Educational Post:
Bearish Bat Harmonic Pattern
Bearish Bat Pattern
The bearish variation has the opposite implication as the bullish Bat pattern. Let’s now illustrate how the bearish Bat pattern appears, and the price movements within each of its respective legs.
Here you can see the bearish variation and the associated fib ratios for the Bat Pattern:
In a bearish Bat pattern, the initial XA leg will be bearish. The following leg will be the AB leg and will retrace the XA leg upwards by the Fibonacci ratio of 38% or 50%. This again marks the B point of the bearish Bat pattern. Again, the B point holds a special significance within the bat structure, and, it needs to terminate at one of these two specific levels in order to correctly label the structure as a bat.
As we will see later, a deeper retracement at the B point can invalidate this pattern, and instead, can lead to the classification of the pattern as a Gartley. Moving on, the BC leg will ensue and will retrace its prior AB leg by 38 to 88%. Finally, the last leg within the structure, the CD leg, will move higher and terminate at or near the 88% retracement of the initial XA leg. Once this happens, it confirms the bearish Bat structure, signaling an imminent reversal as prices should begin the trade lower.
Trading The Bearish Bat Pattern
Let’s now shift our attention to the bearish Bat version. The trading rules would be the same as described above for the bullish Bat pattern, but in the reverse direction. For the purpose of completeness, we will describe the rules here again in the context of the bearish Bat formation.
Below you can see an illustration that details the bearish Bat pattern, along with some additional notations referring to the trade management process.
We will use our pattern recognition skills, or a harmonic pattern scanner, to locate a potential bearish bat formation on the price chart. Once we have found a structure that qualifies, will need to have a plan to execute a short position. Remember that within the bearish bat pattern as well, we need to play close attention to the termination points at point B and point D. And to reiterate, point B should terminate at either the 38% or 50% Fibonacci retracement as it relates to the XA leg. And D point should end at the 88% retracement level of the XA leg.
Rules For Trading The Bearish Bat Pattern:
Enter with a limit order to sell at the 88% retracement of the XA leg.
Stop loss to be placed just above the swing high at point X
Use a multi-target exit strategy. Target one should be set at the swing high of point B, Target two should be set at the swing low of point C, and finally the last target, Target three, should be set at the swing low of point A.
Bearish Bat Pattern Trading Strategy
Let’s now move on and see the strategy in action for a bearish Bat pattern. If you refer to the chart below you will find the British Pound to Canadian Dollar pair with a bearish Bat pattern highlighted.
The XA leg kicks off the structure, and you can see that the price action within this leg is quite impulsive with strong bearish momentum within the overall price movement. Then as prices move higher in the AB leg, we can see that the B point terminated near the 53% retracement of the XA move. Though this is slightly higher than our preferred 50% level, it is nevertheless within an acceptable range for the classification of the bat pattern.
Then after a minor move lower in the BC leg, the final CD leg brought prices higher taking out the swing B high on its way up. At this point we should have been put on notice that a solid bearish Bat trading opportunity is likely developing.
We would have placed a limit order to sell at the 88% retracement of the XA leg, as price was moving higher in the CD leg. You can see the bar wherein our entry would’ve occurred in the circled area near the top of the chart. Also notice that prices continue to move higher even after our sell order would have executed, and the D point terminated all the way to the 97% retracement of the XA leg, forming a double top.
Since our stop loss would’ve been placed beyond the X point high, we would not have been in any major jeopardy of it being hit in this particular instance. It’s also worth noting that the terminal price bar within the CD leg is clearly a pin bar formation. This further bolsters our outlook for a bearish reversal.
As prices move lower, we can see that our first target was hit by the long bearish candlestick that broke below the swing B high. Afterwards, the price retraced higher a bit, before eventually rolling over to the downside again. As the selling momentum increased, our second target was triggered at the swing low of the C point. This was, however, the best we could hope for on this particular trade because shortly after target two was hit, the price action reverses swiftly and begins to trade higher. Soon afterwards, our stop loss at the extreme of the X point was triggered. As such, or entire position was now closed out, but we would have ended up with an overall profit on the trade.
Summary
The bearish Bat pattern is one of four major harmonic trading patterns. The other three include the Gartley pattern, Butterfly pattern, and Crab pattern. The Bat pattern offers the best reward to risk profile of all these other harmonic structures. This is due to the deep retracement that is required to validate the bat formation. Because of this deep retracement, we able to lean heavily on the major swing point nearby at point X, for the placement of our stoploss.
#Binance #crypto2023 #ethereumshanghaiupgrade #multipreneurs
