Harmonic Trading

In financial trading, harmonic trading is a method of technical analysis which involves the studying of price patterns in the form of geometrical shapes.

This is primarily done in order to predict possible market turning points.

Harmonic patterns are mostly based upon Fibonacci levels that determine swing highs and lows and are considered to be an advanced technique, possessing a potentially excellent risk reward ratio.

Unlike most forms of trading, harmonic trading allows the trader to spot potential reversal points in advance.

Even classic reversals techniques such as divergence can only inform the trader of a pending reversal once the top or bottom appears.

However, harmonic patterns have the ability to highlight a reversal zone, before the price even reaches that point.

Some of the most popular harmonic trading techniques include Gartley, Wolfe Waves, and Hurst Cycles.

Understanding the Limits of Harmonic Trading

Harmonic patterns exist in all markets, and are nowadays very popular in the foreign exchange market.

These patterns, such as Gartley or butterfly can identify key reversals. These are given as a reversal zone as opposed to an actual reversal price.

Shaped like M or W patterns, harmonic patterns generally come to be when a trend correction is occurring.

Unfortunately, technical analysis is not an exact science and this includes harmonic trading.

Textbook looking setups don’t always occur. Rather, harmonic trading can be rather subjective.

One can either manually draw the legs of patterns, or use an indicator. Either way, different traders will see and judge patterns differently, especially the first leg, which is known as the impulse leg.

Proponents of harmonic trading will argue that, unlike most other classical technical tools or indicators, harmonic patterns, in and of themselves are almost complete trading systems.

In practice however, the patterns do need some corroboration, ironically often from classical technical analysis.