Common Harmonic Patterns include Gartley, Butterfly, Crab and Bat. Some people think that they are reliable and may yield very good risk to reward ratio. However, in my study, I found that these patterns are not as reliable and profitable as many people think.
I downloaded two indicators from the Internet and run the tests on MT4. They are ZUP and korHarmonics. Because MT4 does not run so well in auto back testing, I manually record the signals and calculate the targets and then check whether the price can hit the target or cut by the stop loss. What I found was very disappointing result. Although some people say that they should be used together with other signals for confirmation, I have another thought that a reliable method should be accurate itself. Therefore, I only test the Harmonic Patterns alone.
I set six targets, i.e. T1, T2, T3, T4, T5 and T6, respectively representing 0.382, 0.618, 0.764, 1, 1.272, 1.618 of the PRZ. Each trade is supposed to have 2 lots, I test combinations of the targets. The test run from Oct 2010 to July 2012. Below I only show some equity charts of the targets.
Gartley pattern is always thought to be one of the best among all these harmonic patterns. Conversely, its performance is the worst among all 4 pattens.
Butterfly seems to have quite good result. In the last chart, I reverse the buy and sell direction of Gartley and combine it with Butterfly to see the equity performance. Once the price reaches the PRZ, the target is set to another side of the PRZ and the stop loss is set to 0.382 of the last movement. For the butterfly patterns, I use different targets.
The charts show the results of different time frames based on T2 and T6 targets, the time frames include 15 min, 30 min, 1 hr, 4 hr and 1 day, the shorter the time frame, more number of trades can be set up. I stop running 15 min earlier because the profit in fact cannot cover the transaction costs involved and it generates too much signals to buy and sell. Overall speaking, the performance of harmonic pattern is not so stunning. The best pattern Butterfly has also a long period of small gain, that is about 1 year in testing.
Are Harmonic Patterns profitable ? At least, I won't use Gartley in Forex after doing the test. Crab is also not reliable enough. The fluctation of Bat is quite big. Only the Butterly is a possible pattern that can bring in profit but it may have long term flat performance. Since all these tests are run on Forex data, my conclusion may be wrong for stock trading.
