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Harmonic Trading vol-3

Scott M Carney

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Copyrighted Material  VOLUME y  Harmonic T R AD I N G Reaction vs. Reversal  Harmonic Trading Volume Three: Reaction vs. Reversal  By Scott M. Carney Copyright 2016 Harmonic Trader Press Printed in the United States of America  Digitized by the Internet Archive in 2018  https://archive.org/details/harmonictradingr03scot  COPYRIGHT HARMONICTRADER, L.L.C. 2016  Harmonic Trading Volume 3: Reaction vs. Reversal 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. This material is protected under all copyright laws. This material may not be reprinted or reused in any manner without written consent of Scott M. Carney. All rights reserved!  Harmonic Trader Press 2016 Printed in the United States of America  Table of Contents Dedication Acknowledgments Foreword Introduction Chapter 1: Core Principles of Harmonic Trading .p.33 Chapter 2: Standardized Harmonic Pattern Identification.p.49 Chapter 3: Advanced Harmonic Trading Execution Strategies .p.127 Chapter 4: Harmonic Trading Reversal Types .p.159 Chapter 5: Advanced Indicator Analysis in Harmonic Trading.p.187 Chapter 6: Harmonic Strength Index (HSI) .p.235 Chapter 7: Advanced Harmonic Trading Management Strategies ...p.255 Chapter 8: Harmonic Trading Timeframes Conclusion Bibliography  ...p.289  Dedication  For Priscila, If Not for You, This Would Not Be. Love, Scott  Acknowledgments Throughout my journey of work, I have encountered many outstanding Harmonic Traders - fantastic individuals whom are dedicated to the financial m; arkets and understanding how they tick. I have immense respect for those whom have dedicated themselves to the study of harmonic phenomenon in the financial markets. I encourage future generations to pick up the mantle of harmonic patterns and move forward with this advanced material to continue to unlock even deeper relationships. The most important acknowledgement to all Harmonic Traders is my appreciation to the standard of character that most uphold. Harmonic Traders possess motivated and pragmatic perspectives regarding the financial markets. They seem willing to share ideas in good faith, promote a larger positive engagement and do the work required to be successful. This represents the essence of the work that I have presented and the core values of Harmonic Trading I would like to thank all of the people that I have thanked in prior material again. Many of these individuals - family and friends - continue to be tremendous influences on my life and have helped directly and indirectly supported the development of Harmonic Trading material since its inception. I would like to thank all of the fantastic friends and family that I have in Brazil. My experiences and connection to this amazing culture and these incredible people has made a profound difference my life. Obrigado! I must recognize Keegan McClellan for his overwhelming contribution and collaboration throughout the past few years. I am indebted to you for helping me automate these long-standing ideas and advance these complex environments into quantifiable strategies. Thank you! I want to recognize Stephanie Kramer for being one of the essential individuals who "kept the lights on" and has been integral to the cause of realizing a larger effort over the past several years. Thank you cuz'! Raul Valin and Nadia Franca - If there was ever a way that I could permanently say thank you, this is it. Thank you for all! Robert Troy Hulmes - You lead by an example that has taught me much. Rooftop! Michael Hausmann - It's always happening. Never forget! Alan Kuenhold - It started because you opened your door. Much appreciated! Mark Douglas, in memory. Your honest insights helped me bypass many avoidable mistakes.  .  -  Foreword  Next trade. Win, lose or draw - it is always about the NEXT TRADE! This perspective keeps us open to new opportunities and helps to maintain a balanced mindset with respect to current positions. As traders seeking to define market conditions from a natural framework of price movements, we must always be open the flow of opportunity available to us. There is unlimited opportunity in the financial markets but it requires a comprehensive measurement approach to effectively define clear possibilities. This has been my underlying purpose throughout my work with Harmonic Trading. It has been quite a bit of time since I have written a book. I never intended to produce books and other resource material to this degree. But, my discoveries in Harmonic Trading have continued to evolve. Over the past 20 years, I have expanded upon the initial concepts that define unique technical situations. As more natural cyclical relationships have been distilled, the basic tenets of pattern recognition have solidified the foundation of measurements that comprises this methodology while integrating advanced strategies to refine those characteristics that consistently provide reliable signals and technical information. Initially, trading was a personal endeavor that I experienced alone and was a passion that few in my life shared. From time to time, I would meet individuals who had experience trading markets or were employed in the industry to some degree. This was a time before the Internet and all of the devices that now seamlessly connect us. For someone whom most would not consider old, I find myself continually repeating things that my