26 June, 2020 | AtoZ Markets – Harmonic pattern was discovered by HM Gartley and developed by Larry Pesavento, who wrote a book about harmonic trading and Fibonacci ratios.
The harmonic pattern is different from the traditional price pattern as it considers market momentum with Fibonacci ratios.
These patterns have enough possibility to provide sustainable growth in your trading balance. Furthermore, you can build your trading strategy using harmonic patterns, or you can understand the market context using these patterns.
Before going further about the Bat pattern, let's have a look at what harmonic patterns are
What is the Harmonic Pattern?
A harmonic pattern is a trading strategy that is created from the geometric calculation and Fibonacci ratios. Traders use these rules as both market continuation and reversal indicators.
There are many types of harmonic patterns in the financial market like- ABCD pattern, Gartley pattern, Bat pattern, Crab pattern, etc. All of these pattern forms look almost the same, but they have some significant differences in Fibonacci calculations.
The harmonic pattern is a competent technical analysis tool that considers the previous price movement and anticipates the future price.
What Does the Bat Pattern Look like?
Let's look at what the Bat pattern looks like including an exclusive Bat pattern trading strategy.
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Identify the Bat pattern.
In the image below, we can see how a Bat pattern looks like:
Like other harmonic patterns, Bat pattern has five legs- they are XA, AB, BC, and CD legs. To identify the Bat pattern, you should draw trendlines at these legs and use Fibonacci levels to identify suitable points. Let's see how Bat pattern forms in the market-
- XA- it is the first leg, which moves against the current trend. If the current market trend is bearish, the XA will move upside. On the other hand, if the current market trend is bullish, XA will move bearish. As the Bat pattern is a reversal pattern
- AB- The second leg is AB that forms after XA leg. The point of the AB leg can retrace from 0.382 to 0.50 to the XA leg. If the XA move is primarily impulsive, then AB should be corrective.
- BC- It is the second impulsive move towards the direction of XA. However, the price will remain indecisive as it will not create any new higher or lower low. Therefore, BC will retrace 0.382 to 0.888 of XA leg.
- CD- CD leg is the last leg of the Bat pattern, which indicates the entry point. CD leg should extend 1.618 to 2.618 of BC leg, where the point D is the entry point.
Checklist for Bat Pattern
Due to the difference in the available price, you can sacrifice a 5-10% calculation of Fibonacci ratios. However, some rules should not break in the Bat pattern. Let's have a look at them:
- The length of AB and BC should be the same.
- Point C must remain within the AB leg.
- AB leg and the BC leg can be similar to the size.
- CD leg should retrace a maximum of 0.886 of XA.
- Point D should extend 1.618 and 2.618 of BC.
Bullish Bat Pattern trading Strategy
The primary indication of a Bat pattern is the XA leg. It will appear after a bearish trend with a new higher high. It is imperative to identify as the XA leg as it is the first impression of market reversal, and other legs depend on it.
Therefore, read the chart from point X to point D and make sure that it retraces 0.886 of the AB leg.
In the image above, we can see how the Bullish Bat pattern forms in the market. Now follow the below-mentioned rule to take an entry:
- Observe the market from point X to point D and wait for a reversal candlestick at point D. Enter the trade as soon as the reversal candle closes.
- In the Bat pattern, XA leg is the primary impression of a trend reversal. Therefore, it is crucial to identify the stop loss level. Any break of the XA level would make the current structure questionable. So put your stop loss below the point X with a 10-15 pips buffer.
- Draw a Fibonacci retracement level from point A to point D. Therefore. Close half of your trade at 0.618 of AD and move your stop loss at breakeven. Later on, you can close full trade at point A or wait for the further upside movement depending on the market condition.
In the image above, we can see how to set take profit in the bullish Bat pattern trading strategy.
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Bearish Bat Pattern trading Strategy
Like the bullish Bat pattern, It is essential to identify as the XA leg as it is the first impression of market reversal and other legs depend on it.
Therefore, read the chart from point X to point D and make sure that the point D retraces 0.886 of the AB leg.
In the image above, we can see how the bearish Bat pattern forms in the market. Now follow the below-mentioned rule to take an entry:
- Observe the market from point X to point D and wait for a reversal candlestick at point D. Enter the trade as soon as the reversal candle closes.
- It is essential to identify the stop loss level. Any break of the XA level would make the current structure questionable. So put your stop loss above the point X with a 10-15 pips buffer.
- Draw a Fibonacci retracement level from point A to point D. Therefore. Close half of your trade at 0.618 of AD and move your stop loss at breakeven. Later on, you can close full trade at point A or wait for the further bearish movement depending on the market condition.
In the image above, we can see how to set take profit in the bearish Bat pattern trading strategy.
Summary
Let's summarize what we have learned about the Bat pattern trading strategy.
- Bat pattern is a market reversal pattern.
- XA is the first move; therefore, point C should not breach point A.
- Point D is the entry point.
- Stop loss would be below or above the first leg XA.
- The ideal take profit level is 50% at 0.618 of AD leg and 50% at point A.
Besides following the Bat pattern trading strategy, make sure to use strong trade management rules as the forex market consists of some unavoidable risks. Therefore, trade management is essential for sustainable growth in the account.
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