Intro to Harmonic Trading

Pennants, Flags, Double Tops and Double Bottoms.

If those terms make sense to you then you’re already ahead of the curve. Today we’re going to take it a step further and introduce you to the realm of Harmonic trading.

What in the world is harmonic trading?

You might have heard of harmonic trading.

Traders who use technical analysis are always on the lookout for patterns, certain tell-tale movements in prices signaling that it’s time to make a trade. Being able to identify and exploit predictable behavior in the markets makes a trader rich and harmonic is no different in that regard.

Harmonic trading is a type of trading method wherein specific patterns are identified, namely those that align with special ratios that have to do with the Fibonacci sequence.

What?

So it sounds a bit mystical but the Fibonacci sequence is a series of numbers that follow a set pattern. Every number after the first two numbers are the sum of the two numbers directly preceding it.

1, 1, 2, 3, 5, 8, 13, 21, 34, 55….

That’s a Fibonacci sequence, and the numbers in the sequence give rise to a phenomenon known as the Golden Ratio. It shows up in a lot of places, so much so that it’s got its own special place in pop culture.

H.M. Gartley actually introduced this harmonic trading strategy, based around identifying price movements around specific Fibonacci levels. There are 4 main patterns – including one named after the man himself: the Gartley pattern.

Why use harmonic trading?

Traders who use common trading strategies react to price movements after or as they are happening. Harmonic traders attempt to identify harmonic patterns that will allow them to predict price movements.

Imagine two police officers. One lives in Baltimore and his precinct is perennially understaffed. The other is Tom Cruise in Minority Report. Harmonic traders are kind of like Tom Cruise, able to see criminal activity before they occur.

Pictured: Tom Cruise, harmonic trading in the future. Source: Wikia

Ok, so you’ve wanted to be Tom Cruise since you were 14, but you’re still not sold.

The proof is in the pudding

The stats seem to be on the side of the harmonic traders.

FX Ground Works ran a 100,000 pattern study in order to figure out how successful Fibonacci trading is.  The success rate on a few of the patterns were impressive, sitting in the high 80s. A successful pattern was defined on a few criteria, but at minimum had to reverse 15%.

Of the trades that hit the target, 70-75% were profitable and the account highlighted at FX Ground Works posted a 65% return

The Final Word

As with anything in life, harmonic trading has its pros and cons. While attractive for its predictive ability; i.e. harmonic patterns tend to forecast reversal points with high probability, harmonic trading can also be quite complex. The patterns are identified through very specific Fibonacci levels and can get quite heady very quickly. You’ll want to use automated software to make your life easier.

Finally, harmonic trading can be high-risk if you aren’t careful. Remember though, the key is in employing proper money management. Keep your leverage in single figures if you’re a newbie. A study at DailyFX showed that 40% of traders with an average per-position leverage ratio of 5 to 1 made a profit within twelve months. Compare that to just 17% of traders in the black at leverage ratios above 25 to 1 and the benefits of playing small-ball are clear.

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