What is Harmonic Trading?
Harmonic Trading is a methodology that utilizes the recognition of specific price structures that possess distinct and consecutive Fibonacci-derived ratio alignments to quantify and validate harmonic patterns.
These patterns calculate the ratio aspects of each price structure to identify the natural reaction / reversal points in the financial markets. Harmonic Trading respects the natural phenomenon of cyclical movements of growth and decline within the markets.
Many have argued that the financial markets are a random entity. According to the Random Walk Theory, popularized in the book, The Random Character of Stock Market Prices, price action is “serially independent,” claiming that price history is not a reliable indicator nor of predictive value of future action.
Principle of Harmonicity
Despite the randomness of the markets, J.M. Hurst argued in favor of the relative importance of price history in his Principle of Harmonicity, which states: “The periods of neighboring waves in price action tend to be related by a small whole number.” Harmonic Trading adapts this Principle to measure “neighboring waves” through the use of Fibonacci-derived ratios instead of a “small whole number.”
Ready to learn more? Check out this article on harmonic patterns.