grandparents said to me growing up about how the world has changed. But, the world has changed, and it continues to evolve on a larger digital paradigm. When I initially released The Harmonic Trader, the Internet was exploding but only as fast as your dial-up connection would permit. In the early 2000's, I released both Harmonic Trading Volume 1 and a few years later, Harmonic Trading Volume 2 that established the principles of Harmonic Trading. In my opinion, the amount of technological progress in the financial industry since the release of Volume 2 - which was nearly a decade ago - has surpassed the total of the preceding 25 years combined. It is important to emphasize this phenomenon, as it is changing not only the way information is disseminated in the markets but it has transformed how money is even transacted. The barriers are gone. Anyone on the entire planet within reach of an Internet connection can participate in the financial markets and attempt to be a successful trader.  Harmonic Trading Volume 3: Reaction vs. Reversal 1  New Ideas and Applications of Harmonic Trading Over the past two decades, I have experimented with combinations of measurements to define unique situations that offer a great deal of reliable information regarding the future probable price action of any market. Initially, these ideas were founded in pattern rules which now have been readily accepted by traders as an effective analytical framework. Once people are introduced to harmonic patterns and apply the measurement strategies, they quickly realize the predictive value of these techniques. Remarkably, the patterns and confirmation strategies enable an understanding of natural limits of price action within any market. Although the trend is always your friend, opportunities are omnipresent depending upon the timeframe considered. The key understanding to getting the most out of harmonic patterns is derived from their categorization and the expected outcomes to differentiate nominal reactions versus larger reversals. One of the greatest advantages measuring harmonic market movements is the derived understanding and set of expectations that provide a framework to explain price action. As we know, the market can only move so far within a period of time. Therefore, a basic awareness of the market's trading history is a critical foundation for any methodology that is looking to buy and sell for profit with some degree of reasonable understanding of what is possible. Within the Harmonic Trading approach, the measured strategies define unique and precise market conditions that validate opportunities unlike any other approach. When combined with traditional Technical Analysis, the entire structure of market movements can be identified, classified and quantified accurately to define price levels that effectively price the opportunity. The remarkable accuracy of harmonic patterns is well-known. Although I do feel that some statistical claims have been manipulated by other online outfits for marketing gain, I believe that the high degree of accuracy associated with harmonic patterns is valid due to the sheer impact it has had on numerous traders' lives. One of the reasons why these methodologies have grown so immensely over the years is because they DO provide an accurate and effective framework to outline potential opportunities. However, price pattern recognition requires an enhanced set of conditions to truly capitalize on this phenomenon consistently. Many have stated that harmonic patterns are 80 to 90% accurate. But what does this mean? Does this mean that 90% of all harmonic patterns will make you rich? No 90% of all harmonic patterns will not make you rich! 90% of all harmonic patterns will give you a framework to analyze specific price zones that represent the completion of a specific set of trading history that comprises a prescribed structural alignment to denote a change in future direction. With all that being said, the only question to consider is how far does the price action move in the desired direction before testing the prescribed stop loss limit. This is an important consideration for any overall measure of accuracy. There must be a measured parameter that explains how much of a price move could be expected following the completion of harmonic pattern. Upon further  Harmonic Trading Volume 3: Reaction vs. Reversal 2  inspection, it is easy to see that a standardized assessment of multiple markets, timeframes and pattern structures must be analyzed more specifically to offer consistently accurate results. As the creator of the harmonic patterns, it is difficult to quietly watch others misrepresent the true value of these measurements. Yes, the patterns can be extremely accurate but there must be a realistic and reasonable rationale to attempt to trade these opportunities successfully. The notion that a trader can click a button and employ a methodology that works 90% of the time is extremely suspect. Confirmation variables are required to separate minor reactions from substantial trading opportunities but the "home-run" outcome for every situation - unfortunately being circulated by less informed actors in the industry - is simply not the norm.  