Shark Harmonic Trading Strategy (Backtest And Example)
Last Updated on April 18, 2023
If you are a harmonic pattern enthusiast, you will like to know about the Shark harmonic trading strategy. Released in 2011, the Shark pattern is one of the latest harmonic patterns described by Scott Carney, and it has some unique trading properties. Want to know about the Shark harmonic trading strategy?
The Shark harmonic trading strategy is a trading method that uses the Shark harmonic pattern to identify trading opportunities and potential profit targets. Traders use this strategy to anticipate potential price reversals, which could be a trend reversal or a temporary pullback.
In this post, we answer some questions about the Shark Harmonic trading strategy and we end the article with a backtest and statistics.
What is the Shark harmonic trading strategy?
The Shark harmonic trading strategy is a trading method that uses the Shark harmonic pattern to identify trading opportunities and potential profit targets. As with other harmonic patterns, the Shark pattern consists of five swing points and four price swings, but the swing points are labeled differently: O, X, A, B, and C.
Starting with the OX swing, which is the first impulse wave, the price then retraces to point A and then reverses to make an impulse wave to point B, which is beyond point X. Next, the price reverses to make a big wave that extends beyond the O swing point to point C, also known as the price reversal zone (PRZ) because it is where to enter a trade in the hope of a price reversal.
The Shark pattern can be bullish or bearish, depending on the direction the pattern is facing, and it may indicate a potential complete trend reversal or a pullback reversal within a trend.
Bullish Shark pattern illustration
Bearish Shark pattern illustration
What is the Shark harmonic pattern, and how is it used in trading?
The Shark harmonic pattern is a new harmonic pattern described by Scott Carney. As with other harmonic patterns, it is based on price waves and consists of four swing and five swing points, but unlike the other 5-point harmonic patterns that use the XABCD labeling system, the swing points are labeled as O, X, A, B, and C points. Thus, the potential reversal zone (PRZ), where the pattern is completed, is labeled the C point rather than the familiar D point in the other patterns.
Although a 5-point formation, the Shark pattern is not the typical M and W framework; it possesses a unique formation that Scott Carney called an Extreme Harmonic Impulse Wave, which retests defined support/resistance while converging in the area of the 0.886 retracement – 1.13 extension. According to Carney, the completion point must include the powerful 88.6% support/retracement as a minimum requirement in all cases. Also, the unique extreme Harmonic Impulse Wave has a minimum 1.618 extension — this combined with the 88.6% retracement defines a unique structure that possesses two profound harmonic measures to define the minimum level.
Traders can use the pattern to identify overextended price action that may signal a price reversal. Generally, the price action will retest the pattern’s initial beginning point and even go beyond it, defining an extended retracement that could trigger a price reversal. This over-extended price action is referred to as the Extreme Harmonic Impulse Wave, which is associated with reactive trading activity. This pattern usually defines tremendous chances, but these reversals are typically abrupt and need swift order placement and trade management to take advantage of them.
In some cases, the price reversal typically results in a limited counter-trend move. So, the overall expectations in price action should be short-lived and seek to capture the clearest opportunities. While the Shark pattern yields many accurate and aggressive reactions that you can trade profitably, you need to be proactive to get into the trade in time, and you need to employ active trade management techniques to get the best outcome.
How do you identify the Shark pattern in a chart?
The Shark pattern has unique characteristics that make it easy to identify if you know what to look for. These are the main ones:
- The third swing in the Shark pattern also extends beyond the high/low of the first swing, giving it an ascending double top or descending double bottom appearance.
- The fourth swing extends beyond the point where the pattern started, giving it the appearance of an overextended pullback.
- Other features have to do with the Fibonacci ratios.
What are the key ratios and measurements used in the Shark pattern?
The key ratios for identifying the Shark pattern are as follows:
- The XA move is not a Fibonacci retracement of the OX swing
- The AB move extends between 113% to 161.8% Fibonacci ratio of XA swing
- The BC swing extends beyond the O point by 113% Fibonacci ratio of the OX swing, and it also makes an extension of 161.8% to 222.4% of the XA wave — the length from O to C is 88% to 113%
- That is, the PRZ (C point) should be a 161.8% to 222.4% extension of the AB swing and a 113% extension from the origin of the pattern (O point).
How do you set entry, stop loss, and take profit levels when trading the Shark pattern?
For your trade entry, you may set a limit order at the PRZ (point C) before the price gets there, with the hope that the price would reverse from there, but that can be dangerous, as the price may move past the level. A better alternative is to wait for the price to get there and show a sign of reversal, such as a reversal candlestick pattern (hammer/shooting star or the engulfing pattern), and then enter with a market order.
Your stop loss should be placed below the lowest point of the PRZ for a bullish setup or above the highest point of the PRZ in the case of a bearish setup.
For the profit target, it can be placed before any of the swing points. The two common levels for profit targets are point A and point B. you may also set multiple profit targets and take partial profit at each level.
