Harmonic Bat Pattern Strategy (Backtest And Example)
Last Updated on October 17, 2022
There are different types of the harmonic chart pattern. The Bat pattern is one of the many harmonic patterns named after animals, but what is it?
The Bat pattern is a simple XABCD harmonic pattern that consists of four price swings and five pivot points — X, A, B, C, and D. One of the harmonic patterns was developed by Scott M Carney – it is believed to have a good reward ratio. With the harmonic chart pattern, you may be able to predict how the price might move in the near future.
In this post, we take a look at the Bat harmonic pattern and make a backtest at the end of the article.
What is a harmonic Bat pattern strategy?
The Bat pattern is a simple XABCD harmonic pattern that consists of four price swings and five pivot points — X, A, B, C, and D. One of the harmonic patterns developed by Scott M Carney, the pattern consists of the XA, AB, BC, and CD price swings.
As with other XABCD harmonic patterns, the Bat pattern starts from point X and swings through points A, B, and C, eventually ending at point D, making two impulse waves and two correction waves. The XA and CD swings are the impulse waves, whereas the AB and BC swings are correction waves.
As you can see, the AB swing is a retracement of the XA swing, while the BC swing is a retracement of the AB move. Then comes the CD swing, which extends beyond the B point but doesn’t get to the X point. In a way, the pattern looks like the Gartley pattern — the only difference is in the Fibonacci ratios. As with other harmonic patterns, the Bat pattern can have a bullish or bearish orientation. See the illustration of the bearish pattern below:
What are harmonic patterns?
Harmonic patterns are chart formations that arise from a unique pattern of price waves. They typically consist of four price waves with five swing points that follow unique Fibonacci ratios. The harmonic patterns are considered reversal patterns that may either indicate a trend reversal or the reversal of a multi-legged pullback.
By identifying and analyzing harmonic chart patterns, you can predict how the price might move in the near future. But to exploit the trading opportunities that come with the patterns, you must first know the criteria for identifying a valid pattern.
Harmonic Bat pattern trading rules
The criteria for identifying the Bat pattern are as follows:
- The XA wave is a normal price swing in the upward or downward direction.
- The AB wave is a 38.2% or 50.0% retracement of the XA wave.
- The BC wave can be either a 38.2% or 88.6% retracement of the AB wave.
- If the BC correction wave is 38.2% of the AB swing, the CD wave should be a 161.8% extension of the BC wave. But if the BC wave is 88.6% of the AB wave, then, the CD wave must be around a 261.8% extension of the BC wave.
- Overall, the CD wave should be 88.6% retracement of the XA move.
How do traders trade the Bat pattern?
Traders who trade the Bat harmonic pattern strategy follow these steps:
- They identify a potential Bat harmonic pattern: When the price makes three waves that may look like a Bat pattern, smart traders use the harmonic pattern tool in the trading platform to trace and label the price swings and project the D (PRZ) point, which should be at an 88.6% retracement of the XA swing.
- They wait for the pattern to complete: When the price gets to the projected D point, they look for signs of the price reversal, such as a reversal candlestick pattern (like the engulfing pattern, pin bar, or an inside bar) or an RSI showing an oversold/overbought signal, as the case may be.
- They place their orders accordingly: For a bullish Bat pattern, they go long with a market order once they see a sign of price reversal around the PRZ level. For a bearish Bat pattern, they go short.
- They put their stop loss and profit target: A stop loss is placed beyond the X-point. They normally use multiple profit targets to take partial profits at multiple levels, with the first target being at the 38.2% retracement of CD and the second target at 61.8% retracement of CD. A third profit target may come at the level of the C point.
Which timeframe is best for harmonic Bat pattern?
The Bat harmonic pattern strategy can be traded on different timeframes, but many traders like to trade it on the hourly, 4-hourly, or daily timeframe. But we can’t say that those are the best timeframe for the strategy until you do thorough backtesting to find out the timeframe the pattern works best.
Harmonic Bat Pattern Strategy backtest
The harmonic bat pattern strategy is very difficult to backtest with precise trading rules and settings. Unfortunately, we are not able to make any meaningful backtest of the pattern. One way to backtest could be to use the zig-zag indicator, but the indicator is forward-looking and not reliable.
In general, because of the lack of objectivity, we believe classical chart patterns might be a dead end for traders. Why would you spend time on something that is not backtested where you have no clue if the pattern is profitable or not? How do you know a pattern is profitable if you have not backtested it?
A backtest doesn’t guarantee anything, but at least you know it has been profitable in the past. If the pattern has not been profitable in the past, you can safely skip it and not waste any more time. Trading is about having a portfolio of trading strategies, not having one or a few subjective classical chart patterns. There is no best trading strategy because you need many to smooth returns.
(If you are new to backtesting and it looks like a daunting task, you might be interested in our backtesting course.)
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