There are many approaches and tools that can be applied to trading Forex or any other financial markets. They can mainly be divided into technical and fundamental.
With each talented analyst making chart observations a new approach is born. This is also the case with Harmonics. They were first introduced in 1930 by H.M. Gartley in his book “Profits in the Stock Market” which is why the first pattern was named the Gartley pattern.
At first, Fibonacci ratios were not applied to pattern recognition but other market analysts later built upon this. Namely, it was Larry Pesavento who introduced Fib levels to define and distinguish patterns, and finally, Scott M. Carney defined all the variations according to those rules and ratios.
The best known are Gartley, Crab, Butterfly, and Bat variations, distinguished by their shape and corresponding Fibonacci ratios. You can use a harmonic bat pattern for stocks, Forex, cryptos, and even commodities.
What is the Harmonic Bat pattern?
The harmonic bat pattern is one variation of the harmonic patterns.
It is a chart pattern used to spot reversals and is labelled with five points of the price swings X, A, B, C, and D with the D point being more of a zone than a point. The pattern’s use case is to outline a Potential Reversal Zone (PRZ) and it typically plays out as a deep retest of the previous support or resistance and continues with the price advancing in the direction of the first impulse wave labelled with its starting point X to A.
Considering the market structure we have a bearish bat pattern and a bullish bat pattern. The key distinguishing factor between other harmonic patterns is the bat-like shape, with the left and right triangles looking like bat wings, and its Fibonacci retracement levels. While trading forex, a bat pattern can be found in any time frame, but the higher the time frame, the more reliable it can be.
Bat pattern rules are:
XA: it is the first leg drawn from the first swing’s low to the second swing’s high and vice versa
B: 0.382 or 0.50 Fibonacci retracement of the XA length,
C: it is usually 0.618 retracement of the AB length but no more than 1, otherwise the pattern is invalid,
D: the target at 0.886 Fib retracement of the XA length.
How to trade the harmonic Bat pattern
Bat pattern trading is always done by opening a position in the Potential Reversal Zone.
It is important to be mindful of the horizontal support or resistance the zone correlates with, as this confluence points out the highest probability reversal level. In the case of Bitcoin, for example, the price interacted with the 0.786 Fib retracement (D), which was on the horizontal support at $16,923.
You could look to set up a buy limit order or multiple ones in that area which would be your entry in this example. The stop loss could be set below the 0.886 Fib retrace or, in this case, $16,872.
Now that the entry and risk levels have been set, you can measure the risk/reward ratio to see if this is a position favourable for entry.
Using the Fibonacci extension first drawn from X to A and then to the D point, we could place the first target at $17,183 at the 0.618 Fib level. That comes far above the 1:3 minimum of a favourable risk/reward, thus making this position viable.
However, remember that the Bat pattern is an advanced pattern for traders that first and foremost understand the market structure, candlesticks, and Fibonacci levels. Without this foundation, it can be hard to apply it to trading.