# What are Harmonic Patterns

Video Transcript:

Hello, traders. Welcome to the seventh module of the Advanced Technical Analysis course, Harmonic Patterns. In this lesson, we’re going to define what harmonic patterns are and what harmonic trading is. We’re going to see how do we use harmonic cycles to trade with harmonics.

Let’s start. Harmonic trading takes geometry chart patterns to another level. It incorporates Fibonacci retracement and extension levels to define very precise trading points in the market. By using harmonic trading, you will be, in fact, trying to spot advanced chart patterns that will give you excellent risk to reward ratio setups and high probability trades.

These patterns have specific price structures that possess distinct and consecutive Fibonacci derived ratio alignments. As we said before, all these patterns are calculated with Fibonacci ratios. When you are drawing the Fibonacci ratios on your charts, the waves of the patterns have to hit the specified Fibonacci ratios for the pattern to be complete. If it doesn’t hit the specified Fibonacci ratios, you will not be trading a harmonic pattern and you will not be, in fact, trading a high probability set up. You have to be very precise when you are calculating the length waves on these cycles. In this module, we are going to teach you all about that.

Harmonic trading respects the natural cycle of the markets and price movements. A little bit of history. This is a quote by J.M. Hurst, an engineer that used a computer algorithm to find the cycles of the markets. The periods of neighboring waves in price action tend to be related by a small whole number. Hurst proposed that markets are moved under the influence of cycles and that there are, in fact, multiple cycles that act on this. After installing thousands of instruments, he discovered these cycles were not random. Waves aligned with each other, but these waves are related to each other by harmonic ratios. These harmonic ratios are the Fibonacci ratios that he discovered.

What he also discovered was that these specific ratios play over and over on the same cycles. This is why harmonic trading is not that common, but is very specific. Not too many people trade harmonics because they haven’t been available to the mass public for a long time, but once you discover harmonic trading and start profiting from just putting harmonic patterns on your charts, you will realize that this is, in fact, a very nice way to even day trade on the string trade. It depends on the time frame that you are analyzing price action on, but harmonic patterns happen countless times every day in any time frame.

Why do we use these harmonic patterns? We use harmonic patterns to get an edge. To consistently put the odds in your favor. How are we getting an edge by using these patterns? Well, because studies have proven that these cycles repeat themselves over and over and these ratios are hit within the cycle over and over and that these zones of reversal when the cycles complete are high probability areas for our reversal. By first correctly drawing and then trading these patterns, you are getting an edge over the other traders that are just trading support and resistance.

For example, when we use harmonics, we are always trading high probability trades with great risk to reward ratios and simple set ups. The setups are simple but the complicated thing about these patterns is learning how to draw them. Once you get the actual ratios that are in play in the cycles, it will become very easy to you. You just have to practice and then you will see the patterns and it will be very easy for you to trade them. Once they are drawn on your charts, the setups are quite easy because these setups are high probability and low risk reversal trades with logical places to put your stops and targets.

Harmonic patterns occur countless times every single day in any market and in any time frame. So if you’re trading forex, you will find harmonic patterns, and if you’re trading stocks, you will also be able to trade with them, etc. The important thing to do is to choose to trade the best and cleanest ones. Given that we are going to be finding these patterns all day long, you will have to choose the clearest one. With the combination of the right Fibonacci ratios and highly conflicted areas, you will be trading with at least a 70% probability of success using this advanced chart pattern. This is incredible because by knowing the right patterns to trade off and learning how to draw your Fibonacci ratios, you will be trading with at 70% rate of success.

Now here’s an example of one of my charts. There’s a lot of things going on with this chart, but the thing I want you to notice is this butterfly-like pattern. This is what a harmonic pattern is. As you can see we start with this high and we go to this low. We have a Fibonacci ratio hit at this low. We have a retracement and we have a Fibonacci ratio hit at this retracement. We have the other wave to the downside that hits another Fibonacci ratio. As you can see, the pattern is not yet complete but when it hits the Fibonacci extension 161-8 or the retracement 113, this is your actual sell zone and you can short this currency pair.

If I remember correctly, this is the US dollar/Japanese yen and the price hasn’t hit this zone just yet, but when it hits this zone, I will be prepared to sell on an excellent risk to reward ratio because my stocks will be just above this Fibonacci ratio. My first targets will be at this high and my seconds targets will be at these lows right here. You can clearly see the waves here. Wave 1, 2, 3, 4 and then the reversal zone. This is what you are going to be trying to find on your charts when you are trading with harmonics.

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