A brief introduction :
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.
Once a pattern is detected, the following steps have to be taken, which can lead to take or discard the trade. Bear in mind that a pattern is not valid by itself and it can expand as long as it likes. Your job has an harmonic trader is to assess the validity of the pattern and the potential reversal zone before entering the market.
- 1. Pattern Recognition
- This indicator auto-detects and alerts harmonic patterns.
- 2. Find the Potential Reversal Zone (PRZ)
- Evaluate the fibonacci projections plotted on the chart by the indicator and look for strength signs. Can you find at least three converging projections? Do you see primary ratios? Is the AB=CD projection present?
- 3. Wait until the PRZ is rejected by the market
- The PRZ can be tested and rejected by one single Terminal Price Bar, or the market can reverse and breakout the PRZ without testing all the fibonacci projections. In any case, the market has to move before you take the trade. You are a follower, not a predictor.
- 4. Enter the market setting the proper stop-loss
- Trade the breakout or the rejection of the PRZ and set the proper stop-loss. The farthest price level of the PRZ or the Point X of the pattern are suitable stop-loss levels.
- 5. Position Management
- It is recommended to reap partial profits as soon as possible to lock into a free ride. Scott M. Carney proposes a very interesting position management system based on a 0.382 Trailing Stop, measured from the reversal point to the reversal extreme.
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