What Is Harmonic Trading?
Harmonic Trading is a methodology that utilizes the recognition of specific structures that possess distinct and consecutive Fibonacci ratio alignments that quantify and validate harmonic patterns. These patterns calculate the Fibonacci aspects of these price structures to identify highly probable reversal points in the financial markets. This methodology assumes that harmonic patterns or cycles, like many patterns and cycles in life, continually repeat. 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.
Harmonic Trading is based upon the principles that govern natural and universal growth cycles. In many of life’s natural growth processes, Fibonacci numeric relationships govern the cyclical traits of development. This “natural progression” has been debated for centuries and has provided evidence that there is some order to life’s processes. When applied to the financial markets, this relative analysis of Fibonacci measurements can define the extent of price action with respect to natural cyclical growth limits of trading behaviour.
Trading behaviour is defined by the extent of buying and selling and is influenced by the fear or greed possessed by the market participants. Generally, price action moves in cycles that exhibit stages of growth and decline. From this perspective, the collective entity of all buyers and sellers in a particular market follow the same universal principles as other natural phenomena exhibiting cyclical growth behaviour.
In an attempt to learn the origins of this analysis, many get lost in the need to understand why these relationships exist. The basic understanding required to grasp this theory should not move beyond the simple acceptance that natural growth phenomena can be quantified by relative Fibonacci ratio measurements. Applied to the financial markets, Fibonacci ratios can quantify specific situations where repeating growth cycles of buying and selling exist. It is the understanding of these types of growth cycle structures (patterns) that provides pertinent technical information regarding price action that no other approach offers. The evidence of harmonic patterns in the financial markets can be found in price charts. A chart is nothing more than the collective record of buying and selling over time. Patterns that form over a particular period of time reflect a signal or technical “signpost” that can indicate the state of potential future price action. Furthermore, these situations have been historically proven to repeat and can identify significant potential trading opportunities with favorable risk-to-reward considerations.
After learning the basic requirements for each structure, it will take some time to develop the experience necessary to differentiate which price structures are valid trading opportunities. Although price structures can vary with respect to their Fibonacci alignments, Harmonic Trading techniques identify common elements of each situation that identify opportunities and maximize trading decisions.