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Harmonic Trading
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Harmonic Trading

  #1 (permalink)
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Harmonic Trading

Harmonic Trading, well what's that?

It's based on patterns that are present in the nature highlighted by the golden or the divine ratio, discovered by Fibonacci.

So what's the deal?

It's a way of showing you where you are, where you'll end and what's going to happen if you won't get there.

How does it work then?
By the way, it's developed by Larry Pesavento and co, and it's the result of many years of observation and hard work in the markets.

Why should you use harmonic trading?

Well, nothing is going to give you a 100% accuracy but if you can use something that's filing up your needs, speaking of having the odds with you, and getting the right risk/reward relation, then keep on reading.


There are several patterns that can be used. I'm going to limit them to two patterns though. The first one includes the base of all, and it's called the AB=CD pattern. The second one is a continuation of the first one or better said it fills up the bigger picture. That one is called Gartley 222.


What's the AB=CD pattern going to show you?
It's going to show you how to:

. Identify a pattern with a low risk and high profit probability allowing you to trade market reversals before they occur

. Trade against the crowd putting you in the winning 5% as opposed to the losing 95%

. Be subject to less manipulation from the market makers, who tend to buy when you sell and sell when you buy

. Minimize your loses to a maximum of 21,4% of any trade

. Identify the exact exit point by reference to price and time

. Identify the entry without applying any indicators

. Take positions so that the risk/reward is in your favor

. Take money out of the markets!







AB=CD

This is what it looks like:

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Now to the rules:

1: Price swing from A to B will be equal to CD 60% of the time. The other 40% of the time CD will be 1,27 or 1,618 of AB

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2: The BC price swing will be ,618 or ,786 of the AB move. In very strongly trending markets the BC swing will only be at the ,382 retracement.

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3: If the AB swing is very strong, it will give a good clue as to what to expect on the BC move.

4: The time bars from point A to B should be equal to the CD time bars about 60% of the time. The other 40% of the time these periods will expand to 1,27 or 1,618 of AB.

5: Should the CD price swing have a price gap or a very wide range bar, the trader should interpret this as a sign of extreme strength and expect to see price expansions of 1,27 or 1,618



So what have we?

We have a road map ahead of us by waiting for wave AB to develop. Simply and easy we wait and when it's determined we wait again, but now for confirmation.

When we got our, (and it easy too, because we get rid of all the if's and if's, all we have to do is to wait for two levels) ,618 or ,786 in this case a hit of ,618 and then a reversal from the level slightly above, we take the trade and put the stop 1-2 ticks above the level of ,786.

In numbers that means we take the entry at 1,4570 and we put the stop at 1,4573 + 1-2 ticks. That's a risk of 5 ticks (Instrument 6E -3range chart-, works in any time frame, it should increase probability by going into higher time frames though) 5*12,50 = 62,5 $. The reward is of at least (if CD =AB) 20 ticks. That means we get a reward of 20*12,50= 250 $. As you see it goes beyond the 1,27% level and it almost exactly hits the 1,618 level.

With the smallest level, that gives us a risk/reward of 1:4, which is pretty amazing, at least in my opinion.


Now, will it always work. NO! Nothing will work 100%. But when it works then it WORKS. And even when it doesn't work, it keeps you out of trouble by offering you a low risk, and by giving you a hint of what's going to happen next. It the price continues above ,786 and the pattern fails then the probability for the move to continue in the same direction is big.

Does it sound simple? Well it is!

In my next post I'll describe the next pattern. Gartley 222. The probability for that pattern to develop into a valid one is of 85%.

Now, learn the pattern. Start looking for it in your charts, and remember that it is simple and easy. If it sounds to good to be truth, then you're probabably -you against you-, which is the most common way to screw things up in the markets.



I'm thinking that it would be a lot easier to have all this things on our charts by letting an indicator plot them for us. I've looked and there's nothing out there for Ninja. There's one "Butterfly" pattern developed by a guy in the Ninja Forum. But those patterns are not that useful in day trading because they are not that common.


So if yo guys want to give this a try. I'll be posting below some stuff I found that's made for meta trader ( I believe it's that one, sorry guys my knowledge's in that area are zero, but I understand that it's possible to translate them into Ninja.

