I happened to browse in a book store and came across a book called: Harmonic Trading – Profiting from the Natural Order of the Financial Markets. Initially I thought it was some kind of Elliot Wave materials. It’s not really about that. Let me define harmonic trading, directly from the book itself:
“Harmonic Trading is a methodology that utilizes the recognition of specific structures that possess distinct and consecutive Fibonacci ratio alignments that quantify and validate harmonic patterns. These patterns calculate the Fibonacci aspects of these price structures to identify highly probable reversal points in the financial markets.
This methodology assumes that harmonic patterns or cycles, like many patterns and cycles in life, continually repeat. The key is to identify these patterns and to enter or to exit a position based upon a high degree of probability that the same historic price action will occur.”
There are people who think that financial markets are a random entity, i.e. price is random, there is no way you can predict based on historical data. However based on history, within this randomness, there is a degree of repetition. In other words, there is order within the chaos.
Just to give one of the more basic and well-known example. Based on the diagram above, if the price fell from A to B and then rebounded to form a 0.618 (61.8%) retracement at C. There is a high probability that price will fall after completion of this “pattern” at C. So, if you are thinking of shorting, you might like to short-sell at C. There must a clear sign of resistance or reversal at C, or else this bearish reversal pattern will not be valid.
I did some checks on quite a number of random counters and I realized many times, they indeed do follow some kind of “harmonic patterns” based on such Fibonacci ratios. I don’t know whether it’s a self-fulfilling prophecy or what. But even utilizing relatively unknown Fibonnaci numbers such as 0.786 or 1.27, proved to be quite accurate, at least for me.
Maybe I shall try to predict a reversal. Please note that I am not analysing on hindsight. This is a “live” example at point of writing. I am not sure whether this particular counter will indeed reverse. I am looking at Archer Dianels (ADM):
Both charts are the same. I am just utilizing the Fibonacci ratios at different point in time. The 2 charts above showed they retraced exactly at 0.382 and 0.618 respectively (using different highs and lows).
Candlestick also shows that it is forming a evening star pattern, which is a reversal pattern as well. Both harmonic patterns and candlesticks seems to indicate that Archer Daniels will fall.
We can verify whether this counter will fall in the next couple of days. 🙂