Learn Harmonic Pattern Trading

Harmonic Trade of the Week – The GBPAUD sinks like a boat anchor!

A 316pip move off a 1 hour bat pattern from 1.7375 to 1.7059.    In recent months the AUD has been losing value and a lot of the AUD pairs have been in channels as the currency loses its value.  This harmonic Bat pattern was forecasting a turn for the AUD currency pair and in this case it was against the British Pound.

GBPAUD_M30_strategy name_20130904013358

 

The move did take the majority of the week to play out – it was not a swift move down 300 pips but instead was a 4 day hold as we saw the AUD regain its strength and change course.

GBPAUD_M30_strategy name_20130904073609

The move finally came to an end for us when we got stopped out, however although we will see a pull back the GBPAUD could be falling more in the near future as we suspect.

GBPAUD_M30_strategy name_20130904144753

The main thing which got us into this trade was:

However nobody thought it would go this far, and this quick.  Congratulations to everyone who was short the GBPAUD this week.

What is a Harmonic Trader?

What is a Harmonic Trader?

Learn 5 important areas behind any harmonic trader:


Improving The Harmonic Trader Within You

When we start looking at different topics we want to consider the order of importance.  This will seem backwards to most but if you could look at each topic and see how important it is to be a great harmonic trader, your priorities might begin to shift:

Harmonic Trader Skills


Area #1 on being a Harmonic Trader – Not Linear but “Non-Linear”: Linear is just a way of saying a straight line. So if you were graphing a linear projection, you would draw a straight line and you could predict the future by extending that line into the future. So to simplify it, if you were to know the relationship of a linear relation, the graph would forecast where price would be in the future. Do you believe you can predict the future with great accuracy like this? Probably not and we don’t believe so either.  If this was the case we would all know where price would be at any given moment and the market would be broken.

linear graph

Figure 1: A linear graph showing a linear relationship.

Clearly harmonic traders or any other traders do not know where price will be, never mind having the accuracy that a linear relation could project.  However this also tells us the market is not linear and if it’s not linear, then it’s non-linear. Non-linear means: “In mathematics, a non-linear system is one that does not satisfy the superposition principle, or one whose output is not directly proportional to its input.”

What does this mean? It means that you cannot predict where the price will go next because the data going in, does not mean the same data comes out. This certainly sounds a lot more like the market. Once we have a better understanding that our market is non-linear it makes it pretty hard to use a linear tool.

Non Linear Harmonic Trading Graph

Figure 2

Which graph from the two above looks more like the financial markets?  Figure 1 or Figure 2?


Area #2 on being a Harmonic Trader – Knowing the faults of harmonic pattern indicators:  You will want to cover the article we did called Harmonic Pattern Indicators and the Secret Truths which will get you started on this topic.

We will summarise the issues for you so you’ll have a quick understanding of what we mean:

  • The bad: Price Is Not True To The Harmonic Pattern Ratios
  • You will see a lot of patterns that are simply not worth trading.  FXGroundworks did a study where you can see over 80% of the harmonic patterns were not traded and their probability went up 600%.
  • They narrow your mind to only seeing what is on your screen and charts which might not be the best pattern to trade with the highest probability.

Area #3 – on being a Harmonic Trader – Chaos and Order:  The patterns are non-linear, and not linear which helps increase our odds.

A harmonic trader is a very unique type of individual trader and the ability to be successful goes beyond just the harmonic trading strategy.  In order to trade harmonic patterns, you’re trading a reversal. You’re doing what a lot of people cannot do because when the price of a currency pair is falling, you’re going to be buying. And then when that same currency pair is rocketing to new highs, you’re going to be selling. However there is something we need to keep in the back of our minds:

If you had the exact same pattern to trade on several different occasions, you’ll get different results. Why?

Because of something known as Chaos and Order in a Non-Linear domain.  We know that results cannot be predicted, they can only be forecast because there are no straight lines or exacts.  This can make the market seem irrational but it’s that chaotic effect that also provides us the order we need.

What I mean by order is that we might not know the outcome of one pattern, but you do understand your probability over 100 patterns.

Area #4 – on being a Harmonic Trader – Finding high structured patterns:   Not all patterns are worth trading and knowing how to be selective to know which ones to trade is a huge factor when trading harmonic patterns, just ask any harmonic trader.

One of the best ways to do this is by looking at the structure of the pattern to define if its a good trade or a bad trading and learning how to identify high structure trades is very important.  We’ll touch on a few points in future lessons but for now you need to understand that Gartley’s initial works in his book displayed high structured patterns that he found with his eyes and a ruler.  The indicators that are out there now might make finding patterns easier, but they are also finding poorly structured patterns.

