Introduction to Harmonic Trading

I’ve been studying harmonics now for the last 6 months or so. It’s not been an easy task. This introduction is a summary of what I have learned about how they may be used and some of the difficulties.

Harmonic trading is about finding and exploiting certain patterns that are regularly seen in all kinds of trading situations, across almost all time frames. There is overwhelming statistical and experiential evidence for their better than chance success rate. By that I mean that expert traders who have devoted the time and effort to find them realise better than 50% success rate (overall). That may not seem like much however when one considers that unenhanced success rates can to in the range of 20-40%, then 50% is much better. Some expert traders get 60% success rates using harmonic trading analysis. I shall not go into the evidence base for success rates – as it is widely available from reputable websites on the net.

In this introduction I will not go into detail on the patterns or their criteria. This is an overview of the patterns and how they may be used. Harmonic pattern analysis or trading do not guarantee big, quick or consistent wins. As with any tool, it is about how it is used and the skill of the user.

Harmonic patterns carry some names like: Gartley, Bat, Crab, Butterfly etc. These may seem weird at first glance. I recall when I first came across these, I thought it was a bit of a joke – or that some weird geek was trying to pull one. The patterns – whatever their names – are consistent. They are real formations. They arise in the chaos that applies to these charts. Chaos Theory shows that patterns are not excluded from chaotic events.

Some of the big difficulties in getting your head around harmonic pattern analysis  may be (as I’ve experienced):

1. Finding reliable information on their criteria. Scot Carney is the true expert on this.
2. Confusion caused by different traders interpreting or applying the criteria differently.
3. YouTube and other videos not explaining aspects of the pattern formation with great clarity. The experts or seasoned traders tend to assume too much, that people will understand what they’re talking about.
4. The initial psychological shock of seeing what would appear to be jumble of lines in actually doing the analysis. You may be inclined to think, “This is madness…I can’t cope.” See: Desirable core personality characteristics for traders.
5. If you get through all of the above actually sticking with it long enough to gain the skill. You may suffer with doubts that you have got the patterns right.

A few important things I’ve discovered about the coping with harmonic patterns:

1. There are some variations on each individual pattern that need to be grasped. This actually leaves some limited room for flexibility. So, being right is about ensuring that any variation is within acceptable parameters.
2. Finding and sticking with the true experts is very important to avoid time-wasting, confusion and doubt. Go with their criteria.
3. Practice is extremely important. It’s like learning to hold a pen and using it to write – all over again. I still recall today how difficult it was learning to use a pencil to write, when I was around the age of 4. It’s really like anything new – there are the common stages of stress and confusion, followed by some mastery, then comfort and confidence, followed by creativity.

The edge in harmonic trading comes from a number of important factors.

1. Understanding the particular sets of harmonic patterns.
2. Memorising and referencing the criteria for each harmonic pattern (and there are about 7 of which 3 or 4 are most common).
3. Doing the analysis with extreme care and attention to detail.
4. Having a lot of patience because patterns may unfold into different ones.
5. Careful analysis of Potential Reversal Zones – these are areas predicted by harmonic set ups for a reversal but it is very much about what happens in the PRZ that spells out whether it is good for an entry. In other words getting the pattern right is not the end of it, rather it’s just the beginning.
6. Setting very careful entry points, stop-losses and exit points. The latter are important with all trades but are particularly important for harmonic pattern trading. Remember that about 50% or so will go wrong and deliver losses.

So what’s next? It’s up to you. I’ve only given a few interesting links and vids below. Good noob traders will be self-driven to find more, learn and practice. As said in our FAQ, we don’t do formal teachings out here.

Knowledge of the basics about Fibonacci, is needed to grasp some of the following.

1. Read and digest everything written by Scot Carney – he is the original true expert.
2. Pitfalls to avoid in harmonic trading.