Harmonic Trading.pptx

Introduction and Harmonic Trading
Method

Contents
 Introduction to Bramesh
 Developing a Winning Trading System
 Designing a Master Trading Plan
 Fibonacci and the Fibonacci Sequence
 Fibonacci and Harmonic Trading
 Harmonic Patterns Identification

What is a Trading System?
 A trading system is simply a group of specific rules, or parameters, that determine entry and exit
points for a given equity. These points, known as signals, are often marked on a chart in real time
and prompt the immediate execution of a trade.
 A trading system should include:
 • a set of instructions or a procedure to be followed -- which provide criteria for set up
 • decision points -- which will create the methodology of the trade
 • decision criteria -- which include a per trade risk limit, risk to reward and targets;
 Execution – Execution with Discipline
 Together, these form a plan which, when followed, helps locate high probability trades.

Why Have A Trading System?
 “Many traders unconsciously acknowledge their lack of progress by continually
jumping from one system or methodology to another, never gaining true
proficiency at any. As a result these people end up with one year of experience
six times instead of six years of experience. In contrast, the superior traders
gravitate to a single approach, the specific approach is not actually that
important, and become extremely adept at it.” Jack Schwager

 A trading system is the core of a trading business. Yes, trading is a business.
 A hobby is something that costs money and brings enjoyment or entertainment.
 Trading, on the other hand, is a business which should make money for the
trader. Putting it simply, the trading system acts as the business plan which is
followed for the trading business to make money.

The Essence of a Trading System
The essential components of a trading system are:
 Consistency
 Repeatability
 Efficiency and Effectiveness
 Measurability

Developing a Winning System
Component of Winning System
 Locate and Identify a Set-Up
 Evaluate the Set-Up
 Determine Potential Risk
 Check Potential Risk
 Select The Entry Point
 Determine The Logical Exit
 Calculate Anticipated Profit
 Calculate Reward to Risk Ratio
 Execute and Evaluate the Trade
 Keep it Simple
 Be Consistent and Realistic

Fibonacci
 Harmonic Trading is all about
Fibonacci Numbers.
 Fibonacci numbers are based
upon the Fibonacci sequence
discovered by
Leonardo deFibonacci de Pisa

The Fibonacci Sequence
 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610...and so on into infinity.
 Within the sequence the each number is the sum of the previous two numbers:
 0+1 =1, 1+1=2, 1+2+3, 2+3+5, 3+5=8, 5+8=13, 8+13+21, ....and again into
infinity

The Golden Ratio .618
 As the Fibonacci sequence continues another pattern begins to develop as
dividing a number by the following number converges to a common ratio known
as the Golden Ratio.
1÷1=1.000, 1÷2=0.500, 2÷3=0.667, 3÷5=0.600, 5÷8=0.625, 8÷13=0.615,
13÷21=0.619, 21÷34=0.618, 34÷55=0.618...
 The 0.618 are found in the Great Pyramids.
 Venus takes 225 days to complete a revolution around the sun. As we all know,
the Earth requires 365 days to complete one revolution.
 If you divide 225 by 365, the result is approximately 0.618

Another Key Ratio .382
 A number in the sequence is divided by a number two ahead in the sequence:
1÷2=0.500, 1÷3=0.333, 2÷5=0.400, 3÷8=0.375, 5÷13=0.385, 8÷21=0.381, 13÷34=-
0.382, 21÷55=0.382, 34÷89=0.382

Fibonacci sequences and ratios and the
Market
 As the Fibonacci sequence and ratio patterns are found throughout nature it
should be easy to understand that similar patterns can found within the trading
markets too since people are part of nature.

Fibonacci Ratios for Harmonic Trading
 Harmonic Trading is a new exciting area of technical analysis that utilizes
effective Fibonacci alignment combinations to define patterns. These
strategies, at times, unveil valid market signals in an unprecedented
fashion.
 The two Fibonacci ratios that will be the basis of harmonic trading are:
 Primary Fibonacci ratio of 1.618
 the Reciprocal (1÷1.618) Fibonacci ratio of 0.618

 These additional ratios
 √1.618 = 1.27 Found by taking the square root of 1.618 to obtain the 1.27 ratio;
 √0.618 = 0.786 Found by taking the square root of the 0.618 ratio to obtains the
.786 ratio; and
 √0.786 = 0.886 Found by taking the square root of the 0.786 ratio to find the .886
ratio.
 All of these ratios are critical in calculating harmonic trading patterns

