This week we are going to look at some of the patterns that occur on charts, so that we can understand how they are formed, how we can identify them and how we can work with them in the crypto market.
Harmonic patterns are formed by a series of price movements that we will identify with letters. Each of the letters represents the price zone where a movement ends and a reversal begins. They are also the zones from which we will plot Fibonacci retracements and extensions in order to catalog them.
The vast majority of these harmonic patterns include an A-B-C-D pattern, but depending on the Fibonacci measurements of the pattern and its previous movement, we will be able to classify them and come up with different scenarios.
First we will look at a basic A-B-C-D pattern, with a pullback from B to C of 0.618 and a subsequent C-D move, which meets resistance in the 1.272 area.
This pattern is identified when the move has been completed and usually involves a price bounce from D. The most important thing to be able to confirm the formation is to identify that the area of the 1,272 level of the Fibonacci extension of the A-B-C move is a top and for this it is necessary to detect a decrease in trading volume in that resistance area. This can be identified with divergences in the RSI in the “D” zone or with the creation of a lower high (in the case of the Bearish ABCD) or with an upper low (in the case of the Bullish ABCD).
This pattern is confirmed with a reversal move with increasing volume and has two target zones that we will mark with the Fibo extension of the A-B-C move, the first at the 0.618 level and the second at 0.382, although it is preferable to exit a larger part of the position at the first target for probabilistic advantage.
On paper it looks easy so let’s move on to look at a chart example, in this case we will see the formation of a Bearish ABCD pattern on the DOT token that was confirmed earlier this month.
As indicated above, we see how point C stops at the 0.618 Fibonacci A-B area and how the price finds a ceiling at the 1.272 level of Fibonacci extension A-B-C, generating point D.
Once the pattern is identified, it is necessary to wait for confirmation, which in this case is generated with a lower high at D and generates a new low with increasing volume, as we see indicated on the chart.
From that area, the pattern is confirmed and we can expect a pullback to the levels indicated above, 0.618 as a primary target and 0.382 as a secondary target (I emphasize that this second target has a much lower probability of being met).
In this case the price reached the first target, generating a movement of 8.50%, but subsequently turns around to generate a new high that ended the pattern and that we see indicated in the following chart.
After seeing this pattern, I would like to introduce you to some more complex harmonic patterns (which we will delve into in future posts) and are formed in a market situation, where a large main movement occurs, which we will identify as X, to later generate an A-B-C-D pattern. Look at some examples:
Depending on the Fibonacci levels where the movements are stopped, we will be able to identify what pattern is to try to take advantage of the movement from D.
At first glance they may seem more complex to identify, but if you learn to work with Fibonacci levels, it will be very useful in your trading. Some of these patterns we have already identified in our analysis, such as the “Bearish BAT” we identified on $QUICK last month. I leave the link below:https://www.linkedin.com/embeds/publishingEmbed.html?articleId=8339121168443384574&li_theme=light
In following articles we will dive into some of these formations with the graphic examples.
Finally, remember that nothing discussed in our articles can be considered as investment advice. Everyone must do their own analysis and develop their own trading strategy. The Belobaba Crypto Fund team only shows our analysis and investment tools and how they help us in our operations when making decisions.