Your goal through these lessons will be to identify high structured patterns as its a critical component to your learning.

A building with good structure would be one that has a lot of support columns.  Would you live in a building which has poorly engineered structure and might fall over at any point?  Now you’re understanding the importance of high structure!  Don’t risk your trading account if you’d like my advice.


Area #5 – on being a Harmonic Trader – Entering and Exiting the Market:  You might be surprised to see this at the bottom of the priority list when learning harmonics.

The reason is because the entry part is easy and takes minimal time.  You should know exactly where you want to enter, and where you want to exit before you even think about taking the trade.  Once you know, its just a matter of doing the actions.  Yes, you will need a trade plan, and sure, you will need to know how to execute it.  But even if you had just learned this, your chances of succeeding will be slim.  Why?

Understand one thing in trading – you will take losing trades.  This should not come as a surprise.  In fact, in any method you will even hit a series of losing trades.  Most new traders especially move onto a different method after they place 3 losing trades in a row.  But, since 95% of what you were learning is all about understanding the patterns and understanding the bigger picture then you will know as a harmonic trader that 3 losses in a row can be normal.  You will understand no matter the trading strategy that they will all hit 3 losers at some point.  So entering and exiting the market is not as important without the understanding and hopefully you see this now that you read 4 prior area’s of importance.

Every system will have a series of losing and winning trades – its the understanding of the method and system you’re using which will get you through it.

 

Psychology in Harmonic Trading – How to master your mind

Psychology in Harmonic Trading:  The Psyche of Traders

Listen to the Audio (or read the text below)

Psychology in Harmonic Trading:  The psyche is a complex and diverse power that no other living being other than humans seems to have – or at least have in the same excellence.  A dog eats, sleeps, humps, urinates and is wildly happy to see its master or mistress at any time of the day or night.  A cat might have its own personality but it generally does mostly what dogs do although it does not seem as passionately happy to see its master or mistress as is the dog.psychology in harmonic trading

Trading requires us to examine our own conscious awareness and when we do, we find out that our personality often governs the way we approach trading.  The problem is, we don’t always focus consciously on how we approach a trade.

Are we quick on the trigger; do we carefully consider each trading opportunity; do we place pending orders and sweat over each tick until they’re triggered or do we nonchalantly go out and not worry whether the trade becomes active or not?

There a quite a few things to learn when we decide to take up trading as a career, among them, how to retrain your brain to think differently.  Many people believe they can learn to become a trader overnight….that there is some magic panacea out there that will transform their lives from the ordinary, everyday run of the mill existence to an exciting, rewarding and rejuvenating life as a wealthy trader.

As many ancients before us discovered, Rome was not built in a day.  It takes quite a while to train our minds to change the way our brains process things and to learn a methodology that gives us an edge.  That edge is having probability on our side.

Seasoned traders may know enough but the ones who don’t, need to learn a new method, change their way of thinking and the way they act while trading.  They need to make sure they know the market very well.  Know why it moves and the way it moves.  Traders who have been trading for some years do not always make a consistent income from the business.  And it is a business.  It’s not a hobby – unless you have so much money you don’t need to make more to live comfortably and then, good luck to you…have fun…:)

People new to trading are like new born babes who have to learn to do more than cry and eat.  As they grow, they need to crawl before they walk; learn to walk before they run and learn to run before they jump.  In other words, they need train their conscious awareness and build the foundation of learning about trading first before they can succeed in becoming profitable traders.

These potential traders need to understand the market; understand the impact fundamentals have on the market; understand the technical tools and the tools that work and the ones that don’t work and then put that together and use harmonic pattern trading to become a profitable trader.

Enter the educational sites FXGroundworks.com, HarmonicStocks.com and HarmonicFutures.com.  Under the banner of Harmonic Nation, these sites are specifically designed to teach the principles of harmonic pattern trading.  They are also designed to alert traders to patterns that show up on their sites and make identifying harmonic pattern opportunities a much easier task.

But within that learning curve, one of the hardest things for people to do is to figure out their own psychological profile.  They have some idea about their own aptitude and their own attitude to learning.  They know whether they have the determination to work hard and work consistently to succeed, or whether they don’t.  All part of the psychology in harmonic trading.

Trading is not for the faint-hearted.  However, neither is it all that hard to become good at trading.  It can be done with the right attitude, the aptitude, the determination and the right technical approach; with the right mental approach.

We need to understand what drives price movement.  This can be the emotion and belief of people who think that if they enter the market at a particular time and place, a trade should go their way.   But what if some kind of catastrophic event or some manipulation by market makers moves price in a way we may not be expecting?

