Wednesday, December 19, 2012

How to Use Fibonacci Retracement in Harmonic Trading

How to Use Fibonacci Retracements in Harmonic Trading


Fibonacci Retracements Video Highlights

Fibonacci retracements can be used in conjunction with harmonic pattern identification in order to predict in advance the most likely price reversal zone for a stock.

Watch the video, and hopefully it will help you in your trading.

Tuesday, December 18, 2012

How to Use Fibonacci Retracements in Harmonic Trading


How to Use Fibonacci Retracements in Harmonic Trading

Fibonacci Retracement of the Pre-ABC Move

When analyzing an ABC pattern for harmonic trading purposes, fibonacci retracements are a key component of the analysis.
The first step is to use the fibonacci retracement tool to identify the retracement levels of points A and C. They should be near to one of the key fibonacci ratios: 38.2%, 50%, 61.8%, 70.7%, 78.6%, or 88.6%.

Fibonacci Retracement of 0-X Move

Bearish Gartley Pattern
Bearish Gartley Pattern

External Fibonacci Retracement of Wave B

The second step is to use the retracement tool to draw an external retracement (which is greater than 100%) of wave B. Use the common fibonacci ratios of 113%, 127.2%, 141.4%, and 161.8%.

External Retracement of Wave B

External Retracement of Wave B
External Retracement of Wave B

Fibonacci Projection of Wave A from Point B

The third step is to examine the size of wave C relative to wave A. To do this, some charting packages have a projection tool, or a retracement tool can be used on wave A, and then moved to begin at point B.
Use the projections of 78.6%, 88.6%, 100%, 113%, and 127.2% as possible projections of wave A to predict the likely end of wave C.

Using a Fibonacci Projection of Wave A

Fibonacci Projection of Wave A from Point B
Fibonacci Projection of Wave A from Point B

Looking for an Area of Confluence

Now that you have made these 3 fibonacci studies on the chart, you can look for areas of overlap. The best harmonic trading patterns will have 3 lines in very close proximity on the chart, indicating a fibonacci harmonic pattern in every facet.
In this example of CHK, notice the close proximity of the 78.6% retracement of the 0-X move, the 127.2% external retracement of wave B, and the 100% projection of wave A (in pink) up from point B. That tight confluence zone is the most probable price reversal zone for the stock.

Fibonacci Confluence Zone

An area of fibonacci confluence at point C
An area of fibonacci confluence at point C

Bullish Harmonic Trading Pattern Example


What Is Harmonic Trading?

Harmonic Trading is a form of stock chart analysis based on the idea that specific price and time relationships occur repetitively in stock price patterns. Certain relationships often precede large moves in the price of a stock (or market in general). The term "harmonic" suggests that distinct phases of price movement over time are related by some factor to past price movements and future price movements. Therefore, the identification of harmonic patterns offers predictive information on future price movements over time.
Click on the Harmonic Trading Example Chart to Enlarge
In this article I will help you learn to identify ideal harmonic patterns for harmonic trading techniques.Harmonic trading is typically coupled with Fibonacci ratio analysis in order to identify potential price reversal zones.
The bullish version of what i consider to be an ideal harmonic pattern is for a price advance followed by an ABC correction where point A retraces to 61.8% of the preceding price advance (labeled 0-X in the example chart of ANF), point B retraces to 61.8-78.6% of wave A, and wave C ends at a 78.6% retracement of the 0-X move.

In the case of this chart of ANF, the time of the ABC correction takes 1.263 times as long as the preceding advance which is approximately 1.272 which equals 78.6/61.8 which are the A and C retracement points. There will often be a harmonic relationship in the time of the ABC relative to the 0-X move.

Stop losses on trades would be placed just below point 0 for the bullish pattern, and above point 0 for the bearish pattern. The minimum target for the move would be the high at point "X" for the bullish pattern. I prefer to employ a proprietary trailing stop technique in order to capture as much of the move as possible.