is Harmonic Trading?
Harmonic Trading is a
methodology that utilizes the recognition of specific price
patterns and the alignment of exact Fibonacci ratios to determine
highly probable reversal points in the financial markets. This
methodology assumes that trading patterns or cycles, like many
patterns and cycles in life, repeat themselves. The key is to
identify these patterns, and to enter or to exit a position based
upon a high degree of probability that the same historic price
action will occur. Although these patterns are not 100% accurate,
these situations have been historically proven. If these set-ups
are identified correctly, it is possible to identify significant
opportunities with a very limited risk.
One of the most comprehensive references to Harmonic Trading was
outlined by J.M. Hurst in his cycles course from the early 1970s.
His Principle of Harmonicity states:
periods of neighboring waves in price action tend to be related by a
small whole number.”
(Hurst, J.M., J.M.
Hurst Cycles Course, Greenville, S.C.: Traders Press, 1973.)
- What is Harmonic Trading?
The important concept to grasp is that price waves or
distinct price moves are related to each other.
Futhermore, price patterns that are quantified by the
alignment of precise ratios manifest these
relationships, and provide a means to determine where
the turning points will occur. When these turning
points are identified correctly, trades are executed at
a price level where the cycle is changing. Essentially,
this type of trading is respecting the natural ebb and
flow of buying and selling. In doing so, these trades
are executed “in harmony” with the market. For
example, when a stock is bought at this turning point,
the majority of the selling that has driven the price
down is very close to ending. Quite often, the harmonic
techniques identify trades at or very close to the exact
reversal point. It is important to note that
Harmonic Trading works on any time frame - intra-day,
daily, weekly or monthly charts. I believe the clearest
trade opportunities, or "set-ups," appear on
daily charts for position or swing trades. However,
hourly charts provide excellent set-ups for shorter-term
or day trades. It is also amazing that these methods
work on longer-term charts, as well. Weekly or monthly
charts are excellent measures of historically critical
areas in the financial markets.
most important principle inherent within the Harmonic
Trading approach is the ability to differentiate various
types of cyclical price action that adheres to specific
structural and ratio conditions. Price fluctuations
represent cycles of growth (rally) and decline
(sell-off). Similar to many of life’s cyclical growth
processes, these movements can be quantified by their
relative Fibonacci ratio relationships and analyzed to
define unique technical situations. In doing so, trades
are executed at those areas where the natural rhythm of
the market is changing.