Harmonic Trading is a methodology that uses the recognition of specific Harmonic Price Patterns and Fibonacci numbers to determine highly probable reversal points in stocks. This methodology assumes that trading patterns or cycles, like many patterns and cycles in life, repeat themselves. The key is to identify these patterns, and to enter or exit a position based on a high degree of probability that the same historic price action will occur.

The Harmonic Patterns are defined by specific price structures that are quantified by Fibonacci calculations. Essentially, these patterns are price structures that contain combinations of distinct and consecutive Fibonacci retracements and projections. By calculating the various Fibonacci aspects of a specific price structure, Harmonic Patterns can indicate a specific area to examine for potential turning points in price action.

One of the most comprehensive references to Harmonic Trading was outlined by J.M. Hurst in his cycles course from the early 1970s. His Principle of Harmonicity states: "The periods of neighboring waves in price action tend to be related by a small whole number." (Hurst, J.M., J.M. Hurst Cycles Course, Greenville, S.C.: Traders Press, 1973) The important concept to grasp is that price waves or distinct price moves are related to each other. Furthermore, Fibonacci numbers and price patterns manifest these relationships and provide a means to determine where the turning points will occur.

When these turning points are identified correctly, trades are executed at a price level where the cycle is changing. Essentially, this type of trading is respecting the natural ebb and flow of buying and selling. In doing so, these trades are executed "in harmony" with the market. For example, when a stock is bought at this turning point, the majority of the selling that has driven the price down is very close to ending. Quite often, the harmonic techniques identify trades at or very close to the exact reversal point.

The analysis of Harmonic Patterns is based on the elements of simple Geometry and Elliott Wave principles. However, unlike the general wave counts of Elliott Analysis, Harmonic Trading focuses on exact price structures. Specifically, Harmonic Trading examines precise 5-point price structures, differentiating these movements with respect to their Fibonacci alignments.

For example, most technicians are aware of the "M" and "W" corrective patterns explained within Elliott Wave Analysis. These corrective structures are vital in the validation of wave counts and Elliott Theory. However, these M's and W's can be further defined by examining where each point lies within the specific price structure. These price structures must exhibit exact alignments that must not be violated.

It is important to note that Harmonic Trading works on any time frame -- intraday, daily, weekly or monthly stock charts. I believe the clearest trade opportunities appear on daily charts for position or swing trades. However, intraday charts provide excellent trades for shorter-term trades. It is also amazing that these methods work on longer-term charts, as well; weekly or monthly charts are excellent measures of historically critical areas for stocks.

Here are a few important concepts that define Harmonic Trading:

• Patterns within Chaos: It is important to note that specific price structures continually repeat within the chaos of the markets.
• Specific Price Structures: Although similar to Elliott Wave Analysis in its examination of price movements, Harmonic Trading requires specific alignment of Fibonacci Ratios and pattern points to validate these structures.
• Signals of Potential Price Action: The most important concept is that Harmonic Patterns can act as signposts of potential future price action.
• Confirmation of Other Methods: Harmonic Trading is not a "Black Box" system, and this analysis should use other technical measures and consider primary trends to confirm the patterns.
  

Harmonic Trading is a powerful area of technical analysis. Using Harmonic Price Pattern Recognition techniques and Fibonacci ratios, one can discover trade opportunities that capitalize on specific situations with respect to the natural buying and selling of the market.