Let’s have a look at a harmonic pattern that did not work.
Things don’t always go as planned, but the technical tools that we use should give us an edge in this business of probabilities.
The following harmonic pattern did not fulfill the target objectives…which we could have seen coming.
GBP/USD -1hr.
We could identify a bearish harmonic pattern and would have expected price to turn down to fulfill the bearish targets.

Now, looking at the longer term picture, price was in a pretty strong bullish trend and thus one would be very careful of bucking the trend.
But then, the harmonic patterns are pretty accurate…right?
So, we would take the trade, but with a conservative entry.
The thumb rule for price objectives of a harmonic pattern says that the minimum price objective is often a measured move….of the wave B-C. (Marked as the blue line in the chart, and plotted on the high of “D”)
So, one would wait to see if price has the momentum to break this level. If it does, then one would expect further bearish moves and target the 127.2 fib projection of wave A-D.
But then, look what happened -

Price found support at precisely that level…thus keeping us out of a bad trade.

This brings me to a very important point.
Technical analysis is NOT the goal of a trading plan.
One must use the tools of technical analysis as a path to enable us to reach our goal…..of becoming a profitable trader.
This simply means that we use technical analysis to manage our trades better.
As we did in this example.
We could plan our trade as per the rules of technical analysis.
Sunil.

Gold does not seem to be co-operating with me recently -:)

It is in a consolidating phase & not much patterns forming.

On the daily time frame, we have a bullish 5 wave structure, which tells me that one should remain long on this…till we get some bearish indications.

Keeping in tune with that, I have been following a bullish flag pattern on the 1hr time frame, which again, seems to be in a consolidation.

Am waiting for this bullish price objectives to be fulfilled and looking for a trigger to re-enter a long…if possible.

In any case, let us have a look at the flag pattern.

The down sloping channel (the flag) has formed quite well and price had broken out of the flag channel to the upside. We are looking at a pullback, which has not yet negated the bullish flag pattern.

For the expected price objectives, we measure the distance of the Flag pole & plot it on the level from where price breaks out of the channel.

Price is expected to travel this distance to fulfill the price objectives.

In this case, the expected price target is appr. 960.00, but we can expect some more moves to the downside, before price resumes the uptrend.

So, we remain bullish & wait for a proper entry.

If we dont get a trade, well we can always look at something else -:)

Sunil.

Let us have a look at an interesting situation that we have been following on the Eur/Cad.
The daily time frame has formed a harmonic pattern - a bullish Gartley.

One can see in the chart, the waves of the harmonic pattern have formed with the precise fib ratios…so far.

Now let’s put a twist to this pattern.
If we take the current wave “C-D”, and examine it in detail on the 4hr time frame, we can see that this wave has formed a perfect bearish Elliot wave.

Now, keeping things very simple, we know that if we have a 5 wave structure, it indicates the direction of the existing trend.
In this case, it means that the overall trend is down, which puts a spanner in the works of the harmonic pattern.

So, again, at the risk of repeating myself…..as a trader one must remain flexible and follow price…instead of trying to predict it.
Let’s examine the alternatives that we have here -
Option.1 - The bearish Elliot wave.
The thumb rule for the Elliot wave says that after completing a 5 wave structure, price should give an ABC correction to the upside, which usually travels to 50% to 61.8% of the entire Elliot wave.
Price then resumes the downtrend again.
This down trend could continue deeper or it completes the harmonic pattern and finds support at the D level. (This has yet to be fulfilled)

In any case, if price finds resistance at the expected level, we should be looking for shorts.

Option.2 - Price does not follow any of our analysis & keeps going up.
Well, we are not looking for longs over here & we may miss out of some long moves…if at all.
In that case, we have only spent some time in the analysis…but have not lost anything from our capital.
There will always be other opportunities.
Sunil.

With reference to the harmonic patterns that we discuss in the FxStreet webinars, there have been a lot of questions on how to classify the different harmonic patterns.
I had put up a post earlier on the same subject and am repeating it again for reference.

Classification of the different harmonic patterns….the way I see them.
Now, I have not come across this kind of classification anywhere & I could be wrong in my conclusions.
But over the number of years that I have been studying the Fibonacci ratios & harmonic patterns, I have observed these subtle differences.

First and foremost, let us understand what a harmonic pattern is.
A harmonic pattern is simply -
An impulsive wave (X to A) followed by two corrective waves (A to B and C to D) which ultimately gives rise to a larger impulsive wave (the price targets)

The important points that one should follow are -

• The retracement of X-A to point B usually identifies the kind of harmonic pattern that should ultimately form.