If for instance a trader buys a position, he or she is relying on other people also buying the same pair at or around where they enter the market, sending price up.  If they sell a position, they are relying on other traders selling the same pair at or around a similar price, sending price down.  If we are wrong, then we are wrong.  We must not take the loss to heart.  It is nothing personal.

Fear and greed become a factor and is fuelled by the extent of peoples’ lot sizes.  Traders will view a trade far differently if they are trading standard lots ($10.00 per pip) than they would if they were trading micro lots ($0.10c per pip).  Panic increases in direct proportion to the size of the money at risk.

Our risk is directly connected to our psyche and our tolerance for taking chances.  Our personality generally goes hand in glove with the way we conduct ourselves in life.

Our ego is one of the most damaging parts of being a trader.  Once our ego becomes involved in a trade – that is we are winning or losing in a trade – our ability to make a rational decision can become impaired.

The market movement (price action) can influence our trade management.  Coupled with our ego, our predilection towards fear and greed and our exposure to the ebb and flow (retracements) of price, it can become very hard to ignore what’s happening on a tick by tick basis.  To see this in action, open up a one-minute chart and watch the wild fluctuations of the market.  It’s a good exercise to get a feel for the seething movement that is the marketplace.

Patience is a key factor.  If you’re a patient person you are more likely to be patient with trading.  If you are somewhat impulsive then there’s every chance that you are more impulsive as a trader.  However we all go through different phases to get to the place where we can more or less leave a trade alone to work itself out.  We must bear in mind that we need to take money when it’s offered by the market.

We need the precise execution of our trade to fit our trading plan.  If we don’t execute the trade to fit our plan then we are really just gambling.  We need to try not to think about the pips or the money or the win/loss; we can only think about whether or not the potential trade fits our plan and fits our rules.

One needs to be open-minded to the possibility of the movement of the market.  One must be able to understand that we can never know where price might head; that we can only ever take a position based on our trading plan, our learned method and our best prediction that price might go in the direction we want.  If it doesn’t, we can’t take that as a personal affront.  It is merely a trade that didn’t go our way.

As a trader we will go through extreme emotions that are based around fear and greed.  The pain in trading can come from a string of losses but should not come from draw-downs from your account.

In times of great uncertainty and volatility, the importance of a plan increases.  Don’t get distracted by the noise of the market.  Don’t confuse your plan with your strategy.  Your trading strategy should be harmonic pattern trading; your trading plan is the way you trade those harmonic patterns.

It’s about finding out as much as you can about harmonic trading and taking nothing for granted.  It’s about changing your view of trading and the way you approach each and every trade.  Change is something that is difficult for some people to come to grips with.  Changing the way they deal with their trades can be the single most challenging thing for them to do.  Changing their conscious awareness of the way they need to trade, is harder.

Taking a winning trade requires no expertise at all.  Winning consistently takes skill.  People need to learn mental dexterity in order to become a consistent winning trader.  The management of the trade requires an extraordinary focused approach.  We need to be able to put aside trades that lose and embrace trades that win.

Unless we can follow our trading plan and let the methodology execute once we have put it into play, we will make a number of mental errors and blow our chance of succeeding as a trader.

A technical method such as HAT – that is an EA that assists harmonic trading – is designed to put the odds in our favor over a succession of trades.  Not just one or even several trades, but over a period of time.  This is cold comfort to the trader who has taken 10, 15 or even 20 losing trades in a row….then has one winner…then faces more losing trades.  However…..if the 10, 15 or 20 trades amount to 500 pips and the one winning trade equates to 1,200 pips….the odds of becoming a consistently winning trader are high.

There is no way to know the sequence of a successful winning harmonic trade or losing trades for that matter.  All we can know is that with this method, 70% of the time, over time, we will be able to take winning trades.

We have to learn not to expect or hope that trades will go our way.  We must realise that we are not interested in being right about a trade, or wrong about a trade.  We are just dealing with overall probabilities.

We have to understand that hoping price will go our way is like rearranging the deck chairs on the Titanic and hoping it won’t sink.  We need to really focus our minds on taking the trades and not being bothered by the losers.  Equally, we need to focus on letting the winners run and not cutting them short.

Don’t feel let down by losing trades.  We need to figure out how much we are willing to risk on those losing trades and then be prepared to let that risk play out if it moves against us.  How much distance are we willing to give the trade to see if it will move in our direction?

Just be sure you followed all the rules of your trading plan – you didn’t jump into a trade; you had no knee-jerk reactions; you made sure your risk versus reward was in check……then just accept losing as part of a haphazard outcome.  It’s a game of chance, with harmonic trading giving you a better than even chance of getting a good outcome.  Harmonic trading, over a succession of trades, gives you an edge.  Because you don’t know what order that succession of trades will come in, you need to ride out the losers and let the winners run.

