1) What is Harmonic Trading
Harmonic Trading is a methodology that utilizes the recognition of specific structures that possess distinct and consecutive Fibonacci ratio alignments that quantify and validate harmonicpatterns. These patterns calculate the Fibonacci aspects of these price structures to identifyhighly probable reversal points in the financial markets. This methodology assumes that harmonic patterns or cycles, like many patterns and cycles in life, continually repeat. 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.
Harmonic Trading is based upon the principles that govern natural and universal growthcycles. In many of life’s natural growth processes, Fibonacci numeric relationships govern the cyclical traits of development. This “natural progression” has been debated for centuries and has provided evidence that there is some order to life’s processes. When applied to thefinancial markets, this relative analysis of Fibonacci measurements can define the extent of price action with respect to natural cyclical growth limits of trading behavior.
Trading behavior is defined by the extent of buying and selling and influenced by the fear or greed possessed by the market participants. Generally, price action moves in cycles that exhibit stages of growth and decline. From this perspective, the collective entityof all buyers and sellers in a particular market follow the same universal principles as other natural phenomena exhibiting cyclical growth behavior.
In an attempt to learn the origins of this analysis, many get lost in the need to understand why these relationships exist. The basic understanding required to grasp this theory should not move beyond the simple acceptance that natural growth phenomena can be quantified by relative Fibonacci ratio measurements. Applied to the financial markets, Fibonacci ratios can quantify specific situations where repeating growth cycles of buying and selling exist. It is the understanding of these types of growth cycle structures (patterns) that provides pertinent technical information regarding price action that no other approach offers.
2) Fibonacci numbers
To trade the Harmonic pattern you would need to add some more Fibonacci level into the default setting. (In mt4: right click on the Fibonacci Retracement-> choose property -> Fibo level -> add)
Fibonaci numbers to add into Fibonacci Expansion:
** Note for newbie: When draw Fibonacci in mt4, it has 2 legs with 3 points. When we need an expansion/projection of AB, make sure the first point of the Fibo Expansion at A, the second at B and the third at A too. If you forget to drag the third point back to point A, your projection is COMPLETELY WRONG.
3) Potential Reversal Zone(PRZ)
Every harmonic pattern possesses a potential reversal zone (PRZ). This zone is a place where with high probability, a reversal might take place. In the next chapters, we will discuss how to identify the PRZ for each pattern. Let’s get to it 😀