Going ‘Da Vinci Code’ With Our Research

At Frontier we rarely use conventional methods of forecasting and modeling such as Technical Analysis. However, during a recent ‘Frontier learning trip’ to Singapore Thanuri and I had a chance to attend a workshop on Harmonic Trading held by the Singapore based Harmonic Forex.

Here are some key insights gained on using Harmonic patterns for currency trading from the workshop and through our own subsequent research into the subject.

Harmonic trading, a branch of technical analysis, utilizes price patterns and Fibonacci ratios to determine trend reversals in financial markets. The assumption made here is that trading patterns/cycles repeat themselves and therefore this can be used to predict future price movements. The key steps are to first identify price patterns with the use of Fibonacci ratios, and then determine entry and exit points in a trade with the assumption that the same historic price pattern will follow (Please refer Harmonic Trader). However, it should be kept in mind that these patterns do not replicate with 100% accuracy.

An important branch of study under Harmonic Trading is the use of Fibonacci ratios (a very popular theme in culture, hence the Da Vinci Code reference) . These ratios are derived by the following Fibonacci sequence discovered by Leonardo de Fibonacci de Pisa.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233…

This is a simple sequence where each successive number is the sum of the previous two (0+1=1, 1+1=2, 2+3=5…). However, the primary ratio derived from this sequence, better known as the Golden Ratio, is deemed to be a universal ratio applied in many forms of study, such as aesthetics, architecture, painting, music etc.  As the sequence advances, it brings about a constant relationship between the numbers. For example, if a former number is divided by the latter the answer is approximately 0.618. And if the latter is divided by the former, the answer is 1.618. Harmonic Trading utilizes many number of ratios either directly or indirectly derived from these primary Fibonacci ratios.

Following are some of the ratios used in Harmonic trading:

Primary Ratios: 0.618 & 1.618

Primary Derived Ratios:

0.786 = square root of the 0.618

0.886 = fourth root of the 0.618

1.13 = inverse of the 0.886 (1/0.886)

1.27 = inverse of the 0.786 (1/0.786)


Other Ratios: 

0.382, 0.50, 1.41, 2.0, 2.24, 2.618, 3.14, 3.618

Source: Harmonic Trader

These ratios are also used in determining support and resistance levels of price movements under technical analysis.

In Harmonic Trading these ratios are used to identify Harmonic Patterns which help determine trend reversals in price movements. There are number of price patterns which conform to certain Fibonacci ratios which signal bullish or bearish trend reversals in the market. (E.g Gartley, Bat, Crab etc.) With the help of a Fibonacci retracement tool, which usually comes with any trading platform, one can identify such patterns in price movements and determine their market entry/exit points.

For further reference on this subject:

http://www.harmonictrader.com/

http://harmonicforex.com/

While we don’t plan to use technical analysis anytime soon at Frontier, as we usually look at market fundamentals, we  believe it is very important to expose ourselves to ideas and techniques very different to our own. Perhaps over time we will look to see if technical and ideas like this might be useful to add on to what we already do.

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