When it comes to technical analysis, there are many tools out there to choose from and integrate into your strategy. Though their approach leans more towards the alternative side, harmonic patterns are another example of this.
Harmonic patterns differ from other trading patterns in that they are more complex and traders try to identify them in order to forecast rather than to respond in real time to what the market is doing. These may be essentially helpful to traders who prefer to extend their trades over longer periods, however, patterns can be observed in all timeframes of a market and this applies to harmonic patterns as well.
Harmonic trading explained
First off, harmonic rating patterns are a result of Harold McKinley Gartley, who introduced them to the world in 1932 and later published a book titled, Profits in the Stock Market, in 1935.
The doctrine of harmonic trading revolves around the trader working to recognize distinct, Fibonacci ratio aligned, patterns on a chart (ratios tend to be specific to each particular pattern). This is done in an attempt to spot a potential trend reversal, helping traders target these probable reversal points with reduced risk – if they are properly identified, that is.
One could think of harmonic patterns as a fine blend of geometry and the Fibonacci numbers to be used as a technical indicator. In much the same way as Elliott wave theory, the use of harmonic patterns is rooted in the hypothesis that patterns repeat themselves in society just as they do in nature and the same can be observed in the way markets move.
The ratios used in harmonic trading patterns all stem from the primary ratios, 1.618 and 0.618. Other derivative ratios that can be found in harmonic patterns include: 0.382, 0.50, 1.41, 2.0, 2.24, 2.618, 3.14 and 3.618.
Important thing to note about trading with Harmonic Patterns
One of the greatest strengths of harmonic patterns is their reliance on precise data. In order for these patterns to be considered valid, price movements of a very specific extent need to happen. Therefore, traders who rely on harmonic patterns will often encounter patterns that seem to match what they are looking for but Fibonacci ratios are not aligned as they should be, making the pattern invalid.
This means harmonic trading based strategies generally require a fair amount of patience in order to deploy properly, whether this is a good or bad thing is all dependent on the traders individual preference.
Apart from being used to pinpoint trend reversal points, some traders also use them to try to determine how long the current trend may continue. However, justy like any other tool that is used to read markets, harmonic patterns are not a promise of perfection. Traders could find themselves caught up in a continuation of a trend rather than their targeted reversal point.
Conclusion
Harmonic patterns are a way to observe and engage a market from a more mathematical point of view. Because of this, they tend to require a lot of attentive practice and study time before one can call themselves a master. To get this right, patience is the traders only partner.