The harmonic technical methodology identifies a trading opportunity.  No technical method, including HAT, can do what the trader expects or wants it to.  The randomness of the market makes it impossible to predict where price will go next.  Conversely, no method of trading with fundamentals can predict price movement either.  It takes other traders to move the market and to make you a winner or a loser.

To make money in the market, everyone needs to buy low and sell high.  The difficulty is, everyone’s mindset and opinion on what constitutes a high and what makes a low is different.

So work on changing your approach to how you trade.  Work on not taking losses personally and following your trading plan.  Make sure your trading plan matches your risk tolerance.  And then do what you should do best; cut the losers short and let the winners run and measure it over a period of time.  After all, trading is a numbers game.   Your psychological trading approach must accept that fact and run with it.

 

 

Gartley Pattern and their Challenges to Traders

Gartley Pattern – What is it?

In order to trade the Gartley Pattern we should classify it first so we can better understand how to trade it.  The Gartley pattern is considered a retracement pattern and there is a good reason for it.

As you can see from the diagram of the Gartley pattern picture the D point is our entry point which in a bearish harmonic pattern is below our X point and in a bullish harmonic pattern would be above our X point.  Please see the topic on the harmonic pattern construction if you have not already done so to understand to patterns and their points or watch a video on the gartley pattern.

 

The Gartley Pattern Rules and Pattern Points

If you find that you do not have the time, will or determination to learn the harmonic pattern points or the differences in each harmonic pattern you might want to consider finding a managed account. Failing to understand the patterns and their points will not bring you success.
The Gartley Harmonic Pattern Ratios

Bullish and Bearish Gartley Patterns

X Point:  The “X” point is a critical part to the Gartley pattern because it starts off the patterns internal structure.  X points and be good, or they could be poor and understanding what makes one better than the other is going to be critical in your pattern selection.

  • A good X point would have a lead-in that is greater than 45 degrees.
  • A bad X point would be flat going into the creation of the X point leaving the emotion of the first reversal point into the pattern non existent. 

 

gartley pattern example of structure

Good Structure + Bad Structure of a Gartley Pattern

 

A Point: The “A” point to many has been used as a target point. This would be the furthest point away from your “X” point that the pattern can move for the Gartley pattern. It should be noted that the “A” point is a meaningless take profit point because there is no historical proof that a Gartley pattern has completed the strength of the entire move or reversal. In fact quite often the rate at which price will fall (on a bearish Gartley pattern) or a bullish Gartley pattern is defined by the super structure or in other words the bars surrounding the pattern.

B Point: This pattern point on they Gartley is more critical than most of the “B” points on the other patterns. This is because the “B” point Is close to the “X” point and even close to the “D” point which we will learn about later. This gives us a very trick situation when it comes to managing our risk and many traders do not know how to deal with such situations. See the money management challenges for more details.

C Point: The “C” point again has been again used as a pattern point but has no bearing on the future direction of price action and hence people taking their targets and trades off way to early. These points “A” and “C” are better to be used as guides on the internal structure of the pattern based on how the formation of them and their relation to the “B” point.

D Point: The “D” point is where we enter the market. The D point goes as high as a 61.8% retracement of the “X-A” leg segment. This means the length of room from your “D” point to your “B” point is quite small leaving a hard to manage risk vs reward.

The Gartley pattern can turn into a Bat pattern so knowing when and what to do about it is critical for anyone who trades the Gartley pattern. Failing to understand the patterns and their points will not bring you success.

Gartly Pattern Indicator Challenges

Over 90% of Gartley patterns have poor structure ratings and should not be traded.  

The truth is that many people are not successful with the patterns unless they can find the very selective ones with good structure ratings.

You might find 1 in every 500 patterns which meet the criteria to take a good trade.  This is more than any other harmonic pattern.  Most amateur traders will loaded up a Gartley indicator or recognition software and see a pattern drawn in on the charts.  Then they figure that because of the success of H. M. Gartley himself they should trade the pattern they see. This could not be further from the truth. If you look at H. M. Gartley’s work he wasn’t trading on a 1min chart or even a 5min chart in his books. His books instead show us large example patterns where they might have taken several months to form.

The educated trader would recognize:

  • Not all Garvey patterns are the same.
  • Not all Garley patterns make sense to trade from a risk management point of view (means we risk to much with little to gain)
  • A Gartley pattern has the potential of turning into a Bat pattern. Do you know when to trade the Gartley or when to trade the Bat pattern?
  • A Gartley pattern with poor structure ratings is a bad trade to take. )

Remember the next time you trade a Gartley Pattern to make sure that you have very good structure so that you can benefit from the high probability.

