I admit it, previously I was not a fan of trading based on harmonic patterns. In general terms, I had the feeling that they are patterns with a high component of subjectivity, so they are subject to continuous reinterpretation. However, in trading, you have to keep an open mind and study any new development that appears in case it could give us an edge in the market. That being said, the other day I came across with three new harmonic patterns (the first reference I have come across is from the end of 2012). These are the Shark, Cypher, and Nen Star patterns, which we will see in detail.
The Shark Pattern
It is a variation of the traditional M and W patterns. The Shark pattern is made up of two separate price segments: on the one hand, an impulse wave that fails, and on the other, an impulse wave that reaches extreme levels.
As you can see in the following diagram, the ideal structure of a Shark pattern tries to take advantage of an over-extended price movement. To validate the pattern, it is necessary that after it is formed (reaching point C), the price must be turned quickly, initiating a new trend in the opposite direction.
In particular:
- The initial impulsive movement is the one that occurs from 0 to X. This movement defines the retracements that follow.
- Then the price corrects until reaching point A.
- The prices then resume the initial impulsive movement to point B. This movement should represent between 113% and 161.8% of the initial 0X movement.
- The volatility increases suddenly and the price turns sharply to point C. The movement from B to C must represent between 88.6% and 113% of the initial movement. It must also represent between 161.8% and 224% of the XA movement. If these conditions are verified, we will open a position after the price change its direction in C.
- The target of the pattern is usually in the price range between A and B and is generally the 50% retracement of the BC movement.
Below you can see an example of this pattern on the 60-minute chart in the AUD/USD pair:
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The Cypher Pattern
This harmonic pattern closely resembles the traditional M and W-shaped patterns. It is made up of 5 points (X-A-B-C-D), with point D being the entry area. The following diagram shows the harmonic relationships of this pattern:
In particular:
- The initial impulsive movement is the one that occurs from X to A. This movement defines the retracements that follow.
- Then the price corrects to point B.
- The price extends the trend of the original impulsive movement to point C. This movement should represent between 113% and 141.4% of the initial movement.
- Then the volatility shoots up and the price corrects quickly until reaching point D. This movement should suppose at most a 78.6% retracement of the initial impulsive movement XA. Likewise, this movement must represent between 127.2% and 200% of the AB movement.
- Once point D is reached, we will open our position, with the profit targets being the Fibonacci retracements of 38.2% and 61.8% of the CD movement.
Below you can see an example of this pattern in a 5 min chart of the AUD/USD pair:
The Nen Star Pattern
This pattern is often confused with the Bat pattern, but there are important differences between their respective structures. The ideal scheme of a Nen Star would be the following:
In particular:
- The initial impulsive movement is the one that occurs from X to A. This movement defines the price retracements that follow.
- Then the price corrects to point B.
- The price extends the trend of the original impulsive movement until reaching point C. This movement should represent between 113% and 141.4% of the initial movement.
- Then the volatility shoots up and the price corrects quickly until reaching point D. This movement should suppose around 127.2% of the initial impulsive movement XA (this is the main difference with the previous pattern). Likewise, this movement must represent between 127.2% and 200% of the AB movement.
In case it is not clear, here is a chart comparing a bearish Cypher with a bearish Nen Star so you can see the difference between the two patterns:
As in the previous case, once point D has been reached, we will open our position, with the profit targets being the retracements s of 38.2% and 61.8% of the CD movement.
You can see an example of Nen Star in the following weekly chart of the EUR/JPY pair:
I hope that these patterns we have just presented are helpful to you. In case you are interested in trying out these price formations, I just left a harmonic indicator for Metatrader in this article that is designed to detect a wide variety of harmonic patterns, including from the classic Gartleys, Bats, Butterflies and Crabs to these newer ones as well as other more exotic variants such as the Anti versions of the classic patterns or the Black Swan/White Swan pattern that I will talk about in another article.