Introduction
 Harmonic trading is not exactly a new approach to technical analysis. Its foundations
stretch back nearly 80 years, when H.M. Gartley devised the trading structure (now
known as the Gartley pattern) that would ultimately form the basis of the harmonic
strategies undertaken by modern practitioners like Scott Carney.
 The commonly understood structure unfolds in four price legs, resembling an “M”
shape for bullish patterns and a “W” shape for bearish patterns.
 These structures are marked by five price points: The X point marks the beginning of
the structure, and this is followed by an impulse move to point A, a corrective move to
point B, a trend-based move to point C, and then an extended correction to point D.
Each of these moves will fall in line with a specific Fibonacci retracement. Different
retracement levels will define different harmonic patterns.

What is Harmonic Trading
 Harmonics is the process of identifying the market’s rhythm or its pulse if you will
and exploiting any and all opportunities. There are visual occurrences that have
tendencies to repeat themselves over and over again. It is our job as chart
technicians to identify them and trade them. The principles of harmonics and
ratios have no boundaries. They can be applied to any instrument or timeframe.
We will peel away the myth of the term “noise” and learn to focus on the only
thing that matters on a chart, PRICE.
 Knowing each pattern is important, just how each pilot knows the parts that make
up the plane. And just like how each part of an aircraft is used for a certain
purpose, each harmonic pattern has the highest probability when used in its own
situations.

Three Stages of Harmonic Trading
 Trade Identification
 Trade Execution
 Trade Management
These three stages are important to consider as the general process of trading
harmonic patterns. As I said earlier, any system utilized to trade the markets must
identify a potential opportunity, execute the trade, and manage the position until it is
closed.

PRZ (Price Reversal Zones)
 PRZ is critical area, as this is where the pattern has reached completion and is
sending the signal to buy or sell the asset.
 PRZ is the area that price should not violate in order for the pattern to hold true.
 If price passes through the PRZ, then the pattern is not valid.
 Harmonic trades place their stops at the bottom PRZ if it is a bullish Pattern. And
the top of the PRZ if it is a bearish pattern.

 Bat Patterns and Gartley Patterns are both classified as retracement patterns
because their D point is closer to the B point
 Crab Patterns and Butterfly Patterns are both classified as extension patterns
and extend the furthest
 The ABC part of our harmonic patterns is where we typically have the same ratio
in every pattern between the 38.2 to 88.6 retracement

The Gartley Pattern
 The Fibonacci retracements that yield the
most reliable reversals are the .618 at the B
point and the .786 at the D point.
 Furthermore, the pattern should possess a
distinct AB=CD pattern that converges in
the same area as the 0.786 XA retracement
and the BC projection (either 1.27 or
1.618).
 The most critical aspect of the Gartley is
the B point retracement, which must be at
a 0.618 of the XA leg.

Bullish Gartley Pattern
 The Completion at D signals UPSIDE as long as Point X is not Broken
 The A-B leg retraces about 61.8% of the X-A leg
 The B-C leg retraces 38.2% to 88.6% of the A-B leg
 The C-D leg ends at around 127% to 161.8% of the B-C leg
 The C-D leg ends also at around 78.6% retracement of the major X-A leg
 AB = CD

Bearish Gartley Pattern
 The Completion at D signals DOWNSIDE as long as Point X is not Broken
 The A-B leg retraces about 61.8% of the X-A leg
 The B-C leg retraces 38.2% to 88.6% of the A-B leg
 The C-D leg ends at around 127% to 161.8% of the B-C leg
 The C-D leg ends also at around 78.6% retracement of the major X-A leg
 AB = CD

Trade Plan with Entry,Exit,SL and Target
 Your entry would be to buy or sell the area where the 78.6% of X-A and 127% of
B-C meet.
 Your stop loss would be below the origin of the X-A. Meaning below the high or
low that is X.
 For targets, some traders like to for 50% or 61.8% as a minimal target, and copy
the X-A leg and project it from the point D for the extended target.
 For trailing your stop, you can raise it to a breakeven as soon as the minimal
target is achieved.

