Dear Traders,
Many traders see financial markets as opportunities to
invest and profit from their savings. To profit from price movements in the
market, we need to perform accurate technical analysis. Harmonic patterns in
technical analysis, which help us understand price movements whether they are
rising or falling, can contribute efficiently to our trading. By eliminating
the influence of emotional biases, harmonic patterns empower us to make more
rational trading choices. In today's article, we will examine the Bat harmonic pattern,
one of the harmonic formations, and explain how you can trade using this pattern.
What is the Bat Pattern?
The Bat pattern is a harmonic pattern
used in technical analysis to predict trend reversals. The five-point Bat
pattern presents a pattern shaped by Fibonacci ratios. This pattern is named
"Bat" because it resembles a bat figure on the price chart. The Bat
pattern is a price movement pattern that resembles a bat opening and closing its
wings. If we see a Bat pattern after an upward trend, we may consider that
prices could move downwards. Conversely, after a downward trend, if we see a
Bat pattern, we may consider that prices could move upwards. Therefore, we
encounter two types of Bat formations on the price chart:
- Bullish Bat harmonic pattern
- Bearish Bat harmonic pattern
The Bullish Bat pattern can facilitate an upward reversal
after a downtrend, while the Bearish Bat pattern can lead to a downward
reversal after an uptrend. Both types of Bat patterns can be used as powerful
tools to identify reversals in price movements.
How is the Bat Pattern Defined?
The Bat harmonic pattern reflects a specific price action
pattern that suggests a possible reversal opportunity. The Bullish Bat pattern
forms when prices make a correction after a downward movement and then turn
upwards again. The Bearish Bat pattern forms when prices make a correction
after an upward movement and then turn downwards again. Both types of Bat patterns
have five main points (X, A, B, C and D).
In the Bullish Bat pattern:
- Point X: It is the starting point where the price begins to move in a certain direction.
- Point A: It is the first significant rise in price movement from the X point.
- Point B: It is where the price makes a correction after rising from the A point and then falls again. The B point is a crucial point for the formation of the "Bat" pattern. The B point usually retraces up to 38.2% or 50% of the A point.
- Point C: It is where the price rises again after the B point but does not reach the A point. The C point usually rises up to 61.8% or 78.6% of the A point.
- Point D: It is the point where the price movement after the C point, in accordance with Fibonacci levels, commonly retraces up to the 0.886 Fibonacci retracement level. The D point usually retraces either up to 38.2% or 50% of the movement from A to C, or down to 1.618% or 2.618% of the movement from A to B. The D point is important for completing the pattern and signaling a possible reversal.
In the Bearish Bat pattern:
- Point X: The starting point.
- Point A: Prices reach point A after a significant drop.
- Point B: A short-term rise in prices begins and corrects some of the move upwards from the A point. The B point usually rises up to 38.2% or 50% of the A point.
- Point C: Prices start to fall again but do not reach the A point. The C point typically falls down to 61.8% or 78.6% of the A point.
- Point D: Prices start a significant upward trend and surpass the B point. This point is an essential reversal point. The D point usually exhibits one of the following characteristics: it retraces up to 38.2% or 50% of the movement from A to C, or it is up to 1.618% or 2.618% above the movement from A to B.
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| The Bat Harmonic Patterns |
How to Trade with the Bat Pattern?
When trading with the Bat pattern, it's important to
consider other factors along with evaluating the environment in which the
pattern forms. These factors will help confirm the pattern's reliability and
identify possible risks in the future. When forming, oscillators indicating
overbought or oversold conditions can be used to confirm the reliability of the
Bat pattern. In addition, the amount and trajectory of the volume during which
the pattern is formed affects the strength of the pattern. Low volume can
indicate the signal's weakness, while high volume can indicate its strength.
The Bullish Bat pattern emerges when the price reverses from
a downtrend to an uptrend, presenting excellent buying opportunities.
Buy (Long): The most common and classic method is to place a
buy order when prices reach point D and start moving upward. This is a trade
made with the expectation that prices will likely rise.
Stop Loss: It may be often appropriate to place a stop loss
order just below the completion of the pattern. The stop loss order is placed
below point D. This helps minimize losses in situations where the price does
not move as expected, allowing you to control your risks.
Target: You can use technical analysis tools like Fibonacci
retracement levels to set targets. Additionally, you can use the size of the pattern
to determine targets. Targets can be set at 1.618% or 2.618% of the pattern's
height.
The following image shows an example of a trade using the
Bullish Bat pattern on the Australian Dollar/US Dollar (AUD/USD) currency pair.
You can take a closer look at the chart if you wish:
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| Bullish Bat Harmonic Pattern on AUD/USD chart |
The Bearish Bat pattern represents a downward reversal
following an uptrend. This situation can be an important selling signal for
traders following price movements. However, it needs to be combined with other
technical analysis tools and indicators for completion and to confirm the
reversal signal.
Sell (Short): After the pattern is completed and point D is
formed, a short selling position can be opened. This point provides the
strongest signals that the reversal has started.
Stop Loss: The stop loss order is placed above point D. This
helps limit losses in situations where the pattern is not completed and prices
continue to move upward.
Target: You can assess the size of the pattern to determine
targets. These targets can anticipate the pattern reaching levels of 1.618% or
2.618% of the pattern's size.
Below is a detailed trade example showcasing the Bearish Bat
harmonic pattern on the USD/CAD (US Dollar/Canadian Dollar) currency pair. If
you wish to examine the chart details closely, you can review the image:
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| Bearish Bat Harmonic Pattern on USD/CAD chart |
Remember: Managing risk is essential in financial trading. The Bat harmonic pattern, like other technical tools, may not be sufficient as a standalone signal. Therefore, it should be evaluated in conjunction with other technical indicators, and most importantly, you should prioritize logic over emotions when trading.