So, What is the Harmonic Norm? As a proponent of understanding market strategies that define precise expectations, I am always looking for phenomenon in price action that can consistently guide my decisions. My understanding of harmonic patterns and the realistic expectations that I possess regarding possible outcomes facilitate my decisions and dictate how I handle each situation. From the very beginning, I have stressed the importance of a realistic perspective and the need to use the pattern structures as a starting point. I am a firm believer that multiple confirmation of market analysis frequently yields accurate and reliable signals. Therefore, I understand that not all patterns are opportunities and the possible candidates that I consider must possess multiple elements to be a valid consideration. This perspective is derived from the basic assumption that harmonic patterns offer a reaction on the initial test of a distinct pattern and usually experience a secondary test before exhibiting a larger price move. I will discuss this in detail later in this material however this is an example of just one expectation, and a standardized model of how harmonic patterns exhibit definable and repeatable behavior. There are other expectations involved with execution and trade management, as well as advanced identification. All situations can be categorized and classified according to their proportional structure. In my opinion, these are types of trading cycles that I consider to be a type of "micro-price mechanisms within the overall functioning process of the market. We all know that the market ebbs and flows, moves up and down, and money flows in and out. This is the market in action. This is the market's primary function - to exist! It does not matter if the market trend is up or down. The basic function of the market is to exist and prices must fluctuate to create such an environment. Therefore, the fundamental function of markets is driven by cyclical trading phenomenon that frequently exhibit harmonic pattern properties. When we identify these situations, there are specific expectations that are associated with the completion of the structure. This demands that we accurately measure and understand which ratios are significant, especially within structures that may appear the same.  Harmonic Trading Volume 3: Reaction vs. Reversal 3  My main interest in this book is to establish a standardized measurement basis that crystallizes the material initially presented in the first three books. These rules have become the industry standard for harmonic patterns, although others have attempted to present alternative interpretations that only distort the effectiveness of the natural structural measures. I do not nor will I remark on these Harmonic Traitors other than to say "Google it" but I have found that sooner or later most eventually learn the proper way to measure the structures. Personally, I have rededicated myself to the work to create a standardized startto-finish framework and provide the thorough explanation for traders to learn this measured approach correctly. In particular, my focus with the material in this book has been to clarify the proper expectations while explaining why harmonic patterns work. The strategies presented throughout this material seek to foster this basic understanding and share the insights to those situations where the patterns have maximum significance. Most traders learn that harmonic patterns possess the ratios that are exhibited in nature and therefore, identify natural cyclical turning points. It is an ideal model but quite accurate. It provides a price range with "natural limits" to assess execution opportunities and profit objectives while reducing risk. These measurements serve as the foundation for a potential opportunity to differentiate when price action will slightly react from the targeted level as opposed to providing a significant reversal shortly after completing the measured area. The key is to know what factors are critical at the completion of distinct patterns to guide decisions and provide the proper expectations of what will happen to optimize the opportunity.  Once You Know What to Look for... As I have said from the very beginning - even in The Harmonic Trader back in 1998 - harmonic patterns are a starting point but an effective means to analyze price movements that exhibit these properties. Of course, harmonic patterns are not going to appear in every market all the time but these structures inevitability materialize time and time again to mark important changes in the future price action. However, I must stress that the proper measurements are required to realize such success. It seems that other interpretations that been promoted as improvements are mere distortions from immutable basic harmonic ratios that categorize price action as such. The key take away from the whole pattern debate is to always apply those measures that are directly related to the elements of harmonic opportunities. Simply stated, the harmonic measurements serve as primary framework that cannot be skewed without distorting results and destabilizing the essence of analyzing the markets from this perspective. When I released the initial pattern rules in my first book, The Harmonic Trader, the entire subject of Technical Analysis lacked respect. However, two vicious bear markets and the advent of trading technology have changed the market's focus to chart and quant-style computational analysis. These factors have altered "The Street's" focus from reputation-based to more of a meritocracy where market perspectives are  Harmonic Trading Volume 3: Reaction vs. Reversal 4  assessed upon quality and not zip code of origin. I believe that the strategies have proven themselves