The bat pattern is a harmonic chart pattern, based on Fibonacci numbers and ratios, that helps traders identify reaction highs and lows. Just like other Harmonic price patterns, the bat pattern utilizes Fibonacci numbers to define precise turning points. Unlike other more common trading methods, harmonic trading attempts to predict future movements. The bat pattern is a variation of the harmonic pattern and is hence similar to the Gartley pattern except in terms of Fibonacci measurements. Since it is a variation of the harmonic series, it requires good understanding and knowledge on Fibonacci and the Elliott wave theory to better understand how the pattern works and operates. As a harmonic pattern, the bat pattern usually takes place in the correction phase and leads to a formation of wave 1 in the motive phase. However, it is not to be confused with a leading diagonal formation in the Elliott wave theory, although it is possible for the bat pattern to form within the leading diagonal. The bat pattern is an advanced chart pattern that may seem hard to grasp for beginners especially. Even so, it identifies potential reversal zones with high accuracy. Making it a purposeful and powerful weapon in technical analysis that every trader would hold in their arsenal.
Bat pattern – Quick Setup Tutorial
How to use
The bat pattern requires knowledge from the Fibonacci retracement tool and a bit of the Elliott Wave’s theory. The bat pattern comes in two forms: the bullish, shaping like the letter “M” and the bearish, shaping like a letter “W”.
To identify a bat pattern, it must have 5 points, which we would identify as X, A, B, C and D. The 5 points are part of an Elliot wave movement from motive to corrective phase, with CD as the start of a reversal.
For the bullish bat pattern, XA is the impulse wave 5 of a bullish Elliott wave of a smaller degree. Point B must retrace to 38.2% to 50% of XA, with AB forming corrective wave A of a larger degree. Point C must be at 38.2% to 88.6% retracement of AB. BC then forms the corrective wave B. Lastly, point D must be at 161.8% to 261.8% extension from AB but at the same time, fulfils a 88.6% retracement from XA. CD then forms the corrective wave C.
For the bearish bat pattern, XA is the impulse wave 5 of a bearish Elliott wave of a smaller degree. Point B must retrace to 38.2% to 50% of XA, with AB forming corrective wave A of a larger degree. Point C must be at 38.2% to 88.6% retracement of AB. BC then forms the corrective wave B. Lastly, point D must be at 161.8% to 261.8% extension from AB but at the same time, fulfils a 88.6% retracement from XA. CD then forms the corrective wave C.
After identifying the bat pattern, we will be looking for a trade set up depending on whether the pattern is bearish or bullish.
For a bullish set up, the entry is determined by price action. The stoploss can be put at point X or the 100% retracement of XA. The profit taking level can be taken at point C.
Also read: Parabolic Sar Tested And Explained
For a bearish set up, the entry is determined by price action. The stoploss can be put at point X or the 100% retracement of XA. The profit taking level can be taken at point C.
Pros and cons
Similar to the Gartley pattern, the pros of using the bat pattern trading strategy are that it is highly accurate due to the specific measurements using the Fibonacci retracements. This allows traders to identify price reversal areas, stop loss and profit targets with high accuracy. However, due to the lack of frequent occurrence in the market, it requires patience and discipline from the trader, which in turn leads to opportunity costs, where other potential trades might be missed out on. On top of that, even though the pattern’s specificity falls into a range in the Fibonacci ratios, the degree of specificity also determines the reliability of the pattern. The pattern might give several red flags during its formation and one of the largest one that would cause it to fail is the unmatching Fibonacci ratios. Lastly, it is definitely a beginner unfriendly strategy as it is tedious and hard to grasp with Fibonacci and Elliot wave knowledge as pre-requisites.
Also read: Gartley Pattern
To find out the profitability of the bat pattern trading strategy, we decided to do a back test based on the past 5 trades from 2 Jul 21 on the M1 timeframe. The rules for entry will be the same as what was mentioned above. We will be back testing this throughout 3 types of trading vehicles, namely, EURUSD for forex, US30(DJI) for stocks and BTCUSD for cryptocurrency. For simplicity, we will assume that all trades taken have a risk of 1% of the account.
Definitions: Avg Risk reward ratio= ( Total risk reward ratio of winning trades/ total no. of wins) Profitability (% gain)= (no. of wins* reward)- (no of losses* 1) [ Risk is 1%]
Also read: Price Channel
An example of the application of the strategy is as shown:
For the Backtest results, trades with blue and yellow zones indicate an overall win with the blue zone as reward and the yellow zone as the risk taken.
As shown in our backtest, the win rate of this strategy for EURUSD (Forex) is 70%, AAPL (Stocks) is 60% and BTC (Crypto) is 60%
The average risk reward ratio of this strategy for EURUSD (Forex) is 3.51, US30 (Stocks) is 3.23 and BTC (Crypto) is 2.77.
The profitability of this strategy for EURUSD (Forex) is 7.53, AAPL (Stocks) is 5.69 and BTC (Crypto) is 4.31.
In conclusion, the bat pattern trading strategy is definitely a more profitable one as compared to the Gartley pattern due to its high win rate and high risk to reward ratio it generates. Given its high specificity, like the Gartley pattern, the bat pattern also still has a chance to fake traders out. In such cases, traders may consider using indicators to back their trading plan up or by watching out for certain red flags that can happen such as price action. Even then this comes with trading experience and subjectivity. Hence, this advanced technique is not recommended for new traders who had just began their financial journey in the trading world. Needless to say, a grasp for this technique along with the other harmonic patterns will definitely increase your knowledge in the trading world and allows you to approach each trade plan with a wider perspective.