If you don’t have an Harmonic indicator, like the one I have developed for Stockfinder, then following is a quick and dirty on how to draw them manually.
It’ll take a little bit of practice, but it’ll definitely help you understand the basics.
It still is a “labor intensive” process, it took me nearly 5minutes to draw one out. So drawing them on minute charts is probable not advisable. By the time you’re done drawing, the opportunity has passed.
All you need is the fib retrace tool, and the calculator to calculate the AB=CD PRZ.
I will build on the example of the AB=CD PRZ I calculated this morning, which gave a quick >10point reaction at the PRZ. With a pullback to the “B” point. The main reason I liked this AB=CD is because superseding to Point A we have a leg that is higher than point B. This will be our XA leg. I use one other rule to define Point X, and that is that preceding to point X, we need to see a low that is at minimum 30% of XA. Sometimes I use a smaller percentage, in case there was a long period of small range consolidation prior to point X.
So that’s usually my starting point, where we can start assuming we’re in the progress of forming an harmonic pattern.
So visually this is starting to look like something.
next step is to overlay it with Fibonacci ratios, and making sure it fits within the framework.
Some harmonic implementations are very strict when it comes for the various points to adhere to specific retrace and projection ratios: google “bat”, “butterfly”, “crab”, “gartley” patterns.
I keep my definitions limited to :
B : at minimum a 38.2% retrace of XA, and lower than point X
C: at minimum a 38.2% retrace of AB, and higher than point A
In my indicator I keep a setting of 35%, to allow a little flexibility.
Finding point C can be difficult, but once it has surpassed the 38.2%AB retracement, I start looking for the following:
A low surrounded by one higher low at either side.At that point you can start the calculations with the calculator. It’ll spit out an “entry”.
If however subsequently price retraces further, and takes out the low of this point C, before surpassing entry than we can re-calculate, once we see another low surrounded by one higher low at either side.
we will loop through this sequence until either price surpasses the calculated “entry”, or it falls below “A”, in which case the pattern is disqualified.
I prefer to see one more event at this point and that is a divergence on an oscillator, I use : TD-pressure.
My experience is that TD-pressure gives good signals on SPY, even down to minute charts. but less so on ES. I guess that is due to the nature of after hours trading where volume can be erratic.
From Point C to entry is an area where you can apply your own favorite method, whether it be an MA crossing, stochastics, RSI. etc… But I advise to look for other confirmations at this point, than to solely rely on the calculated “entry”.
Here’s a video on how to draw the fib ratios properly.
Did this as quickly as I could, but of course you also have to make sure you anchor the points precisely to the lows and the highs of the X,A,B, and C points. zoom this chart out and you see that the 113 and 127%XA align with previous highs; happens quite often. This was a “bearish pattern
This turned out be a nice looking pattern, with a time of writing 2 points shy of the 113%XA.
Actually if you switch to a 60min chart, you can draw another pattern by using X at the 8/27 high, A at the 9/1 low, B at the 9/3 high, and C at the 9/4 low.
the way I trade these with weekly options is to get in at reversal areas.
If the overall trend is up, then I like to look for bullish AB=CD PRZ’s that align with possible “C” points on a larger timeframe, for a new CD leg up. Vice versa if overall trend is down.
Any questions or suggestions, please feel free to comment.