Harmonic Trader Top 5 Commonly Made Mistakes (Lesson 4)

Top 5 Mistakes All Harmonic Traders Must Avoid

5 Mini lessons critical to your success.

 

Harmonic Trader Error Number 5:
“Taking a stab in the dark to see what works”

A successful business is going to know that the amount they spend on advertising is going to yield them the same or more in their trading-consistencyreturns.  This is why they are successful, they know what works, and then they repeat the process over and over again.

This is no different when you want to become a big successful business or a big successful trader.  You have to know that what you are doing is worth doing. Harmonic trading or any trading is not going to keep bringing you profits unless you take a very business-like approach to your trading.  This is one of the most common mistakes in general – people trade without knowing what is working and what isn’t.

Harmonic Trader Professior

Trying to improve your harmonic trading by trading more often is not the way to go.

Harmonic Trader Error Number 4:
“Trading Too Much (Over Trading)”

Trading or Harmonic Trading for entertainment purposes is not a way to become successful.   Some patterns are better than others to trade and that is why we use a structure rating on our forex, futures or stocks sites.  When you rank the structure of a trade, you get to figure out very quickly which patterns are worth taking and which are not.  A lot of harmonic patterns (although true and valid) are small and do not have the stability that other, larger patterns do.

Do not force a harmonic trade because you are bored.  Do not force a trade because some indicator told you to trade it.  Patterns you trade should be “textbook” in nature, the best of the best, and obvious to see.

Collect these patterns in a log and the results will be ones you will be proud to show around.

Harmonic Trader Error Number 3:
“Using tools developed for the market, instead of those developed and proven outside of the market”

A lot of people trade different trading strategies because they have seen some results or believe they can get their own results, but they do not look at what is under the hood of an indicator or trading strategy. They might even combine several different indicators to form a story just so they can justify taking a trade.   Instead of trying to invent a magic formula for trading, why not just use the patterns?

Sounds simple?  Yes and a lot of people like to make it more complex by adding other tools like MACD or RSI.  These are both linear in their construction and we need to use tools for a non-linear market if we use anything at all.

Harmonic Trader Error Number 2:
“Not Recording Their Trades”

Yes, keeping a record of trades is no fun, it is also time consuming (which helps solve Harmonic Trader Error Number 4 on Over harmonic-pattern-trading-logTrading).  However learning how to log the patterns you trade is as important as an Olympic athlete timing each lap they run. It’s pretty hard to understand if you’re improving or not without the data to compare your results.

Logging our results allow us to see the growth as well as realizing any problems we’re having, quickly fix them and continuing on. Without seeing the profitable growth chart, we won’t have the confidence to continue.

Harmonic Trader Error Number 1:
“Not Having Any Consistency”

The number one problem most harmonic traders face is their inability to act consistently in their trading and their approach. Without proper consistency in your trading your results are going to be unreliable and erratic. This is the major reason traders in general stumble along in their trading, many for years, without any real traction to their trading.

1.  No consistency in the harmonic trading execution

2.  No consistency in the harmonic pattern selection

3.  No consistency in the risk management or trade management

Once you have a consistent way of executing your harmonic trades, you’re able to take control by managing your trades the same way each and every time. This will allow you to get into the highest probability trades and you’ll begin to get the results you’ve been wanting to see.

 

 

Harmonic Pattern Indicators and the Secret Truths (Lesson 3)

Ask yourself this: As a trader, do I have an edge? Am I getting the best outcome and the best way to trade? Have I learned all I can about trading safely and making the most profit?

Learning about Harmonic Pattern indicators can best be described as strapping on a pair of training wheels to your bicycle.  When you’ve been trading harmonics as long as I have, you get to know all the advantages and disadvantages and the point of this article will be to share these findings with you. You’ll get to know what is good, what is bad and what is downright ugly.

The Disadvantages

How do we work through getting too many patterns that have poor quality?

The bad: Price Is Not True To The Harmonic Pattern Ratios

With some Harmonic Pattern indicators, price action in some imperfect harmonic pattern software does not hit the specific fib extentions and retracements to a complete, valid pattern all of the time. Variances are used to captured the “if it’s close enough, then it’s good enough” outlook, however these variances are often so wide that the harmonic pattern indicator ignores the structure. A lot of the ‘free’ harmonic pattern software you see will have incorrect harmonic ratios and wide variances which lead to patterns that “look harmonic” but are anything but an authentic harmonic pattern.

