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- Ch 1: Trading Basics
- Ch 2: Fibs / Harmonics
- Ch 3: Identify Pattern
- Ch 4: The Toolkit
- Ch 5: Setup Anatomy
- Ch 6: Examples
- Ch 7: Trading Plan
Identify the Pattern
Identifying a Harmonic Pattern
Now that we’ve gone through and identified what the patterns are in the last chapter, let’s go through an example.
Just like in math class, you first have to learn how to do long division by hand before you can use a calculator. So, first, we’ll go through the process of identifying a potential pattern by hand before using the neoHarmonics toolkit.
If you are already familiar with trading harmonic patterns, then the following process will be very familiar to you.
Steps to Manually Analyze a Harmonic Pattern
The first step is to visually see a potential pattern. On the chart below, I’ve drawn a potential harmonic pattern. But, is it valid? What type(s) of pattern is it? Where is point D (potential reversal zone)?
Next, you measure the XAB retracement. In this case, point B comes in near the 61.8%, as you can see below. Thus, this could be a Crab pattern or a Gartley pattern (based on our harmonic patterns learned in the last chapter). No other patterns could be valid, since this XAB retracement is either too small or too large for them to be valid (for example, a Butterfly would require a 78.6% retracement and this is only 61.8%).
Next, we determine XA and BC projected zones (Crab pattern). If this is a Crab, then we expect point D (our potential reversal zone) to fall within 2.24 to 3.618 of the BC projection (blue box) and 1.618 of the XA projection (maroon line). These levels are referring to the Crab pattern from Chapter 2. Thus, we have the potential area illustrated below:
However, the XA projection line (maroon level) does not fall within the BC projection area (the blue box between 224% and 361.8%). These two zones must intersect for the pattern to be valid. Thus, this is an invalid pattern!
Next, we determine XA and BC projected zones (Gartley pattern). As mentioned earlier, the other option was a Gartley pattern. To test for a Gartley pattern, we do the same thing as above, but use the Fibonacci ratios that the Gartley pattern requires. In this case, we expect point D (our potential reversal zone) to fall within 1.272 to 2.618 of the BC projection (blue box) and 0.786 of the XA retracement (maroon line) (referring to the Gartley pattern from Chapter 2). Thus, the Gartley pattern gives us the potential reversal zone illustrated by the maroon line and blue box.
We have a match! The XA leg retraces to a price (maroon line) that falls within the BC projection zone (the blue box). Thus, we know to look for a potential reversal around that area.
Phew! That was a lot of work. Now that you know how to do it by hand, it’s time to use your “calculator” (the neoHarmonics pattern analyzer) and find the patterns quick!
Now, the neoHarmonics way!
First, simply click the neoHarmonics Pattern Analyzer tool (“H”) and draw a line from point C to point X (the dotted line on the chart below). At this point, the tool will automatically find points A and B, add the labels, draw the connecting lines, test for valid patterns (if any), and output the potential reversal zone (point D)!
As expected, there is only one valid pattern, the same Gartley pattern we found above. It also identifies the same potential reversal area we found above (indicated by the dotted green line within the box). All from drawing a single line!
Using the neoHarmonics tool, you simply draw a line from point C to point X and the rest is done for you!
As you can see below, if we play the chart forward, the market came within a few ticks of our level and took off like a rocket!
Of course, not all trades work out this well, but the accuracy of these patterns definitely make it my primary tool in my trading toolbox! As always, it’s important to have a method of triggering (entry) and proper money management (targets and stop placement). (Always use a stop!) These are topics we will cover in a later chapter.
Finding a potential pattern is a challenging task without the proper tools. The Harmonic Pattern Analyzer™ makes the process extremely fast and accurate. Now that we know how to find a pattern by hand, let’s dig deeper into the neoHarmonics toolkit and see what it all has to offer.
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