Checklist for the Gartley pattern
It should include the following key elements:
 AB=CD pattern
 78.6% Fibonacci retracement of the X-A leg
 127% or 161.8% Fibonacci extension of the B-C leg

Bearish Gartley Example of Hindalco

The Bat Pattern Or M Pattern
 X-A the first leg forms when the price
rise/falls sharply from point X to point A
 AB leg can retrace between 38.2% – 50% of
XA leg
 BC leg can retrace between 38.2% – 88.6% of
AB leg
 CD leg can retrace up to 88.6% of XA leg but
D point should not cross X
 CD leg can also be an extension of between
1.618% – 2.618% of AB leg
 Potential Reversal Zone (PRZ). Is 0.886XA
retracement,.
 It is an incredibly accurate pattern and
requires a smaller stop loss than most
patterns and mostly forms near Downtrend

 Your entry would be to buy or sell the area where the 88.6% of X-A and 161-
261% of B-C meet.
low that is X.
 For targets, I use 50% or 61.8% of CD leg as a minimal target and 1.2712 of CD
leg as Target 2 and copy the X-A leg and project it from the point D for the
extended target.
target is achieved.

Checklist for the BAT pattern
 AB=CD pattern or an extension of this pattern
 A 88.6% Fibonacci extension of the X-A leg
 A 161.8% -261.8% Fibonacci extension of the B-C leg

Bajaj Auto Bearish BAT Harmonic

INFINITE Bullish BAT
 28 Oct 2010 Example

Difference Between BAT and GARTLEY

Butterfly Pattern
 The Butterfly is a reversal pattern that allows you to enter the
market at extreme highs and lows discovered by Bryce Gilmore
 Four distinct legs labelled X-A, A-B, B-C and C-D
 X-A the first leg forms when the price rise/falls sharply from
point X to point A
 A-B Leg then sees the price change direction and retrace
78.6% of the distance covered by the X-A leg, Mandatory
Requirement
 B-C the price changes direction again and moves back down,
retracing 38.2% to 88.6% of the distance covered by the A-B
leg.
 C-D leg very often extends forming a 161.8% or 261.8%
extension of the A-B leg
 Butterfly pattern must include an AB=CD pattern to be a valid
signal. the most critical number in the pattern is the 1.27 XA
leg. The XA calculation is usually complemented by an extreme
(2.00, 2.24, 2.618) BC projection.
 These numbers create a specific Potential Reversal Zone (PRZ)
that can yield powerful reversals, especially when the pattern
is in all-time (new highs/new lows) price levels.

Checklist for the Butterfly pattern
 A 127% Fibonacci extension of the X-A leg
 A 161.8% -261.8% Fibonacci extension of the B-C leg

Adani Port Example Butterfly
 21-Jan -2015 Butterfly Renetry example

 Your entry would be to buy or sell the area where the 127% of X-A and 161-
261% of B-C meet.
 Your stop loss would be below or above the 161.8% Fibonacci extension of the
X-A
extended target.
target is achieved.

Butterfly and Gartley and BAT Pattern

The Crab Pattern
 The Crab is another reversal pattern that allows you to
enter the market at extreme highs or lows.
 Four distinct legs labelled X-A, A-B, B-C and C-D
 X-A the first leg forms when the price rise/falls sharply
from point X to point A
 A-B Leg then sees the price change direction and retrace
38.2% to 61.8% of the distance covered by the X-A leg.
 B-C the price changes direction again and moves back
down, retracing 38.2% to 88.6% of the distance covered
by the A-B leg.
 C-D leg very often extends forming a 161.8% extension of
the A-B leg
 Crab pattern PRZ should also represent a 224% – 361.8%
Fibonacci extension of the B-C leg.

 Your entry would be to buy or sell the area where the 161.8% of X-A and 224% –
361.8 % of B-C meet.
low that is X.
extended target.
target is achieved.

Checklist for the CRAB pattern
 A 161.8% Fibonacci extension of the X-A leg
 A 224% – 361.8% Fibonacci extension of the B-C leg

The SHARK Pattern
 Shark pattern is a variation on the traditional M and W
shaped patterns but follows the same general idea in
producing trading signals.
 The Shark pattern is composed of two separate price
segments: A Harmonic impulse wave that fails, and
another Harmonic impulse wave that hits extreme
levels.
 The SHARK Pattern starts at the 0 point, representing
an extended down/up leg to begin the pattern at X. The
initial point X acts as the low of this prior substantial
decline.
 The SHARK Pattern is dependent upon the powerful
88.6 retracement and 113% Reciprocal Ratio.

