Strategy: The Butterfly Reversal.
Harmonics are a very useful tool for gaining insight into possible reversal levels after strong trends.
"M" shapes are often found at the bottom of trends and "W" shapes at the top. Most often these fit into the rules of the butterfly reversal.
A defining characteristic of the butterfly is the final leg (D leg) is always a very strong leg.
It's a strong and scary false breakout. Comes out of a range and always tends to look like trend continuation.
In the times the butterfly reversal will work, the strong move is terminal.
It'll run just far enough to take out the stops and bring in breakout traders and then have a spectacular reversal.
Another trait of harmonics is the reversal is at least as strong as the move heading into it, often stronger.
Since they have as a defining feature very strong swings at different points, when we have large chart harmonics these are often also accompanied by news that drives the fast moves.
In the times they work, harmonics are one of the most accurate forms of forward looking signals for a reversal.
However, it should be noted that trading harmonics as a sole strategy against a trend is not expected to have a winning outcome.
Typically you'd expected to hit about 1/3 winners on 1:3 RR and come out around even. That's if you do it really well. Otherwise, it's a losing game.
Lots of "M" shapes form in a downtrend and lots of "W" shapes form in an uptrend.
The formation of these does not always mean reversal, but when there are reversals; you often see these structures signalling them.
Harmonic butterflies are a classic false breakout / stop hunt pattern and very useful to know about.
"M" shapes are often found at the bottom of trends and "W" shapes at the top. Most often these fit into the rules of the butterfly reversal.
A defining characteristic of the butterfly is the final leg (D leg) is always a very strong leg.
It's a strong and scary false breakout. Comes out of a range and always tends to look like trend continuation.
In the times the butterfly reversal will work, the strong move is terminal.
It'll run just far enough to take out the stops and bring in breakout traders and then have a spectacular reversal.
Another trait of harmonics is the reversal is at least as strong as the move heading into it, often stronger.
Since they have as a defining feature very strong swings at different points, when we have large chart harmonics these are often also accompanied by news that drives the fast moves.
In the times they work, harmonics are one of the most accurate forms of forward looking signals for a reversal.
However, it should be noted that trading harmonics as a sole strategy against a trend is not expected to have a winning outcome.
Typically you'd expected to hit about 1/3 winners on 1:3 RR and come out around even. That's if you do it really well. Otherwise, it's a losing game.
Lots of "M" shapes form in a downtrend and lots of "W" shapes form in an uptrend.
The formation of these does not always mean reversal, but when there are reversals; you often see these structures signalling them.
Harmonic butterflies are a classic false breakout / stop hunt pattern and very useful to know about.
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