Trading with harmonic patterns can give all types of traders critical insights into market movements. Harmonic patterns can provide traders with future projections and stops in advance. They can also be reproduced as well as reliable, both essential characteristics of a statistically significant pattern, and thus a model that can be very useful to the right people. There are several different types of harmonic patterns, but the one we’ll be detailing herein is called the Shark Pattern.
What is the Shark Pattern in trading? The shark pattern is a 5-point harmonic pattern. It includes points 0, X, A, B, and C. It is characterized by a variety of geometric indicators including:
- Unspecified point A
- Point B is located at between 113% and 161.8% extension of XA
- Point C is located at 113% extension of 0X and 161.8%-224% extension of AB.
As with all 5-point harmonic patterns, the shark pattern is characterized by its geometric shapes, being identified by the numeric relationship between its five different points. However, understanding the mathematical structure of the shark pattern is just one piece of the puzzle, so let’s go into some detail about how the shark pattern works in practice.
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Table of Contents
The Different Types of Shark Pattern
Like other harmonic patterns, the shark pattern has two primary types: the bullish shark pattern and the bearish shark pattern. Very basically, the bullish shark pattern forms an “M” shape, while the bearish shark pattern forms a “W” shape. The two different types are similar in that they have the same geometric dimensions and thus operate in a principally identical way, though one is a “flipped” version of the other, in a sense.
- Bullish Shark Pattern – The bullish shark pattern is understood to show volatility. According to ProfitF, this can result in entry being triggered very quickly, and in price targets that are met early. Additionally, a bullish shark pattern can result in broader stop-loss levels.
- Bearish Shark Pattern – The bearish shark pattern, according to Blackwell Global, typically shows entry and exit points. The bearish shark pattern will most often have an extended series of candlesticks bodies as well as long spikes forming near the potential reversal zone of point C.
How to Identify the Shark Pattern?
Now that we’ve gone over the different types of shark pattern, it’s essential to understand how one can go about identifying the shark pattern in the real world. Harmonic patterns are incredibly useful, but only so if you can reliably, accurately, and confidently identify them. Being able to do this is a function of understanding both the construction of the shark pattern, as well as some of the tools and indicators that can be used to identify and/or draw the shark pattern.
Construction of the Shark Pattern
To properly understand the construction of the shark pattern, we’ll need to spend some time looking at the different legs and waves that form this pattern, according to both Scott Carney himself, who discovered and popularized the model in 2011, as well as Blackwell Global.
- Failed Harmonic Impulse Wave: This component of the shark pattern generally represents a failed breakout of the security in question.
- Extreme Harmonic Impulse Wave: An extreme harmonic impulse wave is a price movement characterized by a radical change.
- Impulse Leg (X-A): The impulse leg shows a generally strong move upwards after a period of stagnation or decline.
- Retracement Leg (B): The retracement leg shows a reversal of a previous trend, or a decline after a period of upwards movement.
- Continuation Leg (C): The continuation leg shows a resumption of a previous pattern, or a return to upwards movement. In the shark pattern, this must reach an extension of between 113% and 161.8% of the B-A leg.
- Retracement Leg for X-C: Another retracement leg, where the previous upward trend starts to reverse. The shark pattern must reach an extension of between 88.6% and 113% of this retracement.
- Extension B-C: This is an extension of the A-X leg, and must be within the range of 161.8% and 224%.
Tools and Indicators Used to Identify and/or Draw the Shark Pattern
Harmonic patterns can be difficult to spot by looking at a chart unless you have a very well-trained eye. Luckily though, several different tools can be used to help traders identify the shark pattern, as well as various indicators that will point towards a shark pattern being present.
According to GrapeCity, one very common method used to identify harmonic patterns is using Fibonacci tools, with one of the most common tools being Fibonacci Retracement. Fibonacci retracement can help identify the shark pattern in that it can be used to calculate and draw retracements on a particular stock’s chart.
Then, once retracement levels are calculated, we can compare those levels to the levels required for a pattern to be identified as a shark pattern, allowing us to identify a pattern as a shark pattern accurately.
How to Improve the Reliability of Shark Pattern in Trading?
One of the main goals of trading with Harmonic patterns is to maximize replicability as well as the reliability of the model. One way to do this is by using multiple different Fibonacci tools, which allows us to identify and study the pattern more accurately, increasing its reliability and, thus, our confidence in it.
Another Fibonacci tool that can be used with the shark pattern, in addition to retracement, is the Fibonacci extension. Certain values related to the extensions in the model can be calculated and compared to those values that we know to be true of the shark pattern, helping to increase the reliability of our identification of a trend as a shark pattern.
How to Trade with the Shark Pattern?
Now that we have an understanding of the basics of the shark pattern, we can go into some detail regarding how you can go about trading the shark pattern. Many different trading strategies can be applied to the shark pattern, but for the sake of brevity, we’ll just be outlining one of the most basic and common ones here, which involves entering or buying a security in a bullish shark pattern.
Trading the Shark pattern: Buying in a Bullish Shark Pattern
Described below are a few things to consider when trading the bullish shark pattern –
- Tradeable Leg: Not all legs of the shark pattern are tradeable, in that the model must first be well established before it would be wise to trade. Generally speaking, one should wait until at least leg C of the pattern is formed before we can begin trading. This lets the model establish itself well enough for us to use it to our advantage.
- Trade Entry: Because we’ve already established that trading should only happen after Leg C has been found, we can only set a trade entry point somewhere after that. So, if we’re buying, we can enter a trade at point C, as we can expect the stock to move upwards after that point. This point can be identified as what is always the last and typically the lowest point in a pattern.
- Stop-Loss Target: If we plan on trade entry at point C as we outline above, we’ll want to set our stop-loss target at the next Fibonacci retracement level. This is the point at which if the price reaches, we’ll want to cut our losses and get out. Remember, sunk costs are sunk!
- Setting Take Profit Targets: If we’re trading the shark pattern using the strategy outlined above, we’ll want to set our take profit target, the point at which we’ll close the trade and be satisfied with our profits, at any one of several different retracements of C. This could be anywhere between 38.2% and 100%. Setting a take profit is mostly a subjective decision based on what your goals are, and how long you’re willing to wait and risk the trend discontinuing.
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Conclusion
As you should now be aware, the shark pattern is an intricate harmonic pattern, but one that can be very useful once it is fully understood. As is the case with all 5-point harmonic patterns, it’s essential to understand the different types of the model that exist, its construction, how to identify it accurately, and most importantly, you have to know how to trade it!
After reading this article, you should feel comfortable with all the above and are ready to start getting your feet wet in trading the shark pattern. It can be difficult and will require practice and experience to get right, but once mastered, it can yield impressive results.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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