 After a quick reactive bounce to the A point, the structure abruptly continues the
decline, only to find support slightly past the prior low at X. This is the failed wave 3 or
wave 5 – in Elliot Wave terms – that establishes the rest of the structure.
 However, the important limits from the Harmonic Trading perspective requires that this
X, A extension be at least a 1.13 but not greater than a 1.618. After that impulsive failed
wave is established, the BC leg rallies to at least a 1.618 extension of the AB length but it
does not exceed 2.24. Again, this tight range of 1.618-2.24 is a defining element of the
structure. If the 1.618 limit is not reached, the structure is not a valid .

 Your entry would be to buy or sell the area where the 88.6% -1.13 of 0-X and
161-224% of B-C meet.
 Your stop loss would be 0.5% below the origin of the 0. Meaning below the high
or low that is 0.
 For targets, I use 50% or 61.8% of BC leg
target is achieved.

Checklist for the SHARK pattern
 AB movement should be 1.13 to 1.618 retracement of XA.
 BC movement should be 1.618 to 2.24 retracement of an AB
 CD movement should be 0.5 retracement of BC
 For a proper Shark pattern C should be between 0.886 and 1.13 of 0X
movement. (0 being the point before X)

Checklist for the SHARK pattern
 New Low/High that exceeds the prior low( Point B and X)
 Point B should be within the range of 1.13 and 1.618. Shouldn't exceed 1.618
extension of wave XA
 B-C = 1.618/2.24 of A-B
 D = 0.5 of B-C Leg

Bullish Shark SPARC
 15- Oct

Bearish Shark Reliance
 12/03/2014

The Three Drives Pattern
 Although it was not specifically identified, one of
the first references to a Three Drives pattern was
outlined in Robert Prechter’s book, “Elliot Wave
Principle.” He described the general nature of
price action that possessed either a three-wave
or a five-wave structure.
 Adapted from this principle, symmetrical price
movements that possess identical Fibonacci
projections in a 5- wave price structure
constitute a Three Drives pattern.
 The critical aspect of this pattern is that each
drive completes at either a 1.27 or a 1.618. Also,
the price legs should possess clear symmetry
with each drive forming over equivalent time
periods.

The AB=CD or 'lightning bolt pattern‘
Harmonic Pattern
 AB=CD is a reversal pattern that helps you identify when
the price is about to change direction
 AB=CD pattern is a four point harmonic pattern which
may be considered the developmental basis for other
harmonic patterns.
 A-B leg when a market is trending upwards, the first leg
(A-B) is formed as the price rises/fall from A to B.
 B-C leg price switches direction and retraces up/down
between 38.2%-78.6% to form the B-C leg.
 C-D leg At point C, the price switches direction again
and continues its original uptrend. This leg (C-D) slopes
upwards, parallel with the A-B leg and should ideally be
the same length as the A-B leg when it completes.
 The ideal AB=CD pattern is equal in time and price, with
point D being an Fibonacci extension between 127%-
161.8% of the B-C leg.

 You can sell at point D (or just before) where the pattern ends, or, in a downtrending
market, go long at point D.
 A perfect (hence highly reliable) AB=CD harmonic pattern would have an A-B
retracement with a market price differential multiplier of 0.618 and a B-C projection
with a market price differential multiplier of 1.618.

 Your entry would be to buy or sell the area where AB=CD
 Your stop loss would be above /below D. Meaning below the high or low that is
D.
 For targets, I use 38.2%,50% as Minimal Target and 61.8% of CD leg as
Ultimate target .
 Watch closely how the price reacts around the levels. If the price struggles to
break through any one of them, then you can close your trade down and take
profit early.
target is achieved.

Conclusion
 As can be seen by the above description, the invention provides a Fibonacci-based
methodology which may provide an ability to lower an investor's risk while participating
in short term finial market trading by potentially identifying and applying harmonic
patterns to historical financial market data to substantially identify when a potential
zone reversal for a current market place trend may occur.
 Although the description above contains many specifications, these should not be
construed as limiting the scope of the invention but as merely providing illustrations of
some of the presently preferred embodiments of this invention. Thus, the scope of the
invention should be determined by the appended claims and their legal equivalents
rather than by the examples given.

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