through challenging environments and continue to gain credibility in the trading world. Incredibly, nearly 20 years has already passed and the once obscure harmonic pattern discoveries are now common knowledge within the trading community. Most of the pattern discoveries arose from a great deal of research that identified overwhelmingly clear technical situations that possessed defined structural signals. For example, the importance in differentiating Bat patterns from Gartley structures was an enormous breakthrough. However, it now seems to be a simple fact. In essence, the pattern definitions made it easier for people to find trading opportunities once they knew exactly what to look for. Through it all, the strategies have been tested to provide statistically reliable expectations. As the industry continues to migrate most of its operations online, market participants will find themselves looking for advantages by analyzing price action and chart history. As the community has embraced Harmonic Trading, the online discussion and interpretations have expanded the total engagement to the point where my initial work is now a separate entity from me. In my opinion, I encourage interpretations and advancements that seek to improve the overall understanding of what I have put forth over the past two decades. I can only stress that the primary pattern measurements that are founded in the essence of what is harmonic remain as the standard for future application. Otherwise, traders will find themselves attempting to identify random movements as repeatable behavior that simply is not a true phenomenon.  Realistically Harmonic Many traders often search for one tool or method that can tell them when to buy and sell. It seems that these individuals are overwhelmed by the market in general and are looking for a lottery ticket more than a logical approach to understanding price action. Like anyone who has spent countless hours in front of the screen looking at endless of charts, it becomes apparent that certain market conditions possess clearer signals than others. I think one of the biggest misnomers of the market is that to be successful one must understand everything that is occurring all at the same time. Certainly, the news outlets attempt to tie all of the various market moves together to package one big story. Real traders understand that not all markets can be traded all of the time. In fact, successful traders are typically spending as much of their time preparing for the trade than actual trading itself. If you're not spending as much time preparing for trade than trading, you're probably going to make mistakes. This type of discipline can be difficult for most as they are unable to be patient and wait for opportunities to develop. A degree of selectivity is mandatory to focus on only those opportunities that present overwhelming conditions for a successful trade. All of these considerations are critical throughout the trading process and assessments must be made to minimize risk and maximize profit. Most important, I believe that a realistic perspective of what is possible is an essential trait to stay grounded and navigate a  Harmonic Trading Volume 3: Reaction vs. Reversal 5  professional course in your trading endeavors. In my opinion, most people who are dedicated to measuring the market do realize that it takes more than one strategy or simple tool to develop the skills necessary to succeed. Remarkably, there are broad elements within the industry that still operate on this type of unrealistic hype. I do believe that the larger public is becoming more aware of these unsavory elements, especially as more traders are dedicated to learning the proven strategies to succeed in the financial markets. I have spoken about this general disdain for the bad actors in the industry in each of my books. I have been forced to address a variety of issues, especially due to the unusual degree of disregard for fiduciary responsibility up and down Wall Street. Ultimately, I want the work to speak for itself and always remain the focus of what is important. Although sometimes these distractions must be dealt with, the fiduciary responsibility that I maintain to consistently put forth the best work that I can create is a driving principle of Harmonic Trading.  The History of Harmonic Trading In my own life, I have experienced a variety of positive and negative relationships that have had a profound impact on my personal trading journey as well as my perspective of the industry that I love. I feel that I have created a special foundation where individuals can actually learn predictive strategies that help them understand future probable price direction. However, it is important to share the personal journey that has shaped me to advance my work with harmonic patterns and expand the knowledge base of Technical Analysis in general. It is an interesting story and I believe it is an essential element to finally explain how the strategies were developed, where I initially released my work and provide the proper citation of those who came before me - the predecessors to what is now known as Harmonic Trading. It is important for me personally to recognize these predecessors from the inception of my initial discoveries to clearly delineate the Harmonic Trading advancements that have been put forth over the past two decades. So, let's start at the beginning. The history of Harmonic Trading has its roots in my initial market endeavors