COPYRIGHT HARMONICTRADER.COM, L.L.C. 2004

Harmonic Trading of the Financial Markets: Volume One

(Excerpt 1)

By Scott M. Carney

Library of Congress 
Cataloging-in-Publication Data

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.

Copyright HarmonicTrader.com, L.L.C. 2004


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The Evolution of The Harmonic Trader

  First, I want to thank the thousands of people who have bought my first book, The Harmonic Trader. It has been a rewarding experience for me to share this information. The response has been overwhelmingly positive and I never could have imagined that it would have been so well received. I hope you find the material in this book as enriching and educational. 
  My first book, The Harmonic Trader (HarmonicTrader.com, L.L.C. Nevada; 1999), was a compilation of ideas based on several general technical approaches that incorporated new applications of existing analytical tools. The Harmonic Trader and the Harmonic Trading techniques evolved from a collection of individual strategies into an entire methodology to analyze price action in the financial markets over the course of several years. These techniques define a unique system of rules for every step of the trading process. From the identification of a potential trading opportunity to exiting a trade, these techniques guide every decision from start to finish.
  The Harmonic Trading approach offers pertinent technical information regarding the state of potential future price. Specifically, The Harmonic Trader outlined strategies that identified areas of potential support and resistance in ways that no other technical method had previously measured. The eventual evolution of years of experience culminated into the categorization of an entire system of pattern recognition of specific price structures based upon prescribed alignments of Fibonacci ratios. 
  The writing of The Harmonic Trader was a gradual evolution of many years of work that essentially arose from a great deal of trial and error. The book came together smoothly however, as most of the initial work focused on precisely defining each of the basic patterns. Although the actual writing was no small task, the real work was organizing the file cabinets of charts, notes, trade journals and the like, into an effective and comprehensive “how-to” manual. In fact, most of the unprecedented ideas outlined in the book were the result of lessons learned from actual trades. I refined the strategies to devise a system of the most effective techniques to identify Harmonic patterns. In doing so, several new strategies were presented that identified and defined new price patterns unlike ever before. 
  The system utilized new technical measures that proved consistently reliable and effective in determining potential future price action. In the development stages of this approach, I never stopped to question why such Fibonacci phenomenon was occurring. Rather, I continually strived to find the methods that were reliable and perfect the rules to define these situations. As the best relationships were identified, I classified distinct areas of specific price behavior that commonly developed in these specific situations. Essentially, I went with the techniques that worked! After compiling hundreds of charts and notes, I started to write The Harmonic Trader. 
  Initially, I compiled a list of Fibonacci strategies that repeated and the technical events that were consistently occurring within the framework of price patterns. Focusing on the peculiarity of exact combinations of Fibonacci pattern alignments, much of my initial work attempted to define the best situations among multitudes of possibilities. I realized early in my research into the best harmonic patterns that each set-up was not the same. Although many potential pattern structures appeared to be similar, I realized that the alignment of points was a critical factor in differentiating potential trading opportunities and in providing vital information regarding the potential state of future price action. 
After this discovery regarding price structures, I succeeded in defining the best alignments of Fibonacci measurements that validated each pattern. In the process, there were several unique concepts outlined in The Harmonic Trader that shed new light on the measurement of price movements with respect to Fibonacci analysis.
  It is important to emphasize that Harmonic Trading is different from all other Fibonacci-related market approaches. Harmonic Trading techniques define potential trading opportunities with extensive precision and detail. Every price movement must be analyzed for possible information regarding the state of future price action. In addition, this approach utilizes unique rules and measurement techniques to generate valid trading signals.
  It is important to note that others long before me have utilized Fibonacci ratios with price patterns. Robert Prechter and A.J. Frost in their book, Elliott Wave Principle, advanced the original writings of R.N. Elliott and clearly outlined Fibonacci applications with respect to their measurements of price movements. In fact, Elliott Wave analysis was probably the first comprehensive application of Fibonacci measurements to price pattern movements in the financial markets. Although Charles Dow utilized standard retracements (1/3, 2/3) in his tenets of Dow Theory long before Elliott, the aspect of relating Fibonacci measurements differentiates these methods and possesses greater technical implications beyond simple estimation. Regardless of the differences, various predecessors have applied similar tools and measurement techniques in previous literary efforts.
I would like to take a moment to discuss the material presented in The Harmonic Trader. The following list represents a few of the unprecedented ideas that were outlined in The Harmonic Trader that must be distinguished.

  • Potential Reversal Zone (PRZ). Although many have discussed the use of simple Fibonacci measurements, The Harmonic Trader was the first comprehensive work that specifically outlined the concept of three or more Fibonacci calculations of a specific price structure converging at a defined price level as a potential zone for a change in trend. Essentially, the Potential Reversal Zone (PRZ) calculates resistance and support targets based upon the Harmonic Trading measurement techniques. In the years since this concept was introduced, it has been referred to groupings, clusters, Target Reversal Zone, etc. Whatever the term, the concept was initially presented in The Harmonic Trader.

 

  •  Distinguishing ALL points within the pattern. The Harmonic Trader specified and differentiated every aspect of 5-point reversal structures by examining each Fibonacci point within the pattern, proving that not all patterns are the same. One of the most notable developments from this differentiation was the creation of the ideal Gartley pattern – a set-up that required a 0.618 B point and a 0.786 D point retracement as the only valid alignment for the structure. After The Harmonic Trader was released, this alignment has become the industry standard for the structure. 

 

  •  The Mid-Point (B) as the defining element of 5-point price structures. Another unique concept outlined in The Harmonic Trader was the significance of the mid-point (B) in 5-point price structures as the critical determining element for all harmonic patterns. For example, the B point distinguishes Bat patterns from Gartley structures. 

 

  • Alignment of Fibonacci numbers defines the pattern structure. After differentiating each of the patterns, The Harmonic Trader and Harmonic Trading techniques emphasized the importance of the alignment of Fibonacci ratios to differentiate each price structure. This discovery proves that similar structures are not the same. Furthermore, each alignment requires specific strategies that are common to each structure. 

 

  • Alternate AB=CD pattern. Among many of the unique technical measurements discussed in The Harmonic Trader, the alternate AB=CD pattern was a vital advancement of the basic AB=CD theory and it is a critical element within the Potential Reversal Zone of many harmonic structures.

      I discuss each of these concepts extensively and offer many new strategies in this book. It is important to note that these ideas build upon existing technical approaches that are thoroughly cited and recognized throughout the discussion of this material. From this foundation, the Harmonic Trading techniques discussed in this book incorporate the best synergies of several Fibonacci-related strategies to define specific situations for potential trading opportunities.

COPYRIGHT HARMONICTRADER.COM, L.L.C. 2004