Note: The indicators on any of our sites (FXGroundworks.com, HarmonicStocks.com, HarmonicFutures.com) have eliminated this issue and you also have the ability to program your own custom patterns. 

The ugly: The Wrong Kind of Lazy

Don’t you think that being lazy when learning to trade harmonic patterns is kind of ugly? When you trade harmonic patterns using indicators, you are asking the indicator to point out the harmonic pattern for you. With ill-conceived harmonic indicators most likely the patterns are going to fail. You will be better served to learn how to draw the correct ratios for solid harmonic patterns on your own in the long run. Otherwise, if you rely on others to always do it for you, it could leave you “stuck” with out-dated tools. While it might work fine for now, when your trading platform gets updated and you’re slowly forced to update your own method, you’ll be wishing you took the time to learn how to draw patterns manually.

Note: In video Lesson 9 we will teach you how we go about creating our structure rankings for our harmonic patterns. You will be expected to know and understand how to do this to gain a pass mark in the quizzes. This is so you can prove you have the knowledge, and then you can be lazy. At least you are lazy with no true dependency.

Still not so good: Narrows Your Mind; Doesn’t Keep You Sharp

When you use a harmonic pattern indicator you tend to believe what you see. Meaning, if the pattern isn’t on your chart, then you think it must not exist. This is actually not true, in fact it couldn’t be any further from the truth. When you program or write an indicator there are a certain number of candles that you define as a ‘look back’ period. If a much larger pattern doesn’t show, it could be because the ‘look back’ period is not far enough back to cover the patterns’ X point. There may also be patterns that have a D point closer to current price that will hide other valuable harmonic patterns in the past – but that are still very much relevant to trade.

Note: Once we do get a high probability alert, there are still a few quick and simple checks we want to do with the harmonic pattern to further increase our probability of success, before we jump into the trade. This is explained in our members’ video lessons.

The Advantages

The good: Good Harmonic Pattern Indicators Make Good Training Wheels for New Traders

When it comes down to it, if a trader discovers harmonics by looking at a good harmonic pattern indicator and they get onto the right track sooner rather than later by learning how to spot them manually, then over all it is a good thing. Like everything in life – getting quality software or merchandise goes hand in glove with success. Cheap is just that – cheap. I don’t know anyone today who has really prospered by getting ‘cheap’ things and who then have been able to convert that cheap product into high quality outcomes.

Note: We often use the analogy that learning to trade harmonic patterns is like flying a plane – before you hit that auto pilot button we need to know how to do everything manually.

Conclusion

There are many harmonic indicators that you can find around the internet. BUT – unless the ones you are using are coded correctly you will not have much, if any success. Nothing is perfect. No indicator can predict the human emotion that moves price action when fed by fear or greed. If your indicator is showing your price feed that doesn’t mean it is taking into account an aggregate feed (in other words taking an overall snapshot of the market). Plus, if you are using a retail broker, situations of widening spreads especially around roll-over periods can impact your trading and hit your stop loss and take you out of the market.

Come look at what we offer – trade safely, minimize your risk and use proven harmonic pattern software. Cheap isn’t always good. Profit is good.

 

 

 

Harmonic Patterns and The Ratio Construction (Lesson 2)

We’ll answer the questions on harmonic patterns:

How do you draw harmonic patterns?

When you look at a harmonic pattern for the very first time you might think it’s complex. You might actually think it’s not worth figuring out, or at the first sign of difficulty you end up packing up your bags and going back so simple moving averages.

Not so fast…

The patterns are not as difficult as they seem, and we have created a few videos below to really help you get started.

Knowing each pattern is important, just how each pilot knows the parts that make up the plane. And just like how each part of an aircraft is used for a certain purpose, each harmonic pattern has the highest probability when used in its own situations.

There are a few things that are common between most of the patterns and will help you remember their ratios:

  1. Bat Patterns and Gartley Patterns are both classified as retracement patterns because their D point is closer to the B point
  2. Crab Patterns and Butterfly Patterns are both classified as extension patterns and extend the furthest
  3. The ABC part of our harmonic patterns is where we typically have the same ratio in every pattern between the 38.2  to  88.6 retracement

Steps to finding and validating all harmonic patterns

 

Step 1 – How to draw harmonic patterns:

Look for an extreme high or low on the chart. This will be labeled as your X point. Draw a line going from the high in our case to the nearest low:

X Point of a Harmonic Pattern

 

Step 2 – Drawing the A Point

The end of the nearest low would be considered your “A” point.