nearly 30 years ago. It started with me at a time where I was transitioning from primarily fundamental analysis to Technical Analysis. My observations about financial fluctuations in fundamental values of companies led me to focus on price action. In doing so, I was able to begin my formal study of all books related to Technical Analysis of price action. I started with the older books from the 1930s and 1950s since I felt that these were they forefathers of modern Technical Analysis. I also read numerous pop culture market books during this time. Probably the most infamous of these was Peter Lynch's One up on Wall Street This was one of the first books that clearly defined the ability to look at the market from an individual perspective and begin to look for relationships that were outside of fundamental numbers. Peter was always looking for that good story where he could make his "multi¬ bagger" on trades - that means making many times his money. However, his book ignited an excitement where I started to pay close attention to what was happening in  Harmonic Trading Volume 3: Reaction vs. Reversal 6  the economy and the financial markets. I became an avid reader of any recommended financial book. I found myself increasingly wanting to know more about the indicators and other technical measures that were frequently discussed by traders more so than brokers' recommendations. I always felt that the traders were more in tune with what was happening in the markets than stockbrokers or financial advisors tied to a recommended buy list. Regardless, I understood early on that the answers were not going to be handed to me and there was much to consider when it came to the world of trading. This became ever apparent for me during a college summer internship on the floor of the Philadelphia Stock Exchange. As a CRT operator, I was in the options pits manually adjusting the quote prices displayed at the market maker's terminal as he barked them out. I spent the first few weeks trying to keep up with the regular employees whom had been there for a while. I was intrigued by the overall operation, the excitement and the basic understanding that people were making large sums of money working at a dynamic place of employment. For me, it was clear that those who understood probable future price direction were able to successfully navigate the chaos that was the trading floor of this time. Albeit a physically small exchange, the floor in Philadelphia was as busy as any frenetic day in New York. I learned a lot during this time and a few individuals took the time to teach me some complex option strategies even though I barely knew what a put or a call was. It was all special and certainly different from any other corporate environment that I had previously experienced. I came away from that internship with a passion to further explore what this industry was all about. I rededicated myself to studying books on charting and Technical Analysis. The more I investigated the measurement of the market using technical tools, the more I realized that this was the true means to know when to buy and sell for profit. In those early days, I was considering fundamental information but quickly into this discovery, I also learned that most of it that attempts to describe what is unfolding in the market actually has little value when it comes to determining price. Therefore, I finally made the jump in the early 1990s to full Technical Analysis as my exclusive means of determining trade opportunities in the market. Although this was the right move, there were a few years of study required of all methodologies before I could fully grasp which technical tools worked the best. In this research, I spent tens of thousands of dollars on books and seminars to discover who had the real deal and who was able to clearly define opportunities in the market. I was fortunate to encounter a retired former floor trader as I was finishing my college degree who mentored me on many old-school methods of Technical Analysis. I have mentioned him before but I would like to recognize him again. Although he never wrote a book and he was an extremely private person in nature, Bill Sourbey was my primary mentor in Technical Analysis. He was a former floor trader in the Minneapolis grains pit in the late 1950s. He shared many stories of the old days - and this was back when they were still writing quote changes on a chalkboard! Regardless, he showed me unique charting methods. And, he would create by elaborate charts by hand. He  Harmonic Trading Volume 3: Reaction vs. Reversal 7  stressed the importance of trendlines, channels and various price action phenomenon that he painstakingly measured. His discipline and focus on measuring every data point of individual price action showed me that charts were merely a collection of information that told a story. He believed that specific points and price levels served as critical to finding limits of possibility. These all helped to shape my predictive abilities and understand that price action moves within definable constraints that can be measured must be measured! In fact, I did not truly understand the nature of what he taught me until I had a few years of experience studying his charts. I met him at the University of Arizona where he was a volunteer. Bill and I formed a friendship and we shared an interest of Technical Analysis. Bill was an oldschool market guy he kept meticulous notes, developed his own indicators and was able