A retail trader in the forex market is like a small fish trying to survive in a shark-infested ocean. With many professional and institutional traders who can manipulate the market with their huge orders, you must be extremely good to swim your way around those predators. Learning the Shark pattern can go a long way in helping you achieve that.
The Shark pattern is one of the many harmonic patterns named after animals. Other harmonic patterns with animal names include the Crab, the Bat, and the Butterfly patterns. The Shark pattern was discovered in 2011 by Scott Carney, and it shares some of the features of the Crab and Cypher patterns.
As with other harmonic patterns, the swings and swing points in the Shark pattern must meet certain Fibonacci ratios for the structure to be valid. We will discuss all those details in this post. Here are what you stand to learn from the post:
- What the Shark pattern is
- The psychology behind it
- The tools you can use to trace the pattern on a price chart
- How to trace the pattern
- How to trade the bullish and bearish patterns
What is the Shark pattern?
The Shark pattern is one of the newest harmonic patterns described by Scott Carney. Just like other harmonic patterns, it is based on price waves and consists of four swing and five swing points. Unlike the other 5-point harmonic patterns that use the XABCD labeling system, Scott Carney, for reasons best known to him, used a different labeling system for this pattern — the swing points X, A, B, C, and D in the other patterns are labeled as O, X, A, B, and C points respectively in the Shark pattern. 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.
Apart from the different labeling, the Shark pattern is somewhat similar to the Cypher pattern since, in both patterns, the third swing extends beyond the first swing high/low. That is, the fourth swing point (B in Shark and C in Cypher) lies beyond the second swing point (X in Shark and A in Cypher). At the PRZ end, the Shark pattern is similar to the Crab pattern, as the last swing in both patterns extends beyond the origin of the first swing — the C point extend beyond the O point in the Shark pattern just the same way the D point extends beyond the X point in the Crab pattern.
On the aspect of shape, the Shark pattern has an M shape and appears like a double top pattern with the second top being higher than the first. It can also have the opposite orientation where it adopts a W shape, with the second swing low being lower than the first — more like a descending double bottom appearance.
The pattern is quite unique in the sense that it contains an extreme harmonic impulse wave that represents an over-extended price action, which is usually followed by a reactionary trading behavior especially when it retests a defined support or resistance level. But just like other harmonic patterns, the various retracement and extension swings in the Shark pattern follow specific Fibonacci ratios.
The components of the Shark pattern
While, like other harmonic patterns, the Shark pattern has a 5-point swing structure, with four swings, its labeling is different, and the swings follow specific Fibonacci retracement and extension ratios. The components are as follows:
- OX swing: The OX swing starts from the O point and extends to the X point. It is an impulse wave with a local swing high at the A point in a bullish formation. In a bearish formation, the A point would be a swing low.
- XA swing: Starting from the X point to the A point, the XA swing is a correctional wave. It does not have any specific Fibonacci retracement ratio attached to it. However, in a bullish pattern, the A point is higher than O point, while in a bearish setup, the A point is lower than the O point.
- AB swing: The AB swing starts from the A point to the B point. It is a continuation of the OX swing, which extends beyond the point X level. Thus, in a bullish formation, point B is higher than point X, while in a bearish formation, the B point is lower than the X point. The AB swing is usually about 113% to 161.8% extension of the XA swing.
- BC swing: Extending from point B (which is beyond the X point) to the C point (which extends beyond the O point), the BC wave is an over-extended impulse that seems like an outright reversal of the OB move (the OX and AB swings). However, because the price action is already over-extended and exhausted, the price is expected to retrace that move after reaching the potential reversal zone (the C point). The BC wave is a 161.8% to 224% extension of the XA wave and a 113% extension from the O point.
The psychology behind the Shark pattern formation
With the harmonic trading system gaining popularity amongst institutional and even retail traders, the shark pattern is one of the most widely traded patterns in the harmonic family owning to its unique nature and reliability. Just like a shark bite, the Shark pattern presents a powerful tool for attacking the market at the right moment to take your own bite at some pips.
But how does the Shark pattern come about? Why do they form? To understand the psychology behind the Shark pattern, we need to take a look at the various price swings that make up the pattern, especially the hyper-extended BC swing.
The pattern starts with a normal impulse price swing, followed by a correctional wave. Then, the price attempts another impulse wave but was stopped just after going beyond the previous swing high or low — depending on the orientation of the pattern. What follows is a massive reversal move that gives back all the gains from the previous swings and even more.
This characteristic hyperextended move creates a sort of price exhaustion, which can trigger a strong reaction when the price reaches the potential reversal zone, especially if that level corresponds with a previously established support or resistance level.