A Point of a Harmonic Pattern

Step 3 – Verifying the XA Leg and the Harmonic Pattern Ratio

We will now have to take out the harmonic patterns’ guide which has all the ratios for all of the patterns. If you do not already have this you can get it as the last page on the harmonic magazine issue 1. At this point you can use your Fibonacci retracement tool and draw from the X point to the A point. You will see the Fibonacci levels get drawn in and what we want to do is see how high the B point retraces on the XA segment.

B Point of a Harmonic Pattern

 

Step 4 – What pattern could this be?

You can see now we have completed the first two segments to form half of the almost completed harmonic pattern. At this point we can ask ourselves:

What possible pattern could this be?

Your answer would be revealed by referring back to your harmonic pattern guide. You will find that so far, the following patterns line up with the possible potential outcomes:

  • Bat Pattern
  • Crab Pattern

Both the Bat patterns and Crab patterns have XA segments that retrace between a 0.382 and a 0.618.

Please remember the Bat pattern is allowed to go up to a 0.618 retracement of the XA leg but this is not preferred. Although it does have some unique advantages which we discuss with those trading with us as members.

As long as the B point retraces between 0.382 and 0.886 we know there is a possibility of a pattern.

Step 5 – Drawing the harmonic pattern C point

So we will now continue to draw in our C point.

C Point of a Harmonic Pattern

 

Step 6 – Checking the AB Segment Retracement

Our C point of the harmonic pattern has to do a retracement of the AB leg between a 0.382% and a 0.886%. As long as it retraces enough and doesn’t exceed the A point we can continue drawing our harmonic pattern.

This 382 to 618 retracement of the AB leg (making the C point) will be common with all the major harmonic patterns.

C Point Retracement Ratios

Step 7 – Drawing in the last part of the harmonic pattern

We can now continue on our way and draw in our last leg of the pattern. At this point we’ll find out if we are going to be trading a Bat pattern or a Crab pattern. The Bat pattern is a retracement pattern so we’ll always see it reverse before the X point. All Crab patterns will be extended beyond the X point and go much further. Let’s draw in our D point and complete the CD leg of the harmonic pattern.

D Point of a Harmonic Pattern

Step 8 – Verifying the Harmonic Pattern ratio

We’ve completed all the segments of the pattern, we now just need to make sure that the X point is a retracement of the XA leg to the value of 0.886. So take out your Fibonacci tool again and draw from the X point to the A point and see where your 0.886 retracement is and if your D point hits it.

XA Retracement to complete the 0.886 bat pattern

Step 9 – One last verification of the pattern

Bingo, it hit the 0.886. Now, we’re not done yet, but hang in there! We have to do one last measurement. The BC extension has to complete between a 1.618 and a 2.618. This is a large area so a lot of the time this will complete our harmonic pattern but it’s always good to double check. On some patterns you’ll find that this does not work out and the harmonic pattern becomes void.

BC Extention to complete Bat Pattern

You are now finished

We have now completed the pattern. You can take a deep breath, if you’ve made it this far you’ve done very well. Remember, you do not have to do this manually. This can be automated by using one of our membership services depending on the market you are trading (up at the very top of the page).

Harmonic Patterns Building Blocks and Foundations (Lesson 1)

Harmonic Patterns are extremely effective when trading any of the financial markets.  If you trade stocks, futures or forex it won’t matter because these markets all have one thing in common.  They are non-linear.  What does this mean?

A non-linear system is one that its output is not directly proportional to its input. We forecast probability with non-linear systems, we do not predict price.

This means that any symbol we trade does not have a mathematical formula that allows you to predict price with 100% accuracy.  In fact, the best you can do with non-linear data is you can forecast it.  With a non-linear system, nothing is for certain, where with a linear system, everything is predictable.

This is where harmonic patterns come into the picture. When we deal with these harmonic patterns, their numbers and ratios are all based off the Fibonnaci sequence which some people call the “Fingerprint of God”.

Fibonacci Sequence in a Flower

Most flowers have the same number of petals as a Fibonacci number.

These numbers are inherent how different things are naturally created.  We can see them in flowers.  In fact most flowers have the same amount of petals as a fibonacci number.  You can even see the impact the fibonacci sequence has on a plant chimney in Finland.

fibonacci numbers on tower

Fibonacci sequence 1-55 by Mario Merz in Linnankatau power plant chimney in Turku, Finland

It is very important to understand that the harmonic patterns work in nature because no matter how you trade, you will always have a series of losers that will make you question how you are trading. It’s nice to know you have the whole world backing you up when you’re using the Fibonacci sequence in your trading.

When you learn about Harmonic Patterns through each lesson you read, it’s always best to apply a little analogy to help you remember everything. So let’s do this and put it into an analogy that everyone can relate to – flying: A pilot needs to understand the theory of lift or he’ll have a difficult job trying to stay alive once he gets into a plane, never mind making a living out of his passion.

