattern is more common to the structure. The B, pro5ection is another dening element of the pattern$ as it must be at least a 1.61 extension. owever$ the B, pro5ection is not as extreme in the Butter7" as it is in the ,rab. 1. ection can /ar- *rom 1.1" to ".618 and deend 3on the ! oint retracement. ?. Alternate AB=!; attern are common ithin the tr3ct3re. The Butter7" is similar to the Fartle" because it re#uires a specic alignment of ibonacci ratios8especiall" a precise B point8to validate the structure. Although such a strict denition reduces the number of possible trading opportunities$ this precision reduces those invalid situations that ma" appear similar but fail to "ield consistentl" accurate setups.