So, the pattern presents an extreme price structure that seeks to capitalize on the over-extended nature of the extreme harmonic impulse wave. To put it simply, the price is extended, and the primary movers are already exhausted. This creates an opportunity for the price to bounce back and retrace all that move. It is this reactionary move that presents a fairly predictable trading opportunity that is associated with the Shark pattern.
The Shark pattern: types
On the price chart, the Shark pattern can have different orientations, which, in turn, determines the type of price reaction it evokes. The pattern can be positioned in a way that it creates a potential bullish reaction at the PRZ, and it can also be in a way that it potentially creates a bearish reaction. Thus, the Shark pattern can be grouped into the bullish and bearish patterns.
Bullish Shark pattern
A bullish Shark pattern is one that has an upward orientation. It has the shape of an M, with the second swing high being higher than the first one. The four swings that make up the pattern are arranged this way: an upward impulse wave (the OX wave) followed by a downward retracement wave (the XA wave), and then another upward impulse wave (AB) that moves above the first swing high. This is followed by a hyper-extended impulse wave (BC) to the downside, which ends at the C point or the PRZ.
When the pattern is completed at the PRZ, it can potentially trigger an upward price reaction, which is why it is regarded as a bullish pattern. The pattern can occur in an uptrend or a non-trending market.
Bearish Shark pattern
With a W shape that looks like a descending double bottom pattern, the bearish Shark pattern has a downward orientation. It starts with a downward impulse wave (the OX wave), which is then followed by an upward correctional move (the XA wave). Then, another downward impulse wave develops and moves below the first swing low. The price then turns upwards and surges past the O point where the pattern started from.
The pattern is completed at the C point, which is called the bearish potential reversal zone because the price is likely to turn back from there and head downwards. While this pattern can be seen in a downtrend, it can also occur in a trendless market.
Tools for identifying the Shark pattern in a price chart
While you can draw this pattern manually with the help of some basic tools in your trading platforms, such as trend lines for tracing the various price swings, the labeling tool for marking the various swing points, and the Fibonacci retracement and extension tool for measuring the ratios for each swing, there are built-in platform tools or custom indicators that can be used to perform all the three tasks at once.
A custom harmonic indicator, such as the ZUP Indicator, can be used to trace the price swings, label the price swing points, and show the Fibonacci retracement and extension ratios at the same time — for those trading with the MetaTrader 4 (MT4) platform. The tool was designed from the MT4’s zigzag indicator and the Fibonacci tool.
If you are using the TradingView platform, there are different built-in tools for tracing the harmonic patterns. You can find the ABCD Pattern tool, the XABCD Pattern tool, and the Cypher Pattern tool, but none of them bears the OXABC labeling used in the Shark pattern. However, you can conveniently trace the various price swings and swing points in a Shark pattern with either the XABCD Pattern tool or the Cypher Pattern tool, except that they will bear different labeling from the OXABC used by Scott Carney.
How to trace and identify the Shark pattern
The Shark pattern has some of the features of the Crab and the Cypher patterns. As you would find in the Cypher pattern, 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. But just like in the Crab pattern, the fourth swing extends beyond where the pattern started.
While most harmonic patterns contain four swings, you may begin to suspect a harmonic formation when the third swing has completed, and the fourth swing is emerging. A third swing with a higher high or lower low than the first swing suggests a possible Shark or Cypher pattern. What you do at that is to take your harmonic pattern tool and trace the various swings with their Fibonacci ratios so that you can project the possible PRZs for a Cypher pattern and a Shark pattern. Then, watch how the price reacts when it gets to any of them.
Here are the steps to follow:
- Identify the first swing high/low and the point where it started.
- Take the relevant harmonic tool in your trading platform and click on the origin of that first swing. Note that the labeling is likely to be of the XABCD pattern as harmonic tools with OXABC labeling are rare.
- From that first swing point, drag the tool to the second swing point, giving it the appropriate label. Then, drag the tool to the third and fourth swing points and label them accordingly.
- Now, drag the tool to a potential fifth swing point beyond the origin of the pattern even though the price hasn’t got there yet. This fifth swing point should be 1.618 to 2.24 extension from the third swing point and 1.13 extension from the origin of the pattern.
- Meanwhile, take note of the area around 0.78 retracement of the entire opposite swing, it might end up as a Cypher pattern instead.
When you finish, crosscheck the Fibonacci ratios of the swing points to be sure that they meet the criteria for a Shark pattern.
Shark pattern rules: the checklist
- The XA wave is not described with any specific Fibonacci retracement ratio.
- The AB wave should be about 113% to 161.8% extension of the XA swing.
- The PRZ (C point) should be 161.8% to 222.4% extension of the AB swing and a 113% extension from the origin of the pattern (O point).
How to trade the Shark patterns
The Shark pattern is quite complex and requires advanced chart analysis using Fibonacci ratios to estimate where the price is likely to reverse. Although it may seem difficult at first, you can learn how to analyze and trade it if you understand the basics.