• Point C is generally the weak link in the pattern. The retracement of A-B to point C could form at any fib ratio, right from 0.382 to 0.886.

• Point D is the ultimate confirmation point of a harmonic pattern. ‘D’ will always form at a confluence of 2 fib levels (depending on the type of pattern) and these fib levels are very accurate. The 2 fib ratios (the Retracement of X-A AND the Projection of B-C) form precisely at the expected levels.

Let’s have a look at the specifics of the retracement ‘B’ (of the move from X to A) –
The Bat pattern -
In this pattern the first corrective wave to ‘B’ is a shallow correction, and retraces to 38.2 to 50.0. In that case, the second corrective wave to ‘D’ should form at 0.886 of X-A.
(Note: Most of the times ‘B’ forms at the 38.2 level.)

The Gartley pattern -
In this pattern the first corrective wave to ‘B’ is a specific correction to 61.8 of X-A. In that case, the second corrective wave to ‘D’ should form at 0.786 of X-A.
(Note: This is a very specific pattern and the two corrective waves will always form at the 61.8 and 78.6 levels precisely.)

The Butterfly pattern –
In this pattern the first corrective wave to ‘B’ is a deep correction, and retraces to 78.6 of X-A. In that case, the second corrective wave to ‘D’ should form at 1.272 of X-A.

You will notice that the location of ‘D’ is based on the fib ratios of X-A, and the fib ratios of B-C have not been taken into consideration.
This is because I have observed that the B-C projections may vary from one fib level to another, but the fib ratios of X-A always form at the precise levels.

Let us have a look at another harmonic pattern.
The Crab pattern -
This is a pattern which does not occur very frequently, and one can only identify it after the entire 5 wave structure has been completed.
This is because, unlike the previous patterns the first corrective wave to ‘B” is somewhat subjective. In fact, the identifying factor for this pattern is the second corrective wave to ‘D’ which is a very deep wave.
In this pattern the first corrective wave to ‘B’ could be anywhere from 38.2 to 61.8.
The second corrective wave, subsequently to ‘D’ is a deep wave & should form at 1.618 of X-A.

Finally, some amount of discretion is required, since price will never behave exactly the way we expect.

But this classification has given me an edge for the anticipated price moves & I hope it does the same for you.
From my experience, I have seen that it is the Gartley & the Butterfly which occur more often & I would concentrate on these 2 patterns.
Sunil.

The previous bullish harmonic pattern that we anticipated on Gold did not complete and it was one of the losing trades that occurred.
The bearish move seems to have given rise to an Elliot wave and let’s examine it on the Daily chart.
These longer term patterns tend to give us a larger picture and one can estimate which part of the wave we are in.
Let us start with the weekly time frame.
Referring to a previous post of 14th Dec’08 “Is price movement random?” we had seen the fib relations on the weekly Gold chart.
I am enclosing the same chart for reference

As of today, we can see that price did find resistance a Fib level of 78.6% and hence we can expect some down moves.

Going down to the Daily chart to examine the price action in detail, we can identify a Bullish Elliot wave. The corrective wave.4 seems to be in the process & we can expect some further down moves.

Looking at patterns within patterns, we can see that the corrective wave2 was also a bullish harmonic pattern - the Gartley.
Plus we had a bearish regular divergence at the end of wave.3.
Coming back to the Elliot wave, the thumb rule for the wave.4 is that it should never enter the territory of wave.1. We can thus take this level as a barrier zone and expect some support here.
If price finds support, then we can expect the last impulsive wave5 to form.
If price breaks this level to the downside, then it negates the Elliot wave and we can expect further down moves.

Let me repeat my “mantra” again.
We use the technical tools to give us the best probable trade. But we don’t try and predict the price action. We wait for price to confirm & then enter the trade.
In this case, the wave.5 of the Elliot wave will get confirmed only if price finds support at the designated levels.
So, we wait.

Speaking of Elliot waves, let us have a look at a perfect bullish Elliot wave on the AUD/USD 4hr.
It’s always easy to look back at the situation and say, ‘oh we had a nice setup’.
Let me clarify that this pattern was not traded but was identified by one of our members “Artur” and its worth looking at the way price respects the Fib ratios…which subsequently leads to a pattern being completed.
The chart says it all & I don’t think I need to add any comments for it.

Sunil.

We keep coming back to Gold and i think I am going re-name my blog as “Goldology” -:)))

But somehow, Gold seems to respect the Fib levels (and subsequently the harmonic patterns) very precisely and frequently and hence we can identify more setups on this.

Lets have a look at a certain harmonic pattern which has completed on the 4 hr time frame.