You as a trader need to understand the importance of the Fibonacci numbering system or you will have a difficult time pulling through any series of trades that make you question the method of trading patterns. This is not unique to trading patterns but to any way of trading.

 

We’re not just using harmonic patterns because they work:

The difference is that by using harmonic patterns we are just using numbers that naturally occur in the world around us

Harmonic Patterns

Butterfly Pattern

and we are bringing them inside of the market to give us an edge that naturally occurs. There are far too many individuals trying to combine the perfect combination of indicators with magical settings when the true magic is just outside your window. Literally.

Instead of spending years of time trying to search for the magical formula, your search will end when you start basing your trades off probability that can be calculated.

Finally you’ll have that knowledge of knowing the difference between a good trade to take and a bad trade, and it will all be based off probability.  Taking good trades over and over again with patterns that exhibit high probability, coupled with good money management and we’ll have a way of trading that is very powerful (like mother nature).

 

Instead of re-inventing the wheel, why not use something that has already proven itself in nature and the world around us?

Conclusion:

This first lesson has taught us that:

  • The ratios used in the patterns we learn about naturally happen outside of the market
  • Their ability to prove themselves in nature is what gives us an edge as traders
  • We are no longer going to try and predict price, but instead forecast the probability of it
  • Understanding these patterns and that they naturally occur will not have us question “why” it works.

Structure Ratings with Harmonic Pattern Trading

“Structure Ratings” – (SR) is a technology we developed to increase the success rate of our harmonic traders. The algorithms are not for sale, but are available as part of your membership with Forex, Stocks or Futures sites.
Structure rating has proven to give traders a 6X to 12X advantage over other harmonic traders who are not using the structure ratings with their harmonic patterns.  Before traders start to use our structure ratings, they may have suffered the following problems:

  • They can’t tell which pattern has the highest probability and they suffer with their pattern selection with poor trading results
  • They aren’t consistent with how they approach the market; giving them inconsistent results and more losing trades
  • They end up sitting down at their computer wanting to trade and just get frustrated and trade a poor pattern. Instead they could be doing other things around the house while waiting for the alarms to go off when a high probability harmonic pattern appears

 

How does it work?

Each new harmonic pattern alert that is triggered in the market will have a rating to the structure of the harmonic trade. This is going to be seen at the end of the pattern alert where you will see a bar which stretches from 0% all the way to 100%. The further up we go, the higher the probability that our trade is going to work out. The image below will show you what happens when your alerts get filtered. Each structure alert is on 1 line, and is for 1 pattern. So you can see in the image how many alerts this was by counting each row. Each row will have a new pattern. When we use the filters we can see things drastically change. For example if we said:

Show me all the patterns which have a structure rating of 0%-100% then you will see the results in red (left). If you wanted to see all of them above the 70% area and told the filters to do this, we would see the alerts in green (right).

What is harmonic pattern structure ratings?

You can filter out all the low probability patterns to only see the highest probability patterns which can make life as a trader a lot easier.

How much of a difference can it make?

Over a 6X to 12X improvement in your pattern selection with structure ratings

We completed a study on the gartley pattern statistics which looked at all the patterns and their structure ratings. More on the specific article can be found here on the Gartley Pattern. What we found out is that when it comes down to your pattern selection you will see about a 6X to 12X improvement in your trading.

How often do high structure patterns exist?

It will depend which market you are contemplating (stocks, futures or forex)

When looking at the forex market you are going to see about 20-30 of these. This is going to depend on the market since the forex is open 24 hours a day, and the stock market is only open during the NY session. But 20-30 is more than enough to have high probability trades picked out of the system for you.

How is the structure rating calculated?

This information will not be made public, however…

I will give you a basic example of one of the things we do look at when it comes to the patterns. Let’s say there is a pattern found and it is only made up of 10 candle sticks. This is going to be a pretty small pattern because each leg (XA, AB, BC, and CD) is going to have to be made of a certain number of bars before the pattern increases in structure. This is just one of over 50 items we look at when calculating the structure score for the harmonic patterns we alert you to.

Can I be alerted to only the highest structure patterns?

Yes, of course! This is one of the many benefits and time savers of getting started.

You will be able to configure the threshold in which you want to be alerted. Once you get through all the educational material on the harmonic patterns and pass the quizzes, you will be ready for when an alert comes your way and know exactly what you need to be doing. Any questions regarding the structure ratings, please feel free to leave a comment below.

Testimonial

I love the structure ratings. Since they were introduced I spend more time away from the computer than at it hoping the market will do something. Since using the structure ratings, I get better results in my trading.

”Adrian - ”Canada”