How does the Shark pattern perform in different market conditions?
The Shark pattern can occur in any market condition, including a trending and a range-bound market. In both market conditions, it signifies a potential price reversal. In a range-bound market, it may occur as an extended swing beyond the boundary of the trading range, which is followed by a vehement price rejection and reversal to the opposite end of the range.
In a trending market, it may occur as a multilegged pullback that is followed by a price reversal to the trend direction for the continuation of the trend.
What are the risks and limitations of using the Shark pattern in trading?
As with technical analysis methods and chart patterns, the Shark harmonic pattern does not always lead to a good outcome. The pattern can fail, as the price can continue moving after reaching the projected price reversal zone. Even if the price seems to reverse from the PRZ, it can still reverse again and move in the opposite direction before reaching the price targets.
Another issue is that the pattern may be difficult for the inexperienced eye to identify. Early into the formation (at the third swing), a trader can confuse it with the Cypher pattern and make a PRZ projection for the Cypher pattern which lies way before the starting point. If the trader places a limit order at that projected Cypher pattern PRZ, that would lead to a loss.
How do you confirm the validity of the Shark pattern?
For a harmonic pattern to be considered the Shark pattern, it must fulfill the following three Fibonacci ratio rules:
- The AB swing should show a retracement of between 1.13 and 1.618 of the XA leg, and point B must be beyond point X.
- The BC swing extends beyond the O point by 113% Fibonacci ratio of the OX swing, making an extension of 161.8% to 222.4% of the XA wave — the length from O to C is 88% to 113%
How do you choose the appropriate timeframe for using the Shark pattern?
The right timeframe you choose for trading the Shark pattern depends on your trading personality and style. If you are a day trader, you would choose an intraday timeframe, such as the hourly to 15-minute timeframe. But if you are a swing trader, you may look for the pattern on the daily timeframe or H4 timeframe. A position trader would look for the pattern on a weekly timeframe. However, the higher the timeframe, the more likely it is for the pattern to work.
How do you manage trade size and position sizing when using the Shark pattern?
When trading the Shark pattern, you manage your position sizing the same way you do when using any other trading strategy. It is always preferable to risk only a small percentage of your account balance, say 1%, per trade. With that account risk, you can calculate the actual position size with this formula:
Position size account risk/(stop loss x per unit value of the asset)
How do you integrate the Shark pattern into a broader trading strategy?
As with other chart patterns, you can integrate the Shark pattern into a broader trading strategy by combining it with other techniques. Being a price action pattern, you can combine it with other price action trading tools, such as trendlines and support/resistance levels. For example, the PRZ in a bullish Shark pattern occurring at a well-known support level gives it a higher significance and makes the trade setup a high probability one.
You can also study the price structure on a higher timeframe to understand the position of the Shark pattern in the overall market perspective.
How does the Shark pattern compare to other harmonic patterns in terms of potential profitability and risk?
The Shark pattern is more likely to give a better outcome than many other harmonic patterns, such as the Cypher pattern. The reason is that the PRZ of the Shark pattern occurs in an extended zone formed by an Extreme Harmonic Impulse Wave (the BC wave) — as Carney often calls it. With the price at an extended overbought or oversold zone, the likelihood of a reversal is high.
How do you use other technical indicators in conjunction with the Shark pattern to make trading decisions?
There are many ways to use technical indicators to trade the Shark pattern. You can use an oscillator, such as the stochastic or RSI as a trade trigger to know when to enter a trade after the price has reached the PRZ.
Also, you can combine the Shark pattern with a moving average in a trending market; you use the moving average to identify the trend and dynamic support or resistance level. A confluence of a long-period moving average and the PRZ gives the trade setup a high probability of success.
How do you use fundamental analysis in combination with the Shark pattern to make trading decisions?
You can combine fundamental analysis with the Shark pattern by trading the pattern only when the trade setup is in agreement with your fundamental analysis. For instance, if your analysis indicates that the market would be bullish for the foreseeable future, you only trade the bullish Shark pattern and ignore the bearish ones.
How do you effectively backtest the Shark pattern to assess its performance?
It is very difficult to backtest the Shark pattern strategy using an automated method because the pattern may be difficult to code. But if you can code a reliable pattern, then you backtest it the way you would test any other strategy, using both in-sample and out-of-sample data to minimize curve fitting.
How do you continuously learn and improve your use of the Shark pattern in trading?
In trading, as in any other skill-based endeavor, you learn by constantly practicing your skills. The more you trade the Shark pattern, the better you hone your skills and improve your trade execution.
How do you manage the emotional aspects of trading the Shark pattern, such as fear of missing out or fear of loss?
The easiest way to overcome trading emotions is to trade with an amount you can afford to lose and reduce your position size to the lowest possible. You should also have other streams of income so that your day-to-day life won’t be dependent on your trading profits. That way, you lose your emotional attachment to the money.