Advanced Forex Trading Strategies: Harmonic Trading
In the next section of this advanced trading tutorial we look at harmonic trading, which is even more obscure in terms of generalized popularity in the market. Harmonic trading uses various Fibonacci retracements in combination with one another in order to determine where the reversal point is likely to unfold.
One of the benefits of harmonic trading is the fact that it enables traders to structure positions with very tight stop losses. On the negative side, this means the market does not need to move far to stop out your trade. But on the positive side, it means that you will be able to limit your losing trades so that they will have a very small impact on your overall trading account. Most expert traders agree that this benefit far outweighs the potential negative of getting stopped out in the losing trades.
Harmonic Pattern Structures
In contrast to the main Elliott Wave structure, harmonic patterns have several different structures. In the chart graphics below, we outline some of the most commonly used harmonic patterns:
Chart Source: FiboGroup
These images show various reforms of the BULLISH harmonic pattern. In order to visualize the BEARISH reforms of these patterns we would need to simply turn these patterns upside down. All of the calculations and Fibonacci retracements involved would be exactly the same.
Each of these patterns unfolds using a series of four points: A-B-C-D. The D-point represents the reversal zone and this is where you buying or selling entries would be taking place when using these patterns. The above graphic shows four of the most common structures: the Gartley, the Crab, the Butterfly, and the Bat. Each structure uses different Fibonacci calculations but the methods for trading these patterns is essentially the same.
Traders are waiting for the leg structure to unfold before placing a trade based on the assumption a reversal is imminent. Reversal patterns are usually excellent for risk and reward ratios but it is important to understand that you will be fighting against the dominant momentum in the market in order to get the better pricing for your trade.
As with anything, there is a give and take to these types of trades. But expert traders have spent decades perfecting both of these trading strategies and the strong performance record tied to each method is evidence of their overall efficacy. It is generally a good idea to start trading these patterns using a demo account until you feel you have perfected the process.