Patterns we normally trade are based on structure. For instance, Double tops and bottoms work with the existing levels of structure, Trend Lines, Support and Resistance, etc. Harmonic patterns work with Fibonacci related relationships, so from one point to the next, they bounce from one fib level to another, causing an inner structure to be produced that is a Harmonic Pattern. In each pattern of these patterns, we look at five parts.
X – The start of the Trend
A – The end of the Trend
B – The first pullback of the trend
C – The pullback of the pullback
D – The target of Letter C, which would also be the pattern completion
Traders should make room for adjustments to the Fib levels that are used in the pattern when charting it. Even though its win ratio is very good, you need to allow this pattern to breathe. Look left for clues. We need to understand the following in relation to this pattern:
1) AB should be the .382 retracement of move XA but not more than a .618 XA.
2) BC should then retrace to between a 1.272 and a 1.382 ext of XA
3) CD leg should then break the .786 of XC
Number 3 is the zone we will try and identify before the price gets there to assist with the trade.