Rules for trading the Shark patterns
Here are some rules for analyzing and trading the pattern:
- You must allow the pattern to complete at the potential reversal zone (the C point): Because the Shark pattern, just like other harmonic patterns, is based on Fibonacci ratios, they are leading in nature. So, you know the potential reversal zone before the price gets there. However, you should avoid placing limit orders at the estimated PRZ before the pattern completes because anything can happen: the price may not get there and, instead, forms a Cypher pattern, or it may fail entirely.
- There is a need to use a reliable trade trigger: You don’t just place a trade when the pattern completes, you need a reliable trigger to confirm that the price is about to reverse. Some of the tools you can use as a trigger are oscillator divergence signal, a counter-trendline breakout, or reversal candlestick patterns, such as pin bars, engulfing patterns, inside bars, and morning or evening star.
You must plan for your stop loss before making a trade: There is a need to know where you can safely place your stop loss before making a trade. The most common place is 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.
- You may have to use multiple profit targets: The Shark pattern has many swing points that may be difficult for the price to overcome. So, it is common for harmonic traders to use multiple profit targets placed around some of those swing points. Two common levels for profit targets are point A and point B (using the proper Shark pattern labeling) or point B and point C if the pattern is labeled with the XABCD labeling.
Step-by-step guide for trading a bullish Shark pattern
Here are steps you can follow when trading a bullish Shark pattern:
1. Identify a newly forming Shark pattern
At the early stages, the bullish Shark pattern looks like a bullish Cypher pattern — both have an M shape with a higher second swing high. When you see a formation like that, monitor your chart closely to see how the pattern develops.
2. Draw the pattern and estimate the potential reversal zone
Use the relevant harmonic tool in your trading platform to trace the various swings and estimate the potential reversal zone — the C point or the D point, depending on the labeling — which is between 161.8% to 224% extension from the preceding swing low and 113% extension from the swing point where the pattern began.
3. Wait for the price to reach the potential reversal zone
Knowing the potential reversal zone, you just have to wait for the price to get there and see how it reacts. The price is more likely to reverse if the PRZ corresponds to an already known support level.
4. Look for a bullish trade trigger
Once you notice signs of exhaustion after the price has reached the PRZ, look for a bullish trade trigger that can push you to enter a trade. It can be an oscillator bullish divergence signal, a breakout of a counter-trendline placed on the fourth swing, or a bullish reversal candlestick, such as the hammer, morning star, bullish engulfing, or an inside bar.
5. Place a buy order at the open of the next candlestick after the trigger
Go long with a market order at the opening of the next candlestick after the trigger or place a buy limit order above the candlestick that completed the trigger.
6. Place a stop loss order
Put your stop loss a few pips below the lowest point of PRZ. Use a hard stop loss instead of a mental one.
7. Secure your profits
You may use two profit targets. Take your first partial profit just below the preceding swing low (the A point or B point, depending on the labeling). Your second partial profit target should be a little below the swing high (the B point or the C point).
Step-by-step guide for trading a bearish Shark pattern
You can follow these steps when trading a bearish Shark pattern:
1. Spot a newly forming bearish Shark pattern
A newly forming bearish Shark pattern resembles a bearish Cypher pattern, as both have a descending W shape. Thus, seeing such a formation, you should monitor your chart closely to see how the pattern develops.
2. Trace the pattern and estimate the potential reversal zone
With the relevant harmonic tool in your trading platform, trace the various swings and estimate the potential reversal zone — the C point or the D point, depending on the labeling — which lies above the beginning of the pattern. The PRZ is usually between 161.8% to 224% extension from the preceding swing high and 113% extension from the swing point where the pattern began.
3. Wait for the price to get to the potential reversal zone
After marking the potential reversal zone, wait for the price to get there and see how it reacts. There is a higher chance that the price will reverse at the PRZ if it corresponds to an already established resistance level.
4. Check for a bearish trade trigger
If the price is showing signs of exhaustion after getting to the PRZ, look for a bearish trade trigger that you will use to enter a trade. Check for a bearish divergence signal in an oscillator, a breakdown of a counter-trendline placed along the fourth swing, or a bearish reversal candlestick, such as the shooting star, evening star, bearish engulfing, or an inside bar.
5. Go short at the open of the next candlestick after the trigger
Place a sell market order at the opening of the next candlestick after the trigger or put a sell limit order below the candlestick that completed the trigger.
6. Place your stop loss order
Put your stop loss some pips above the highest point of PRZ. A hard stop loss is better than a mental stop loss because of violent adverse price movements.
7. Manage your profits
Two profit targets may be enough. The first profit target can be just above the preceding swing high (the A point or B point, depending on the labeling). Your second profit target should be just above the swing low (the B point or the C point).