The Harmonic Pattern Indicator
The harmonic indicator is a comprehensive pattern indicator and it comes in handy for both short term and long term traders.
Table Of Contents:
- The Harmonic Pattern Indicator
- How does the Harmonic Pattern Indicator Work?
- Customizing the Harmonic Pattern Indicator
- How to use the Harmonic Pattern Indicator
The indicator is optimized for the MT4 trading platform. It is a multi-timeframe indicator; meaning it can be used on any timeframe starting from one minute (M1) to one month (MN). This is what actually makes it a valuable tool for any type of trader.
A scalper using the tightest timeframes of maybe one minute (M1) and 5 minutes (M5) would perfectly use this indicator to identify trends. At the same time, a day trader using one hour (H1), four hours (H4) and one day (D1) timeframes would also perfectly use this indicator to identify perfect trading opportunities. Also, a long-term trader using timeframes above D1 would also be in a position to use the indicator to trade.
How does the Harmonic Pattern Indicator Work?
It is important to understand how an indicator works before making a point of using it. The harmonic indicator is designed to analyze the markets of any currency pair and indicate the prevailing pattern depending on the immediate historical data.
The pattern on the EURUSD H1 Timeframe
The indicator by default displays two conjoined triangles like in the above chart. The vertices of the triangles are labeled using letters X, A, B, C, and D. vertex X, A is on the first triangle while vertex C, D are on the second triangle while the two triangles share the common vertex B.
There is also a summary text at the right corner which shows you where you should place your order, the stop loss level and also your take profit level. For the take profit level, you can place it at any of the target levels shown (D1, D2 or D3).
If you place your cursor on the vertices, you shall be able to see the market price level at which the vertex is formed.
The price level at the vertex
The price level is the number below the ‘DreamCC_Batterfly9’ line. In the case of the above chart, the price is 1.12558.
If you look closely on the triangles, you shall realize that one triangle is formed on the historical data while the other triangle indicates what pattern prevails and what the trader should expect in the future depending on the timeframe that they are using (we shall discuss these further in the ‘How to use the Harmonic Indicator’ section).
By indicating previous and current patterns, the indicator indicates the previous and current market wave pattern where X is the beginning of the wave. Therefore, the first wave starts at X, then moves to A and ends at B. The next wave then starts at B moves to C and is predicted to end at D. While the other vertices help in indicating the waves, the direction of vertex D from C is what indicates the current market trend.
The vertices simply indicate the turning points. They show the market prices at which a trend ends and another trend begins.
D could be up or down from C depending on the patter. If D is up from C, then the indicator shows that there is or there will be an uptrend. If D is down from C, then the indicator shows that there will or there is a downtrend.
At times the trend between B and C could still be running and it will have to be completed before the predicted market trend between C and D Starts. If you look at the “Pattern on the EURUSD H1 Timeframe” Chart you shall realize that the trend between B and C is still ongoing and according to the indicator, the trend should end once the market prices hit the price level of vertex C.
Vertices A and C on the downside
From the above chart, you can see that the Market trend between Vertices B and C is already finished and the current trend is between Vertex C and D.
Another thing to note is that it is not a must for the candlesticks or bars (depending on what you are using) to be located within the triangles. What is important is for the market prices to hit the price levels indicated by the vertices.
If you look at the “Vertices A and C on the downside” Chart, you shall realize that the last candlestick three candlesticks are actually forms outside the triangle. But we anticipate that the upward trend will continue until the price levels hit the market level at the price level of vertex D.
Customizing the Harmonic Pattern Indicator
It is important to understand how to optimize the indicator in case you want to use different conditions to analyze the market.
To optimize the indicator, you simply double click on the “Harmonic-Pattern-Indicator” in the ‘Navigator’ section.
Double click on the Harmonic Pattern Indicator
If you have already loaded the indicator on the chart, you could choose to right click on the chart, scroll down to indicator list and click on it. You will be directed to a dialog box containing all the indicators you have on the chart. Then click on Harmonic Pattern Indicator and click ‘edit’ or simply double click on it. You shall be directed to a dialog box showing a number of sections (Common, Inputs, Color and Visualization). What we are most interested in is the ‘Inputs’. Therefore, click on the inputs.