to predict market moves with phenomenal accuracy. His methods were quite simple trendlines, price action analysis and clear break out and breakdown triggers. The other side of Bill was that he developed indicators such as Viscosity. This is a very interesting concept that tries to measure the thickness or thinness of support or resistance within the market. Bill has since passed in my life and he never imparted to me the entire formula of how to determine this. I do have numerous charts and I have been analyzing for years trying to figure out exactly what he was talking about. He was somewhat vague in his descriptions of his analysis but he was an influencing factor and encouraged me to continue my technical studies which I did in earnest. My first introduction to various pattern formations was simple wedge and triangle formulations that denoted breakouts or breakdowns in trends. Trend analysis proved quite accurate and quite effective as a starting point for my studies, as well. The simple fact that I could analyze a price action by drawing a basic trendline along the general direction was a breakthrough unto itself for me as simple as it may seem. It opened up the perspective that actually monitoring price action is the most effective means of gauging what potentially could occur. From this, I then began to focus on the phenomenon that markets frequently trade within ranges and cycles. In my discussions with my friend Bill Sourbey, he constantly reminded me of the importance of certain trendline violations as important structural signals. In fact, he frequently cited Richard Wyckoffs books from the early 1900s and another author named Ted Warren's relatively unknown book How to Make Money in the Stock Market, which provided indepth resources that explain why the market is always in a process of moving through stages. Armed with all of this information, I began to really focus in on the things that I knew were consistently yielding the proper information and correct predictive value for my trades. I made a lot of mistakes in those early years and lost quite a bit of money probably more money than I even had to lose but I knew that this was all in the endeavor to eventually make breakthroughs to become a consistently profitable trader. To do so, I needed a framework of strategies so I could understand market action in any environment on any timeframe.  Harmonic Trading Volume 3: Reaction vs. Reversal 8  During this time, I started to encounter other traders in my area, especially as the internet provided a direct means of reaching other traders unlike ever before. In 1995, I was living in Tucson, Arizona and I encountered a group of traders that met once a month. Although initially intended as a local group support group for Tradestation users, the discussion soon focused mostly on trading strategies relevant to the unfolding bull market mania of this era. Founded by Alan Kuenhold who was a broker with UBS Advisors, the initial group of 10-15 people met at the Williams Center regularly to talk about the markets. It was a great discussion group and it is also the first place where I publicly began to divulge many of the strategies that became Harmonic Trading. After a few months, we officially named ourselves The Gartley  Group. The pattern alignments, the trade management strategies such as the 38.2% trailer, the discoveries with Relative Strength and general price action analysis were all new ideas that eventually became the foundation of Harmonic Trading. I am grateful to Alan and that group for giving me the format to present these ideas. Now, I must admit this was during a time where the market was moving straight up so anything that you bought had a good chance of actually working out. Almost every significant retracement pattern led to a significant reversal. This made harmonic patterns look great. And, when I was able to differentiate which patterns were the most significant and where to execute the trades, the level of precision increased as did the number of people attending the Gartley group. After about two years, the Gartley Group tripled in size as we started meeting nearly every week. On average, we would see nearly 30 or 40 people show up. It was kind of funny because I would walk in there, they would hand me the laser pointer and then I would go through any charts that people wanted to look at based on the way that I was differentiating patterns. The whole experience became extremely emotional as other individuals in the group began to talk about certain penny stocks and talk about the future of technology. The NASDAQ Composite I had increased 300% in a few years and was quickly on its way to the initial test at 5000. However, the mania had gripped the masses in soon several people in the group were investing in speculative penny Tech stocks.  E-Digital (EDIG): The Epitome of Dotcom Mania Well, there was one stock that actually worked. It was called eDigital - the symbol was EDIG. There was one guy in the group who said that this was going to be the next Microsoft and had recommended for everyone to buy the stock at about $.50. Shying away from such penny Tech stocks, I was more accustomed to following the leaders of the market and the more heavily traded issues. For me, I felt that this mania was problematic and the fact that the group went from a constructive discussion of technical methods to focusing on penny Tech stocks.  