Let’s have a look at an interesting situation on the Usd/Jpy.
There are 4 patterns forming within each other along with similar measured moves across different time frames.
Now these patterns were all identified by one of our trader member “Carlos” who has developed a knack of identifying the harmonic patterns across different time frames. This makes our Live Trading Room very interesting as we get to discuss & trade harmonic price patterns across different time frames.

Situation.1 - A bearish butterfly in the process on the 4hr chart

As we can see in the chart, the first 3 legs of this harmonic pattern seem to have formed and we would expect price to rally to complete the last wave C-D. This would complete the harmonic pattern.
Let’s keep 2 points in reference on this chart.
One is the expected rally to the point ‘D’ which should be at 111.30 (appr.)
Second, notice the 2 parallel lines plotted within the wave B-C.
These lines form a classical AB=CD pattern, which normally occurs within a harmonic pattern.
Keeping this in mind, lets go down to a smaller time frame and have a look at this measured move AB=CD.

Situation.2 - A bullish Gartley completed on the 1hr chart

As we can see in this chart, this did form a bullish Gartley. Even though the fib ratios are not very accurate, it satisfies the basic parameters of a harmonic pattern, and more importantly the measured move AB=CD.
Now this pattern seems to have completed and we can expect price to fulfill the target objectives, which is the 127.2 / 161.8 fib projection of A-D.

Referring back to the 4hr chart, we can see that this expected price rally is the last leg ‘C-D’ of the bearish butterfly of situation.1
And the expected fib ratio of this ‘C-D’ wave is the 161.8 of the ‘B-C’ wave. (of situation.1)
So we can conclude, that if price confirms the objectives of situation.2 (the bullish Gartley) it would probably go the 161.8 fib projection.
And again on this 1hr chart, notice the 2 parallel lines within the wave ‘C-D’.
And we know that this classical AB=CD pattern normally occurs within a harmonic pattern.
So there exists the possibility of another harmonic pattern on a smaller time frame.

Situation.3 - A bullish butterfly also completed on the 1hr chart

Looking closely at this smaller AB=CD pattern, we could identify a bullish butterfly within the larger bullish Gartley.
Now in this case, the AB=CD does not apply precisely, but it gave us the base to look for another harmonic pattern.
Price seems to have found support on the ‘D’ level of this pattern and we can expect a rally to the upside from here.
Now we have 3 patterns indicating that price could rally to the upside and we need to look for a proper entry into the long trade.
As always, we do not assume anything and simply follow the “If-Then” principle.
We thus decided to go down to a smaller time frame to look for some confirmations.

Situation.4 - A bullish Gartley completed on the 15min chart
Going down to the 15min time frame, we could identify a bullish Gartley pattern which formed at the support zone.

So now we have 4 patterns indicating that price could rally to the upside.

There are 2 reasons that this post is worth looking at.
One is to observe the fractal nature of price when we have patterns within patterns. This is a very common occurrence in price movements and one only needs to concentrate more on the price action…rather than indicators.
Second is expected plan of action for such situations.
As we mentioned, we have 4 patterns indicating that price could rally to the upside.
But one should not jump into a trade and a trading plan has to be in place.
Applying the “If-Then” principle, we start from the smallest pattern and identify possible target levels. If price breaks these target levels, then we move to the next larger pattern and expect price to achieve those target levels.
Bottom line - A trade can be made successful by managing it properly and using the correct money management and risk management principles.
Sunil.

This is with reference to an earlier comment on the current situation on Gold.
If we are looking at the weekly chart, is this a bullish Gartley pattern?

While it does respect the fib levels within the legs of the pattern, there are a couple of points which are worth looking into.
Firstly any fib level and subsequently a harmonic pattern is more effective if plotted on a swing high / low which has acted a pivot.
In this case, the starting point of the pattern ‘X’ is a swing low which is a pullback within the existing uptrend. Hence this dilutes the effect of the fib levels.
Secondly, as we can notice the first retracement ‘B’ does not form exactly at the 61.8 level. In a Gartley, this point is often an exact retracement.
Hence we can scale down the effectiveness of this pattern to a lower level.
Now it does not in any way negate the pattern, since price will always respect the fib levels.
But in the favor of the pattern, the reversal point ‘D’ has formed at a confluence of 2 fib levels, as described in the chart image.

So, let’s look at this situation from a different perspective.

Looking at this daily chart, we can observe that there was a bearish Gartley pattern which had formed. The structure of this pattern was quite precise as described in the chart image, and one would expect the pattern to fulfill the price objective….which it did.

One can see that the price objective of this bearish Gartley was achieved quite accurately.
Hence one would expect this price target to turn into a support zone.
Coming back to our bullish Gartley pattern, now we can balance the different views we have on the situation and conclude that –
The point ‘D’ seems to be a support zone which could turn into a reversal area.

Let us plot the initial price objective of this bullish pattern, which should be the initial move…if price rallies up.
In any harmonic pattern, the minimum price objective is the confluence of 2 levels –
(a)    Calculate the distance of the wave ‘B-C’ and plot it on the low of ‘D’.
(b)    The 61.8 – 78.6 Fib retracement of the wave ‘C-D’
We can this set a target zone in this area.
In this case, this target zone is also capped by a trend line which we can plot on the highs of ‘A-C’.