Properties of the Harmonic Pattern Indicator
In the inputs, you shall see a number of variables listed beside their values. You cannot change the variables since they are what makes the indicator’s program to run. But you can surely change the values of the variables. Let’s go through each of them and understand what they mean:
- Corner: This determines which corner the text summary will be displayed. It is by default set to 1, which displays the text at the top right corner. 2 places the text at the bottom left corner, 3 places the text at the bottom right corner and 4 places the text at the top left corner.
Corner set to 2
- MinBars: This represents the minimum number of bars or candlesticks that the indicator should consider when looking for a pattern. The value is by default set at 5 but it can be altered accordingly, depending on the trader. If the value is smaller, the indicator will be able to indicate patterns which occur over the small number of candlesticks.
- MaxBars: This represents the maximum number of bars that the indicator should consider when identifying a pattern. It is by default set at 21, but you could alter it depending on your taste. If you make it smaller, it means you are constraining the indicator to a smaller range of bars and it might be harder to identify any trend. The wider the range (the difference between the minibars and the MaxBars values) the better.
- IsTRIANGLE: the value of this can either be set as true or false. If set as true, it means you will see the grey color within the triangles. But if it is set to false, you shall not be able to see the grey color.
IsTRIANGLE set to false
- IsHiding: This is what determines if you want to see the triangles or not. The value of this can also be set as true or false. It set as false by default. If set as true, everything will be hidden and you won’t be able to see anything.
- NumberOfPattrens: This determines the number of patterns that you want the indicator to indicate at any one time. The value is normally set to 1 by default but you would set it to any other value that you wish to. If you set it at 4 for instance, the indicator will identify and display any other pattern it can get to a maximum of 4 patterns. But it is not a must it displays 4 patterns; it only displays more than 1 pattern but cannot go beyond the set value. The chart below shows a case scenario where the indicator displays two patterns.
NumberOfPattrens set to more than 1
How to use the Harmonic Pattern Indicator
Harmonic Indicator is not a complex indicator and it, therefore, does not require a lot of experience to use it. With a simple guide, you will be good to start.
Since you already know how the indicator works, the only remaining part is understanding how to place and close orders; though I bet you are already guessing how to do that by yourself by now.
To begin, you will have to optimize your indicator according to how you would want it to appear and this is done by altering the inputs of the indicator. But for a beginner, it is recommendable to use the default setting since they are what the programmer thought to work best.
The indicator helps you in placing and also exiting orders. For the take profit, you should choose the closest for risk management purposes.
So, let us start with the basics:
1. Opening a long position (Buy order)
A long position should be opened when vertex D is on the upper side of C. Even if the market prices haven’t hit the price level of vertex C, and D is above C, do not be tempted to place sell for the price to hit C and then close it to place the buy towards D. The best thing to do at such a case is to keep off from opening any trade until the prices first hit the level of vertex C.
Keep off till the price hits a level of Vertex C first to place Buy
However, if you are a long term trader, you would place the buy at the level indicated in the summary text at the right-hand corner and also set the take profit and stop loss levels accordingly.
If you are a long term trader, you should confirm the trend of the higher timeframes. You will be more secure if the trend of the higher timeframes is in the same direction. For the day traders, they should confirm that the trends of the lower timeframes are similar so as to place the order.
2. Opening a short position (Sell order)
A short position should be opened when vertex D is on the lower side of C. Even if the market prices haven’t hit the price level of vertex C, and D is below C, do not be tempted to place buy for the price to hit C and then close it to place the sell towards D. The best thing to do at such a case is to keep off from opening any trade until the prices first hit the level of vertex C.
Keep Of till the prices hit vertex C first for you to place the sell
However, if you are a long term trader, you would place the sell at the level indicated in the summary text at the right-hand corner and also set the take profit and stop loss levels accordingly.
The same case applies; if you are a long term trader, you should confirm the trend of the higher timeframes. You will be more secure if the trend of the higher timeframes is in the same direction. For the day traders, they should confirm that the trends of the lower timeframes are similar so as to place the order.