Harmonic Patterns at Key Levels: Solidify Your Trade Idea


Screen Shot 2014-06-17 at 11.12.19

Video Transcription:

Hello, traders. Welcome to The Pro Trader Course and the fifth module, Incorporating Harmonics. In this lesson we are going to learn why incorporating harmonic patterns into your trade setups is going to solidify your trade ideas.

Now, we’re going to jump right into the chart and we are looking at the E-mini Dow chart. And the only thing we have done this far is to draw a wedge on which the E-mini Dow is trading. You can see that we are making higher highs, and we are now making… I’m sorry, we are making higher lows and we are also making higher highs, but the higher lows are exponentially… The degree of the higher lows is exponentially higher than the degree of the higher highs, which makes for a wedge. And we have located this area, this bull/bear zone actually, where price bounced off very sharply in the past.

Harmonic Patterns at Key Levels

Now, we already know what is going to happen. But what I’m going to do here is I’m going to continue the analysis. We are going to put here a level of support… Well, it was tested as resistance and now tested as support again. And right here we have another high, okay? Still, we are looking at this moment in price action to maybe take a short opportunity, or take a short shot at the E-mini Dow, but still, this is not a very comfortable setup to take.

So what we’re going to do is we’re going to take this Fibonacci retracement tool and we are going to look at where we’re at on a retracement from this high to this low. And I think that we are very close to the 127.2, so we are going to use that. And as you can see, we hit the 127.2 to the pip almost. Okay. Still, this is not a secure setup. Why? Because the actual high or the actual resistance that…or the previous high that we were supposed to bounce off of was broken and retested, and now we are higher. So what we’re going to do?

Harmonic Patterns at Key Levels1

We’re going to go to the forward chart, and we are going to look for further areas of resistance. And we have found another high right here, so we’re going to go back to…I’m sorry, to the one-hour chart. And as you can see, this high that we found on the four-hour chart is…well, confluence perfectly with where price rejected the zone and of, course, with the 127.2.

This is still not a very solid trade idea. I’m going to delete this high because it was already broken, and we are looking to short this level. Well, we have three or four things going on in our favor. One, we are at the wedge’s resistance. Two, we are at the 127.2. Three, we have a very strong resistance on the four-hour chart that we hit to the pip, all right? But still, this is not a very strong setup. I mean, you could take this setup, but it’s not a high-quality setup because of the strong move to the upside and because we broke with the previous highs so harshly.

Harmonic Patterns at Key Levels2

So what we’re going to do here is we’re going to try to incorporate a harmonic pattern. To do so, I’m going to grab a triangle tool and, of course, I’m going to zoom in a little bit so we can get a better view of what I’m talking about. Now, remember, this is the zone where we wanna short, right here. We don’t know what is going to happen. I mean, we already know what is going to happen but let’s imagine that we don’t know.

So what we’re going to do is I’m going to try to find some kind of a pattern that resembles a harmonic pattern. I’m going to draw it first and then I’m going to draw the Fibonacci retracement levels just to see if they hit. And if the pattern is confirmed, this will mean that we have a finished pattern right here where we are planning to go short, or a finished bearish, harmonic cycle right here where we wanna short, which would make our trade idea, or our setup, even stronger.

So what we’re going to do here is we’re going to try to find if we do have some kind of a harmonic pattern. To do so, we are going to use the normal harmonic pattern Fibonacci retracements. And if you don’t know which Fibonacci retracements to use, well, you can go to the technical analysis course and you will find an entire module on harmonic patterns.

Harmonic Patterns at Key Levels3

So right here you can see that price came to this low, and to this… I made a 76.4 retracement, and now we’re going to calculate the retracements from this low to this high to see if we hit our Gartley ratio. All of these ratios were first exposed by Gartley and they’re available to everybody for free. So I think that we are going to try the 200 level right here for a perfect Gartley. We hit the 200 and we hit the 127.2. We do have a perfect Gartley in our hands, so this makes… I mean, without the harmonic pattern in our hands, this would make for a 50:50 setup, if we were trying to short.

And remember that we are trying to go short on a very strong up move. I mean, the Dow has been from the start of this wedge to the end, not to the end of the wedge for, but to the high of the wedge, it had moved around 734 points. So we are trying to go short on a very strong up move. And right here what we’re trying to do is actually go short from the top of the wedge to the bottom of the wedge, and the harmonic pattern that we just found makes this setup even more strong.

Harmonic Patterns at Key Levels4

And where are we going to go short? Well, we are going to go short right here. I’m going to zoom in again at the completion of this candle, which makes for a nice rejection of this zone of resistance at the completion of the bearish harmonic cycle. We are going to put our stops just above the harmonic cycle and we are going to put our targets right here. And the targets are calculated by grabbing a Fibonacci tool from the bottom of the last leg to the high of the last leg, and they’re calculating a 61.8 retracement. And the reason we are going to put our targets there is because we don’t know if price is going to go even lower. And as you can see right here, price bounced perfectly from this 61.8.

And this makes for a nice trade because we made 142 points on the E-mini Dow and we risked only 32, making it almost a one to five risk-to-reward ratio. And this is how you’re going to be incorporating harmonic patterns on your setups, and sometimes you are going to have a rough time finding harmonic patterns and not every time you’re going to find them, but when you do, your setup is going to be even stronger.

Comments are closed.