TRADERS WORKSHOP
Harnessing the power of Harmonic Trading to improve your FX trading potential
By: Raghee Horner. Sr. Market Analyst,
educateFX.com
My journey in harmonics came from a background of using Fibonacci Retracements and Extensions for the better part of two decades. It was a natural curiosity that led me to study “Fibonacci Patterns” since harmonic trading uses price patterns and Fibonacci ratios to project reversal levels (think support and resistance) in the markets.
T
raders and investors who use Fibonacci Retracement and Extension levels are already familiar with the idea that price action does have some organization into recognizable patterns of contraction and expansion. Te turning points identified by Fibonacci (and harmonic analysis) are the inflection points of the patterns where the natural ebb and flow of market participation begin.
Te application of these turning points is much like the use of any support or resistance level; it must be considered within the context of the underlying psychology of the market or trend and can be confirmed with other types of analysis to establish more reason for the market to react at that level. Much like Fibonacci Retracements and Extension - where the rally or sell-off used will determine how the support and resistance of the projected levels will be laid across a chart - there is subjectivity in the structure of harmonic analysis. It’s the relationship to the Fibonacci ratios which give these patterns structure and reflect the natural contraction and expansion of the market and give the turning points trading
180 | april 2012 e-FOREX
entry application. Without recognizing these actionable levels, traders will not be able to react to the projected turning price levels and use these inflection points to confirm and/or enter the market.
The three A’s
Actionable application of analysis (the three A’s a trader must live by) is often the most difficult aspect of trading. Chartists and technicians alike could pour over charts spending sometimes hours on their analysis but if the end result is not resulting in actionable price levels or as I call them “decision levels” there is no point in the analysis. Hence, the old saying: paralysis of analysis. Te idea behind a “decision level” is not only that it is support or resistance but that it is a level that will be reacted to. Tere are three reactions that can be expected at any decision level - regardless of how it’s indentified - and that is to accelerate through it, stall or exhaust at or around it, and/or reverse from it.
In the case of harmonics, it’s typically a projection level of a resistance level overhead that price will exhaust at and then reverse from or a support level that will attract buying support, exhaust, and then bounce.
Having been an active stock, futures, and forex trader, I can say with confidence that I believe that harmonics apply well across all three markets but I will say because of the 24-hour activity of the forex market, technical analysis tends to be better respected because of the higher more consistent level of participation worldwide.
Look for reversal points may be what harmonics are known to do and many
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