Trading Bearish Shark
Patterns
by Suri Duddella
Harmonic Patterns foundation and trading concepts were laid
by H.M. Gartley in 1932. H.M. Gartley wrote about a 5-point
pattern (known as Gartley) in his book, Profits in the Stock
Market. Few other authors who have worked on this pattern
theory, but the best work to my knowledge is done by Scott
Carney in his books of “Harmonic Trading.” Scott Carney also
invented patterns like 'Crab,' 'Bat,' 'Shark,' '5-0' and added
real depth of knowledge for with Fibonacci ratios and
established rules on how to trade their trading rules, validity
and risk/money management. His pioneering work is truly
impressive, and the trading world should thank him
immensely as he has opened newer trading styles and careers
for many traders.
The primary theory behind Harmonic patterns is price/time
movements which adhere to Fibonacci ratio relationships and
its symmetry in markets. Fibonacci ratio analysis works well
with any markets and on any time-frame charts. The basic
idea of using these ratios is to identify key turning points,
retracements, and extensions along with a series of the swing
high and the swing low points. The derived projections and
retracements using these swing points (Highs and Lows) will
give key price levels for Targets or Stops.
Pattern Identification
Harmonic pattern identification can be a bit hard with the
naked eye, but once a trader understands the pattern
structure, it can be relatively easily spotted by Fibonacci
tools. The primary Harmonic patterns are 5-point (Gartley,
Butterfly, Crab, Bat, Shark and Cypher) patterns. These
patterns have embedded 3-point (ABC), 4-Point (ABCD)
patterns. All the price swings between these points are interrelated
and have harmonic ratios based on Fibonacci.
Patterns are either forming or completed 'M' or 'W' shaped
structures or combinations of 'M' and 'W', in the case of 3drives.
Harmonic patterns (5-point) have a critical origin (X)
followed by an impulse wave (XA) followed by a corrective
wave to form the 'EYE' at (B) completing AB leg. Then
followed by a trend wave (BC) and finally completed by a
corrective leg (CD). The critical harmonic ratios between
these legs determine whether a pattern is a retracement
based or extension based pattern and defines its names
(Gartley, Butterfly, Crab, Bat, Shark and Cypher). One of the
significant point to remember is: All 5-point and 4-point
Harmonic patterns have embedded ABC (3-Point) patterns.
All 5-point Harmonic patterns (Gartley, Butterfly, Crab, Bat,
Shark, Cypher) have similar principles and structures, and
they differ by their ratios to identify them and locations of
key nodes (X, A, B, C, D) but once one of the patterns is
understood it may be relatively easy to grasp knowledge of
others. It may help for traders to use an automated pattern
recognition software to identify these patterns than using
naked eye to find or force these pattern identification.
Trade Entries and Stops
To enter a trade, I prefer a confirmation of reversal priceaction
combined with a reversal trend change from the
"reversal zones." at 'D'.
It could be a Buy (in bullish patterns) or a Sell (in bearish
patterns). Usually, 'D' is identified by a confluence of
projections, retracements and extensions of prior swings
(legs), universally called as "reversal zone." The entry
criteria and pattern validity are determined by various other
factors like current volatility, underlying trend, volume
structure within the pattern and market internals etc. If the
pattern is valid and the underlying trend and market
internals agreeing with the Harmonic pattern reversal, then
Entry levels (EL) can be calculated using price-ranges,
volatility or some combination. Stop is placed above/below
the last significant pivot (in 5 and 4-Point patterns it is
below D for the bullish pattern, above D for bearish
patterns).
Target Zones
Target zones in Harmonic patterns are computed based on
the retracement, extensions or projections of
impulse/corrective swings and Fibonacci ratios from the
action point of the pattern structure. For example, in Gartley
bullish pattern, the target zones are computed using XA leg
from the trade action point (D). The projections are
computed using Fib. ratios like 62%, 78.6% of XA leg and
added to the action point (D). The extension ratios like 1.,
1.27, 1.62, 2., 2.27, 2.62 are computed for potential target
levels. The primary target zones are marked computed from
D as 62%-78.6% of XA leg (or largest of XA and CD) as the
first target zone and 127%-162% as the second target zone.
Target Zone1: (D + XA*0.62) to (D+XA*.786)
Target Zone2: (D + XA*1.27) to (D+XA*1.62)