For those who are familiar with the harmonic patterns, we know that each pattern - the Gartley, Butterfly, Bat & Crab are identified by price forming at certain fib levels.

Now there a pattern that I have come across quite frequently, which does not fit into any of the above mentioned patterns.

It can losely classified as a Gartley, since it is most similar to the Gartley.

And like all other harmonics, it has very specific parameters which makes it stand apart.

So should we call it as the “Sunil” pattern????

Now, thats a thought -:))))

But till the time we christian this pattern, let us call it as the XADE pattern -

As we have mentioned earlier, a harmonic pattern is nothing but an impulsive wave, followed by 2 corrective waves, which form at precise fib levels.

For the XADE pattern, the two corrective waves (A-B and C-D) always form at the 50.0% and the 78.6% of the initial impulsive wave (X-A)

This makes it similar to the Gartley, since the Gartley has the two corrective waves (A-B and C-D) always form at the 61.8% and the 78.6% of the initial impulsive wave (X-A).

But this is where the similarity ends.

For the XADE pattern, the price target is always the 127.2% of the wave A-D…..not more. not less

WHICH is usually equal to the impulsive wave X-A.

If we label the price objective as ‘E’, then the waves XA and DE are found to be similar….which is we labeled it as the XADE pattern.

Hence we can expect price to achieve the price objective (the 127.2 of A-D & the measured move X-A) and change trend from there.

This occurs with surprising frequency, but again….always let price confirm the moves and mange the trade to reduce the risks.

Now, if this price objective is fulfilled, we could be looking at the formation of a bearish Wolfe wave….but lets take things one step at a time.

Sunil.

PS - Suggestions for a name for this pattern are welcome -:)

Price seems to be in the process of completing a bullish Elliot wave on the EUR/USD daily time frame.

As they say, a picture is worth a thousand words, and the following charts should be self-explanatory.

As always, I would suggest the same principle.

Even though a pattern may be perfect, there are no guarentees in trading.

Do not jump into a trade. Set your levels and always wait for price to confirm.

You may miss out a few trades in the bargain, but it will save you a lot of grief…and money -:))

Sunil.

Sometimes it’s uncanny as to how price respects the Fib levels…..and for that matter why?
Have a look at this bullish Gartley pattern on the daily time frame of the AUD/CHF

One can see that each and every wave of this pattern has formed at the precise Fib levels of the Gartley.
Is there a reason why price reacts at such levels, and keeps going from one level to another to complete a pattern?
I don’t think one can give a proper explanation, as to why it happens.
But then, as traders, let us take advantage of the fact.
If we know that price has a high probability of respecting these levels, let us plan our trades in such a way, that we can get an edge.
Taking this particular example, once we had the pt. D form at a confluence of 2 fib levels…precisely, we could anticipate a reversal to the upside here.
Hence we prepare for long trades and define our price targets.

We must accept the fact that nothing works all the time, and however precise a pattern may be, there is every possibility that it could go wrong.
As traders, we are here to take profits, and hence one must take the profits off the table when price gives us the opportunity.
We can do that, only if we know the possible price targets.

The price objective of a Gartley pattern is always the Fib projection 127.2 & 161.8 of the wave A-D.
But we can define certain in between levels for taking profits.
One such level is a measured move distance of the wave B-C. If we add this distance to the low of D, it gives us an initial profit taking level.
And one can see that this level coincides with 2 other levels of resistance -
(a)    The 78.6 fib level of the wave A-D.
(b)    A previous level of resistance (as shown by the red line)
Since this becomes a strong level of resistance, we can expect some pause/consolidation/pullback in the price movement.
This could even turn into a reversal, which is precisely the reason that one must take profits.
Now, since the Gartley pattern has been quite precise, we have a fair expectation that price will fulfill the next targets.
Hence, we can plan our trades accordingly and still look for longs after any pullback to the downside.
If at all, price does not complete the other targets; we have still walked away with some profits.
And I would rather have small profits in my account, than being proved right all the time.
Sunil.

Its Holiday time & take some time off for family and friends.
The markets will be here & we can all come back afresh after a well deserved break.

I wish each and everyone of you a “Merry Christmas” and may you have a joyous and profitable New Year ahead.

Sunil.

You can download the video recording of the Monthly webinar topic “The 123 chart pattern” from the Transcripts section of FXstreet
http://transcripts.fxstreet.com/2008/12/monthly-webinar-part-1-the-123-chart-pattern.html

It has also been put upon my website www.fibforex123.com

In addition, the PDF file of the same topic is also available for downloads from FXstreet
http://www.fxstreet.com/education/technical/the-123-chart-pattern/2008-12-22.html

as well as the “Free download” section on my website.
Sunil.