Introduction to Harmonic Trading, Volume Two: Advanced Strategies for Profiting from the Natural Order of the Financial Markets
This chapter is from the book
This chapter is from the book
This chapter is from the book
After years of research, Harmonic Trading has evolved into a distinct and comprehensive methodology that effectively analyzes the financial markets. The basic tenets of pattern recognition as quantified by harmonic ratios define a system that provides immensely pertinent technical information and identifies trading opportunities unlike any other methodology. It is important to consider the substantial advancement of Harmonic Trading since its inception.
The release of my first book, The Harmonic Trader, marked the beginning of the entire methodology. The new measurement techniques presented in this book quantified price action in a unique manner. These new ideas created the framework of an unprecedented Fibonacci measurement and price pattern recognition system that consistently defined profitable trading opportunities. Although it was not my intention to formulate such a system, these strategies were the result of extensive research to discover the most effective relationships that were encompassed by these measurement tools. Through it all, I precisely refined many general concepts and publicly divulged many "secret" strategies that comprised the fundamentals of the Harmonic Trading approach.
The unprecedented combinations of specific ratios that differentiated similar price structures as exact patterns defined an effective trading methodology, yielding relevant technical information in an unprecedented fashion. Although others years before me have utilized Fibonacci ratios within the realm of Technical Analysis, the concept of exact ratio alignments presented a new means to define M-type and W-type price structures. These precise patterns offered greater accuracy in the often vague discipline of pattern recognition for many traders.
Although the rules that define harmonic patterns seem to be common knowledge today, it wasn't too long ago that these strategies were practically considered avant-garde within the field of Technical Analysis. This new application of Fibonacci ratios created a system of rules that defined price patterns in an unprecedented fashion. For example, the common definition for the Gartley pattern—requiring a 0.618 retracement and a 0.786 retracement at the B and D points, respectively—which was originally outlined in The Harmonic Trader, has become the standard within the technical community.
These strategies have proven themselves effective through the years, but this success has engendered many Harmonic Trading-related systems that have skewed the basic tenets of the approach. These outfits have espoused the mystical charm of Fibonacci ratios to present more of a "secret code" to the financial markets than a proven system of measurement strategies within the discipline of Technical Analysis. Although I will address the problem of misinformation and unscrupulous "gurus" a little later in this Introduction, there are two critical concepts to be mindful of while studying this material:
- Harmonic Trading is more than Fibonacci. Anyone somewhat familiar with this methodology understands that Harmonic Trading is much more than general Fibonacci analysis. The entire Harmonic Trading approach comprises a variety of tools that include more than simple Fibonacci measurement techniques and integrates a complex system of execution and management strategies. Moreover, the new ideas presented in this book incorporate an even wider gamut of unprecedented trading tools.
- Harmonic Trading is still evolving. In my first book, I presented a number of technical measurement strategies that quantified price patterns with respect to their alignment of Fibonacci ratios. The Harmonic Trader was unprecedented in that it was the first material to emphasize the importance of exact alignments and to employ specific ratio combinations that differentiated a variety of patterns. Although The Harmonic Trader outlined the framework of this methodology, Harmonic Trading: Volume One represented a substantial advancement to the basic approach. Those two books represent more than 500 pages of some of the most comprehensive pattern strategies within the field of Technical Analysis and dedicate a considerable portion of the material to identification techniques, outlining the strict rules that validate structures as patterns. This book builds upon that foundation and improves upon the entire methodology to outline effective trading strategies from start to finish.
Since its release in 1999, many have tried to lay claim to the ideas that were first espoused in The Harmonic Trader. Despite other interpretations, Harmonic Trading: Volume One truly distinguished this approach from the often misguided and misappropriated use of basic Fibonacci strategies. Meanwhile, this book advances the basic tenets of Harmonic Trading offering greater "standardization" of pattern structures and improved confirmation strategies that optimize trading decisions.
As these strategies evolve, there will continue to be a need for more thorough statistical validation to improve the application of these methods and to enhance the overall accuracy of the approach. In fact, this is a driving principle behind the entire Harmonic Trading system—always improve upon what works. Although this may challenge the old adage: "If it ain't broke, don't fix it," the effectiveness of this approach (and of any trading methodology) depends upon continual improvement. I offer comprehensive case studies throughout this material. I will continue to compile research to validate the effectiveness of the Harmonic Trading approach. Furthermore, new concepts such as the RSI BAMM and the 5-0 pattern represent substantial improvements upon the initial foundation of this methodology.
New Ideas in Harmonic Trading
The strategies outlined in this book are entirely new concepts that build upon the prior material presented within the Harmonic Trading approach. Many new topics will be presented with particular emphasis on the Harmonic Impulse Waves, patterns within established trends, and BAMM Theory. In particular, the entire RSI BAMM strategy will be outlined. I will present new patterns such as the 5-0, the Reciprocal AB=CD, and the Alternate Bat. Although Volume Two references many of the basic tenets of the Harmonic Trading approach, this material consists of mostly new ideas and trading strategies. The new patterns and expanded measurement techniques significantly advance the primary identification tools established within this approach. For example, the 5-0, the Alternate Bat, and the Reciprocal AB=CD are important new structures within the existing array of harmonic patterns. Furthermore, these new structures also comprise the basic framework of more advanced techniques. Hence, Volume Two represents a significant evolutionary step and an essential new direction that enhances the existing methodology immensely.
The most significant concept presented in this book and the most profound advancement of the entire Harmonic Trading methodology is outlined in the RSI BAMM methodology. This new complex system incorporates a standard technical indicator—the Relative Strength Indicator (RSI)—with advanced Harmonic Trading measurement techniques. The RSI BAMM employs precise ratio measurements and exact structural pattern specification to identify critical technical price levels. All of the material in Volume Two—especially the RSI BAMM—offers unprecedented strategies that identify the areas where overall trend divergence and harmonic pattern completions define the most critical technical levels. In addition, the new ideas presented in this material advance the basic theory of price pattern recognition by requiring other technical conditions to exist to validate potential opportunities with improved accuracy. Specifically, the advancement of the RSI BAMM separates the minor reactive moves from the more substantial trading opportunities and provides extensive technical information regarding the future potential direction of the price action. Although this material will take some time to digest, I believe these advanced concepts dramatically enhance the entire Harmonic Trading system, furthering its efficacy in pinpointing the best trading opportunities.