This becomes a target zone and we can expect price to reach there, if the momentum turns bullish.
A safe entry into this long trade would be on the break of the Fib retracement 23.6 (of wave C-D), which is also a major support zone.
Lastly, at the risk of repeating the same point again & again, we never assume anything and do not jump into any trade.
We follow the “If-Then” principle and let price guide us into the trades.
Sunil.

Let’s have a look at another long term harmonic pattern - a Bearish Butterfly on the weekly time frame of the Aud/Nzd.

If we look at this chart, the pattern seems to have completed and is poised to take price down to the anticipated target zone of the pattern.
The fib ratios have been met quite precisely and hence there is a strong probability of the anticipated move being fulfilled.
Now even though the pattern looks nice, one should not jump into a short trade.
Any trade has to be planned, and the correct entry, stop and exit levels need to be precisely determined….before you enter a trade.

There are never any guarantees that price will fulfill the required objectives and it is only the correct money management approach which will increase the account equity.
Hence we must take into account mid level support zones and ride the trade by taking profits at these mid-support zones.
Let us identify some support zones, which will become our ‘Take-Profit’ levels, if price moves as per our expectations.

In any harmonic pattern, the initial objective should be determined by a confluence of 2 factors.
(a) We use the "Measured Move" concept, and calculate the distance of wave ‘B-C’. This distance deducted from the high of ‘D’ should give the initial support zone.
(b) The fib retracement levels of the wave ‘C-D’ also offer the initial support zones.
We can notice a confluence of these 2 factors at the Fib retracement 50.0 (of C-D) and designate that as our initial price target.
If price manages to break this level, then we can expect further price objectives at the 127.2 / 161.8 fib projection of the wave ‘A-D’.

Now that we have our exits in place, we should similarly plan the entry and the stop levels.
One could drop down to a smaller time frame to look for a “technical trigger” for a short trade. There seems to be pullbacks forming and one may not get an entry immediately, but at least one is prepared for the trade.

Sunil

With the USD gaining strength and Oil retreating from its highs, could we be looking at a change in trend?
Too early to call for a reversal, but a strong pullback certainly on the cards.
Comparing the different financial instruments, we know that Oil and the Canadian Dollar have a strong correlation.
So if the USD is rallying against the majors and oil is pulling back from its highs, the one currency pair which should  have a double effect is the Usd/Cad.
As expected, this currency pair broke all short term resistance levels with unprecedented momentum.
Now the question is where will it stop?
As usual we try and use fib targets, or harmonic targets to get a target zone.
In this chart we have identified a bullish Gartley pattern.

Now this pattern was not traded, but identified only after looking back for some target zones.
(Its always easy to look back at a static chart and identify patterns…right??)
But keeping in line with our topic, I want to point out the basics behind the harmonic pattern. That price does move in a particular pattern, and one only needs to be aware of this fact to gain an edge.

Which can be seen by the fact that price formed another harmonic pattern on its way to achieving the target of the first one.

Now one can also plot the fibs on the second harmonic pattern, but my point here is that it is the very nature of price to form such patterns.
In any case, price has crossed the expected target of the initial Gartley (the 161.8 fib of A-D) and looks poised to go further.
So we can expect some more bullish moves on this one, before we can identify another harmonic pattern.
Sunil.

Hi Folks,
First of all, let me apologize for not updating the blog in the last week, since I was away.
We may have missed some harmonic patterns in the process, but lets get on.

I wanted to discuss a harmonic pattern in the process on the 4hr Eur/Gbp, which is in response to a query from one of the traders.

If we look at this chart, we could be looking at the completion of a bearish Gartley pattern. The fib retracements have been met quite accurately (as shown on the chart) and one would expect price to move towards the downside.

The second chart shows the expected price objectives that are expected.
The initial price target would be the 61.8 fib retracement of the C-D wave & if price breaks this level, then we can further expect a move to the 127.2 / 161.8 fib projection of the wave A-D.

So far so good.

But if we have a look at this chart, then we can identify a possible bearish Bat pattern in the process….in the same price movement.

Now which pattern would be the right one?
And one needs to identify it correctly since the expected price movements would be in opposite directions.
If the smaller Gartley is valid, then we expect price to resume the downtrend with immediate effect.
If the larger Bat is valid, then we expect price to move to the upside to complete the last wave C-D of this pattern.

Let’s take some points into consideration.
First and foremost, the fib ratios plotted on the larger pattern would be more effective, since they are plotted on the pivot swing high & pivot swing low.
This simply means that the fibs in chart.3 are plotted on bars from where price has turned around.
In comparison, the fibs plotted on chart.1 are not on pivot bars.
The X on chart.1 (the bearish Gartley) is a pullback in the entire down wave & not a separate wave.
Plus the D of the smaller Gartley (chart.1) did not confirm accurately to the parameters of the Harmonic – D did not form at the fib projection 127.2 of wave C-D.
Hence one would give more weight age to the larger pattern.

Now this does not mean that we immediately go long & look to trade the last up leg of the Bat,
We simply follow the “If-Then” procedure.
We know that price does respect fib levels, so looking at the expected targets of the smaller Gartley we could expect a down move to the 61.8 of C-D.
If price breaks that, then we think short.
For expected longs, we can simply plot a trend line along the highs of X-D and we think long if price breaks this trend line.
Till the time price is within these levels, we are in a No-trade Zone, as we can see in this chart.

We wait for price to tell us where its going & till then we look at some other currencies….or go for a swim or a round of golf -J
Sunil.