There is a kind of harmonics psychology of crowds underlying the harmonic patterns. Harmonic patterns are formed by the combined behaviour of hundreds of thousands of traders - crowd psychology - playing out fear & greed, supply & demand scenarios.
To illustrate, we'll take a "leg-by-leg" look at one of the harmonic patterns - the bullish Gartley.
XA leg: The X point is the starting point, and represents a major low swing point. Its a point where sentiment changed radically. This can be found on higher timeframe charts at a major low, and is a key reversal point traders pay particular attention to.
As the XA leg develops it breaks through previous resistance levels - effectively taking them out.
AB leg: This is the first wave in the pattern. The A Point is the top of the trend, and a key sign would be reversal candlestick patterns forming here - such as tweezers, doji's, engulfing candles, harami patterns and so on. Uncertainty of price at this level then takes hold, and price drops back to point B as profit taking gathers momentum.
On the Gartley, the B Point is a 0.618 retracement of the XA leg - 0.618 being a very significant Fibonacci retracement level known to almost all traders.
BC leg: Investors start to buy in at the B level. (the 0.618 retracement of the XA). Other traders gain confidence by the rising price, and also buy in, pushing price up to C.
The C point is a retest of previous highs - typically at a 0.382 - 0.886 Fib retracement of the XA leg.
CD leg: As price fails to break-out of resistance, profit-taking takes price down to D - usually between a 1.27 and 1.618 Fibonacci extension of the BC leg - forming a pattern where the AB leg is equivalent to the CD leg. The AB=CD pattern.
D Point: The D point inside the PRZ, the Potential Reversal Zone, is the trade entry level.
It was discovered that, when a particular sequence of Fibonacci ratios appear in order in a X-A-B-C-D pattern, as in the Gartley pattern above, the probability of forecasting the next move successfully is over 70%.
When that happens, you have an edge, and it's time to trade.
That's why harmonics traders wait patiently until price gets to the D point, and the pattern completes before taking the trade.
For more details of the individual forex patterns, link to:
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