Bat pattern is a type of harmonic pattern used in the graphical analysis. The formation helps forex Traders to identify the end of a counter-trend retracement, measuring its possible depth. It also helps to calculate an attractive entry point, level of stop loss and take profit orders. Bat pattern is a variation of Gartley pattern with different relations between legs and touchpoints. Using Fibonacci retracement levels, the graphical analysis based on Bat patterns is efficient for trading strategies based on following trends.
What is a Bat pattern?
The Bat pattern is a description of a certain shape of the XABCD graphical tool all is it looks like the bat. Like every harmonic pattern, the bat is 5 touchpoints, connecting peaks and bottoms of the price action on the chart. Depending on the trend's direction, there are bullish and bearish Bat pattern, reflecting the technical sentiment and showing where the trend is going to continue. Bat patterns are similar to the Gartley pattern in appearance but different in measures and geometry. The main feature of the pattern is the relation between the initial retracement do the first wave of the trend. Is based on one of the Fibonacci retracement levels widely used the technical analysis - 38.2%. Other legs and touchpoints of the Bat formation have certain conditions.
Bat pattern conditions
Here is the list of conditions describing how to draw patterns on price charts. The conditions are correspondent to the bullish variation, while the bearish kind of the pattern is exactly the same but mirrored:
- Point X is the lowest point of the pattern and it signals the beginning of the uptrend;
- Wave XA is the initial upside movement of the price action;
- Wave AB is the first retracement and it relates to XA as 0.382. In other words, point B is lower than point A by 38.2% taking into account leg XA;
- Point C is the peak of the first continuation leg (bullish), but it’s lower than point A. The ratio between points C and A is in the range of 0.382/0.886;
- Point D is the bottom of the second corrective wave, it is lower than point B but higher than point X. Distance CD is larger than AB by 1.618 or 2.618. The ratio between point D and point X is equal or close to 0.886.
Bat pattern versus Gartley pattern
The form of the Bat pattern is similar to the Gartley pattern, and the overall meaning describes the same price action. However, the Gartley pattern has a deeper initial retracement of 61.8% compared to 38.2% of the Bat formation. Conditions are similar in both cases points B and D reflect the sequence of lower lows, which are higher than the initial point X. The main trading idea is also the same. The bullish type of formation, traders should wait for the price to rebound towards point D instead of going around point B. In other words, the Bat pattern suggests the second wave of the correction, which will be lower than the initial one. So the entry point should be more attractive for long positions, while the stop-loss order will be tighter.
How to draw Bat patterns?
The XABCD graphical tool is placed on the left side of the charting tool. All of the points have to be connected consequently, while the instrument shows the ratios between legs automatically. Those figures do not necessarily have to be equal to Fibonacci levels, they can be close. However, if the ratios are far from the conditions mentioned above, then the formation has to be ignored. On the main advantages of the Bat pattern forex trading method is that traders can spot the reversal point before it happened. For instance, if the first two conditions are met (AB is lower than XA by 38.2% and the ratio between point C and point A is in the range of 0.382/0.886), then traders can calculate the entry point D before it completed the pattern. In other words, a postponed buy-order can be placed before the price reached that level. If the order was triggered, then if-done orders will be used as stop-loss and take-profit, respectively.
How to trade Bat pattern?
The trading approach is to follow strong trends, waiting for the counter-trend collection to finish. The method helps forex traders to find an attractive entry point and lower the risks involved with opening deals against the recent price action. Thanks to the little distance between points D and point X, the depth of the stop-loss order should provide an acceptable profit-to-loss ratio as the Bat pattern suggests several targets for the take profit orders at point C, point A and 161.8% extension counting from point A. The bullish pattern is used to find an entry point for long positions implementing the buy-dips trading strategy during strong uptrends, while the bearish formation is keen on shorts. Here is the full list of trading rules used for the Bat pattern trading strategy.
Trading rules for the Bat pattern
- Once all of the conditions of the pattern are met, traders should open longs in accordance with bullish pattern and shorts with the bearish form at point D;
- The stop-loss order must be placed below or above point X depending on the previous trend’s direction. The number of pips counting from point X depends on the exact currency pair and current market conditions such as trading volume, volatility and so on;
- The initial target for the take-profit order is set at the level of point C. If the price goes in the correct direction, moving the position to the positive territory, traders should remove the stop-loss order in the non-risk mode;
- The second target to take profits is point A. If the rate breaks through point A and the price action continues in the right direction, traders should use trailing stop or extend the take profit order to 161.8% of the led XA.
Graphical patterns in general and the Bat pattern, in particular, can be used together with additional technical indicators. For example, if trend indicators show the momentum which is reflecting the general trend's direction during the period when the Bat pattern is formed, while fast and sensitive oscillators show oversold conditions at around point D, then the likelihood of the British reversal would be higher and chances to get profit from the deal would raise. It is important to keep in mind that all of the harmonic patterns including Bat pattern should correspond with the general trend. The main goal of the graphical analysis is to divide the counter-trend corrective price action from complete reversals. In other words, it is important to measure the depth of the replacement to understand where the market is heading. This is why additional technical indicators play a significant role in trading strategies based on harmonic patterns.
If you like this strategy, you might also be interested in this: Renko charts Strategy
Bullish Bat pattern
Below is a screenshot showing how the bullish Bat pattern looks like on the price chart.
Bearish Bat pattern
The bearish Bat pattern is represented on the screenshot below.
Example of profitable trade deals
The hourly chart below shows that the initial uptrend of the oil price was followed by two consecutive bearish retracements. It would have seemed that the uptrend is going to reverse is there was the sequence of lower lows, while point D was lower than point B. However, a trader spotted the Bat pattern is ratios between legs of corrections corresponded to the conditions of Fibonacci retracement levels. A long position opened at point D with the stop-loss order at point X. To the price of oil reached the initial target at point C, the trader took profit manually. Further price action shows that the uptrend reached the second target of point A after bouncing back to the entry-point D.
Bat pattern represent an effective graphical analysis tool to find periods when the counter-trend correction is coming to an end. The pattern is a type of harmonic patterns, similar to Gartley pattern in terms of the shape and appearance, but it has different measures of ratios between legs and different geometry based on Fibonacci retracement levels. If all of the conditions of the pattern are met, traders can easily calculate the depth of possible corrections, identify attractive entry points and determine the reasonable distance for stop-loss and take-profit orders, keeping an effective profit-to-loss ratio. Bat patterns can be used together with additional technical indicators to increase the efficiency of a trading system and improve profitability.