Harmonic Trading Volume 3: Reaction vs. Reversal 9  E-Digital (EDIG): Jumping the Shark It was where the group "Jumped the Shark" and I knew the end was near. Incredibly, it all culminated over the course of six weeks where this penny stock started to move from $.50 to a $1 to $3 to $7 to $11 and higher. Soon, the stock was going parabolic and the person who had initially recommended it said that he had put his whole life savings into it because he predicted that this stock would go to $200. So, according to him even though the stock was up 1000% in a short period of time, he assumed it would continue. Well, nothing goes straight up! Wrecking day was near and I stayed clear. Despite the post-crash squabbles, the entire experience was the perfect case study in Dot Com mania! Weekly ▼  i $■  FMA130.0?  220.0010  0.  FrM200J8 | zz0.01  0.  EMA500.13 zz0.1  SMA500.09 ■ 0.  zz 1.0  SMA200 1.03  0.  Volatility Baids(20,2.0)  zz 10.0  1.00 0.90 i  0.80 0.70  f  0.60 0.50 0.40 5  0.30  o! s«[ S  hi till, T* il__  0  EDIG 28-OCT-16  N  0.20  \) iDfHf D  J F M J.  TTI  A  0.10  t*"% „D.  M J  T  *0TTTTTD0*0T  J A SON D J F M A M J J A SO 0.00 1998 _|..1999.._.-  HjiMnicAMlyitr(TM)vM5 Copyright @ 2001-2008 HarmoiuiTrjder.c«m, LLC. All Rights Reserved  After some time, it was still recommended as a buy. And people bought! Eventually, the stock went to $21 a share. I remember the exact meeting on the day it hit the $21 mark. There were approximately 50 people there that night. I was late arriving and there were so many that I couldn't even get into the room. I watched  Harmonic Trading Volume 3: Reaction vs. Reversal 10  from outside the door. At that point, I knew that the Gartley Group was over. I also knew that this eDigital stock would not end well. People were asking me if I had bought the stock and I said that I didn't touch those types of positions.  E-Digital (EDIG): The Meltdown Despite my concerns, many people continued to buy. The stock peaked out at the $21 level and then quickly lost half its value back to $10 a share. It was only a matter of time before the whole stock would collapse and that's exactly what happened. I won't even go into the other details of the post-crash arguments and squabbles that ensued, including potential legal action from one person to the next but the clear lesson to be learned from a mania like that taught me how to read the public and understand when certain market periods are exhausted. Weekly ▼ O-  [jzz0.0010  EMA131.30 O-  EMA201.36 zz0.01  B EMA501.93  ilh  zz0.1  SMA501.69 1: SMA200 2.53 O-  zz 1.0  Volatility Bands(20,2.0)  in 10.0  22.50 20.00 17.50  12.50 10.00  EDIG28-OCT-16  Hamo idc Analyzer (TM)rti.()j Copyright® 2001-2008 HamoiucTraJer.com, LLC. All Rights Reserved  Harmonic Trading Volume 3: Reaction vs. Reversal 11  EDIG @ 3.14 Bearish Extension Being known as the harmonic guy in the group, the only analysis that I could provide was a simple 3.14 extension that projected immediate resistance at the $10 level. After the stock rallied vigorously through this price, I distinctly remember hearing comments such as the fact that harmonic measurements don't work in situations like this. Nothing have could have been further from the truth because the 3.14 extension typically signals a parabolic state of price behavior. Even in the early days, I understood that an extreme ratio measurement in a stock such as this would result in only one conclusion. The stock peaked above $22 a share only to immediately lose half its value within a few weeks. By the end of the year, the entire bull-run was over, as the stock was back at the $1 level. Weekly ▼  EDIG 28-OCT-16  0OW31?5  [] EMA201.48 I □ E6BS0 8.76  H SM50 0.48 I  SMA200 0.65  Volatility Bands(20,2.0)  Haimoni£.4iudyier(TM)v6.05 Copj-iight © 2001-2008 HarmonicTrader.com, LLC. Ail Eight* Re.eived  Many of these people lost a ton of money. I felt bad. But, I had nothing to do with it and I knew that things had to change. So, the remaining core Gartley Group actually decided to disband and begin to meet "secretly." It was during this time that I started to create the differentiations of all of the retracement and extension patterns. I was even working on new harmonic structures such as the 5-0 pattern and the Shark  Harmonic Trading Volume 3: Reaction vs. Reversal 12  pattern. I also was beginning to investigate which indicators served as the greatest confirmation techniques for the patterns. I go out of my way to cite those real technical forefathers who have laid the foundation for what modern Technical Analysis is today. Most of my inspiration for these ideas has been derived from the "old-school" books. Based from this technical foundation, I have created the system of trade identification execution and management strategies that effectively defines the Harmonic Trading process. These strategies create a framework so that traders understand what to do in every instance of every trade. From this perspective, an entire skill set has been established based on harmonic measures. Although these are some of the most accurate means of measuring, the business of trading is not easy. If you do the work and you want to understand which strategies are vital, a professional skill set that identifies harmonic opportunities facilitates the ability to execute with an optimal efficiency. This comprehension takes time. Furthermore, I urge everyone to do their own research, look at the materials and assess what I have done as a unique system in way to look at the market, especially now that it is now widely