Bias Invalidation with Harmonic Patterns
Hello, traders. Welcome to the Pro Trading Course and the fifth module, Incorporating Harmonics. In this lesson we are going to look at how you can use harmonic patterns to invalidate your bias. Now we’re going to jump right into the chart, and what we’re looking here is a very rangy U.S. dollar/Canadian dollar chart. And you can see that we have moved from these highs to these lows, all right?
Now what we’re going to do here is we are going to look for a possible bounce of one of these zones. And right here, even though this was a very strong move to the downside, this exact candle was on a breaking new. So basically we are still looking at a range, even though we had a very strong move to the downside, and right here we bounce off the range and we are looking at a possible long opportunity to test these previous bases, which is a very good trade if you ask me because we are aiming at making 165 pips out of it.
Now what we are going to do is we are going to look for that area, and that area comes when we break to the upside right here. Now let me zoom in on the chart, and right here is the area that we have broken. We broke to the downside and we tested the lows of the range and then now we have broken it to the upside. So we are going to look for a weakness on this zone.
And what we found here is that not only we have a retest right at the 50 Fibonacci level from this low to this high, but we also have a bat going on. Now remember that when we are looking for harmonics in our chart we are going to look for a pattern that resembles a harmonic and then we are going to draw the Fibonacci retracement to see if that pattern is confirmed.
And as you can see right here from the first low to the first high of the cycle, we have a 27.2 retracement. Then we have a normal 88.6 retracement from this high to this low. And we have an overall retracement of over 50% right at this zone, which makes this for a bat pattern and an excellent zone of a well to buy on a high probability setup and a great risk to reward ratio.
Now what happens here? Is that we have zones that invalidate this harmonic pattern, and even though this harmonic pattern is completed right here, we are still going to look for the invalidation patterns, because remember that the entry zone on a harmonic pattern is not an exact price level but a zone. So the zone might be broken, in this case to a downside, and invalidate this pattern and, of course, our trade idea because we also have broken with this level.
So I’m going to show you the invalidation levels for this pattern. The maximum retracement of the X to the D move is 88.6% on a bullish bat. Now we are not going to put our stops below the 88.6% bat because it would mean that we would have an open risk of about 100 pips, which makes it for a less attractive risk to reward ratio,.
And what we’re looking here in this lesson is to invalidate a bias, and then not to invalidate a trade idea. So we have our trade idea, we have our stops in place, we are risking on this trade about 20 pips, which is awesome because we are aiming to make 160 on the trade. And what happens here, well, is that I’m going to draw a second triangle from this high to this low to the 88.6, which would mean that we would still have a bat, but the bat would be more deep.
But a bounce off the 88.6 zone would still be possible. And remember that we still have these zones to look at. But what happened here, and I’m going to zoom in right now so you can see the overall picture of this market. Right. So what would happen here is that we would possibly have a bounce out of the 88.6 but still be in a very good shape to make another test at a long opportunity.
Now, if we go below the 88.6, this would mean that the bullish cycle would be in fact invalidated and we would now be trying to look for short opportunities. And not only that. I mean, if we draw some trend lines here we would also eliminate this channel that we are now working. Now if we break with the 50 and vote [SP] for a deeper, we would still be in a bullish cycle but we would be aiming at this retest for a short opportunity in a much better risk to reward ratio and a much better market scenario.
So what happens here is that the market broke as we hit our stop losses, and remember you’re not going to win every single trade. But it came down to the 88.6 for another try at the bull push. We are not going to take this bull push because our bias was already broken, and as you can see we went beyond the 88.6, now we are in a bear market looking for bear opportunities. Remember these are not entries but invalidation of bias or overall bias. And by breaking this harmonic pattern or this bullish harmonic pattern or hitting the invalidation zones on the harmonic or the bullish harmonic pattern or bullish harmonic cycle, we can know for sure that now we are in a bear market and not a bull one.