I'll attach them and post some pictures too.

Here is the AB=CD pattern

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BPS 1-2-3 Pattern.zip



And here's the one for Gartley 222

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and the file (I renamed it to .doc in order to be able to post it, it should be .ex4) :

BPS-Harmonic-Patterns.doc


And here's something called ZUP (a zigzag universal with patterns Pesavento) :
I believe this one is the most complete, including all the patterns.
the file:

ZUP_v67.rar

and the document describing this guy's work.
part 1

Harmonic Trading-zup.pdf

and part 2
Harmonic Trading-zup2.pdf



And in case that should not be enough, I found a site with the code for Gartley 222, dono if it's good, but here's the link:

TS SUPPORT :: View topic - Pesavento Patterns Indicator for MultiCharts



That's about it guys, for now!

Trade safe, and concentrate on your loses, the profit's taking care of themselves!

/George


Last edited by George; October 2nd, 2009 at 04:38 AM.
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  #2 (permalink)
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But when it works then it WORKS. I agree!

Good write up George, Harmonic methodology is my prefered way to trade.

Here is a free 300 page ebook link HarmonicTrader.com - "The Harmonic Trader" .pdf A good resource on Harmonic trading. Hope you like Butterfly patterns too. I wished they all turned out like this Bearish Butterfly.

Jeff

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Thanks Jeff,

I'm reading it right now. Yeah, imagine they all turned out like that one. But still, when you put the method and the pattern in comparision with everything out there, they beat them all, and it's so "all included" as well! It keeps the trader out of the emotional swamp, by projecting out the road map.

/George

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Nice introduction George. I would like to learn more about this method, and I will try to assist with the programming part too if I can.

I was doing some research on this and was posting to upload the Harmonic Trading free PDF, and I noticed TraderJesse beat me to it. His is a link to the pdf, I've attached the PDF here to make it even easier.

Mike

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Thanks Mike!

/George

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Thank you George for this great topic. My only question is, in order to get the most out of this system, we have to be able to identify the wave AB. Since everything else evolves around AB. We have to know where the wave AB starts from and where it ends. I believe that is the most important puzzle to the whole thing. It is easy to see the waves after the fact, but in real live trading, we have to know where the wave AB starts and ends. I would appreciate any feedback you might have.

Thanks
-Keep

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Keep,

You're welcome.
First and foremost identify the trend. Take a look at the bigger picture. For instance, put up a chart with a frame of 60 minutes:
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Here you can see that the trend is down. That means that you only take trades in the direction of the trend.

Now you zoom to (I zoomed to a 8 range chart, zoom to whatever you want or use)
a chart with a smaller time frame.
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Wait for the wave to end. And then you got your AB relation.

You can clearly see that, even when it fails it keeps you out of trouble, which means that your money is safe and they can be used in a trade with good odds.

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I hope I answered your question!

/George

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George, thanks for the explanation, but I don't think I can follow you. On your 60 min. chart we see the trend is dow, Then we look at the 8 range chart. Now, in that chart there are so many waves formed. How do you know which one is wave AB. Is there just one? Are there more than one? Could you identify these waves on the chart.. Again we are looking at a chart which has past in time. It is to see the waves. But when you are live, how do you determine that?

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Keep,

You're with me on the first one I see. You should look for shorts. When you zoom. I'm zooming live on this own below:

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Edit: Sorry the value on the chart should be ,786 not ,768

Chart taken at 13,03 my time

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In other words, look for a swing in the direction of the trend (a top, with a bottom confirmed when it's not continuing in the same direction). That's how you'll get your A-B. Put out your FIb retracement, and wait for the retracement to go ,618 or ,786 (,382 if the movement is strong). Take the trade if you get it confirmed (hitting those targets and then reverses from there). Put your stop (if you get in at ,618, put it at ,786 +1-2 ticks, if you get in at ,786 then put it slightly above).

Now, relax and enjoy. The probability of getting ticks on these is pretty high (it almost always react, but not always follow through) and with a good money strategy you can almost avoid to get wet at all!

Is it more clear now?
/George

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