I hope you had a profitable day. Only one trade for me today cause I had some work to do. It was an ITM call based on an effective pattern, ABCD pattern. In this article I will explain this pattern and the reasons I took my today trade and moreover I will talk about another harmonic pattern, the Gartley. For my introductory article on harmonic patterns please click here. My today trade.
Now let’s go to the first screenshot of the day which is my trade in EUR/JPY.
The yellow lines are fibonacci levels.I know there is a confusion but I will explain everything.Look at the four letters in the screenshot. We have three pairs of letters,A-B , B-C and C-D. The first pair A-B is a small down trend. The second pair B-C is a small up trend and a 78.6 fibonacci retracement of the leg A-B.It could be also 38.2 or 50 or 61.8 fib retracement but nothing over 78.6 fib retracement.Now,look at C-D leg which is a small down trend.If we have these retracements in the first two legs we should expect a reversal in letter D (which could be a 127 or 161.8 fib extension of the leg B-C) and the beginning of a new up trend.This is a ”bullish ABCD pattern”.
I was waiting the price to touch and close in the 161.8 fib extension and I took a call which was ITM.The price made a big reversal and after that we had the beginning of a new up trend as you can see in the screenshot.Now, let’s talk about the confirmation I had. The first confirmation is the 8 period RSI, like every trade of mine, which was in an oversold condition but when I trade ABCD or other harmonics I want more confirmation.You can’t see it in the screenshot but this 161.8 fib extension was a previous resistance which broke and now it acts like a support(change of polarity strategy). We have an ABCD pattern, oversold and last but not least a support area.Now, we have enough evidence to take a solid trade.Other confirmation you could have is a daily Pivot for support or a whole number or a previous support line.
The Gartley Pattern
If you are trading and looking for harmonic patterns the “Gartley” is the most often pattern you can see.Look at the screenshot.
We have four pairs of letters. X-A , A-B, B-C and last C-D. The leg A-B should be a 61.8 fibonacci retracement of the leg X-A. B-C should be a 38.2 or 88.6 fib retracement of the leg A-B and finally the leg C-D should be a 78.6 fib retracement of the leg X-A. If you have these retracements the Gartley Pattern is ready. We should expect a reversal in the letter D and maybe the beginning of a new trend. In our case 78.6 fib retracement is a past support(you can’t see it in the screenshot but you should always look for past price levels), our RSI is oversold and we have a crossover in the stochastic oscillator near level 20.