IBM - Harmonics (theory)
Updated
The first thing to look for when identifying the Bat pattern is the impulsive leg or the XA leg. We’re looking for a strong move up or down depending if we either have a bullish or a bearish Bat structure.
The next thing that needs to be satisfied for a valid Bat pattern structure is a minimum 0.382 Fibonacci retracement of the XA leg and it can go as deep as 0.50 Fibonacci retracement of the XA leg, but it can’t break below the 0.618. This will create the B leg of our Bat pattern.
How to trade the bat pattern
The next thing we’re going to look for is a retracement of the AB leg up to at least 0.382 Fibonacci ratios, but it can’t go above 0.886, and this will create our third point C of the harmonic Bat pattern strategy.
The last thing we want to establish is the D point and in order to get to the D point, all we do is to find the 0.886 Fibonacci ratios of the impulsive XA leg, which will result in a deep CD leg and finally it will complete the whole Bat pattern structure.
In the current scenario, I presented also a surprising correlation between the time cycles, where the X and A leg time frame could indicate potential CD range. As described above - if this scenario turns true and price action will indeed form a bullish harmonic bat here, the initial retracement could potentially reach levels of the previous low of this cycle (X).
This is just a tutorial and an idea for a potential Long, at the bottom of the formation and end of the current time cycle - nevertheless, I mark this idea as Neutral and place IBM in my 'watched' list.
The next thing that needs to be satisfied for a valid Bat pattern structure is a minimum 0.382 Fibonacci retracement of the XA leg and it can go as deep as 0.50 Fibonacci retracement of the XA leg, but it can’t break below the 0.618. This will create the B leg of our Bat pattern.
How to trade the bat pattern
The next thing we’re going to look for is a retracement of the AB leg up to at least 0.382 Fibonacci ratios, but it can’t go above 0.886, and this will create our third point C of the harmonic Bat pattern strategy.
The last thing we want to establish is the D point and in order to get to the D point, all we do is to find the 0.886 Fibonacci ratios of the impulsive XA leg, which will result in a deep CD leg and finally it will complete the whole Bat pattern structure.
In the current scenario, I presented also a surprising correlation between the time cycles, where the X and A leg time frame could indicate potential CD range. As described above - if this scenario turns true and price action will indeed form a bullish harmonic bat here, the initial retracement could potentially reach levels of the previous low of this cycle (X).
This is just a tutorial and an idea for a potential Long, at the bottom of the formation and end of the current time cycle - nevertheless, I mark this idea as Neutral and place IBM in my 'watched' list.
Trade closed: target reached
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