embraced. After I released The Harmonic Trader people began to take notice. I was having great success, and I was sharing my information and charts with many people freely. Maybe this was a naive step of mine, but I believed in sharing the information with people that I knew and others whom requested it. I felt that we were on the same boat as traders trying to succeed in a challenging market environment. Everyone was trying to figure out how to trade the market, especially during a time where the Internet stocks were going through a historic bull market. Against the backdrop of a frenzied market environment, my goal was to share the information and make it available so that people could understand the power of harmonic patterns and realize the importance of being as precise as possible. From this, I was motivated to explore the subject, refine the strategies and develop the most accurate tools available. I was confident from the start I was using the right measures to analyze price action. Although it is easy to get caught up in the mystique, I was more focused on relating the theory of these natural cycles with harmonic ratio proportions to define turning points in the financial markets. It was my goal to take that knowledge to new areas of experimentation and capitalize on the natural advantages of harmonic measures. I wanted to refine it as far as I could to differentiate patterns structures, interpret price action at those completion points and make larger assessments of the trend. From this, Harmonic Trading thrived and led me to produce two more books Harmonic Trading Volume 1 and Volume 2. In 2010, I received an offer from Financial Times Press who was able to promote the material globally. Furthermore, the validity of this strategy was reinforced as more traders became aware of harmonic patterns, their popularity has grown. On a final note, I want to stress that for me it is always about the work. I always felt that if the work was excellent people would respond people. Traders have responded! For that Harmonic Traders, I thank you. This is become something far greater than I could ever imagine. I feel that with the limited time that I have left on  Harmonic Trading Volume 3: Reaction vs. Reversal  13  this planet that I want to share this knowledge. I want to leave behind a legacy where people can not only trade the markets effectively but actually realize the amazing natural wonders and natural cycles that are occurring in the universe and in the world, every day. For me, integrity and character is everything. My goal in this material is to preserve the value of the Harmonic Trading approach to show people the correct way to measure the markets not just the well-chosen examples. This has been something that I have seen quite a bit in recent years. People are teaching harmonic patterns based straight out of my book but they're doing it incorrectly and in most cases, are unable to do it in real time. My goal is to bridge this faulty promotion and clarify the ambiguity in the execution and trade management process that optimize trading decisions. By now, most people know the definitions of the ratio alignments in the patterns. But as I've always said, the harmonic patterns are a starting point. They require a precision and a dedication above and beyond what most offer. Yes, I have products to sell. I have a software program, webinars, etc. But, I have made it my fundamental goal to provide the bulk of this information that presents the foundation of Harmonic Trading approach for free. Why would I do this? I have met so many people from around the world who want to learn about the markets but they don't even have the money to be able to buy my book. This is disheartening. I am not going to sit by and dismiss these people because they can't afford to buy a $50 book. So, I offer numerous resources online for free. Having lived abroad for a few years, I understand the struggle that most people face when they must live on a limited amount of money. However, with the advent of the Internet Age, we have an opportunity to reach people in a way like we've never done before. I believe this is the true accomplishment of Harmonic Trading - an open dissemination of the information to educate people about the market to empower individuals whom are willing to do the work, and ultimately improve their lives. I have talked to people from Africa, Iran, China, Saudi Arabia and many other countries that otherwise might have been previously out of reach. These interactions have been inspiring to say the least. In fact, many of these people volunteered to translate my first book The Harmonic Trader into their native language. Without this type of response, I would never be able to have the first book translated into five languages. I am grateful for these experiences and I feel confident that the work is reaching traders in a positive manner. Most have related to me that they are able to avoid the pitfalls of the learning curve that can often be quite expensive, as well as the confidence a defined measurement framework instills. There is a profound comprehension in the understanding of the phenomenon of these natural laws and the associated ratios to define clear structural relationships.  Harmonic Trading Volume 3: Reaction vs. Reversal  14  Introduction  A Reintroduction to Harmonic Trading My main goal in this book is to set the whole record straight to reinforce the established structural measures while emphasizing the need to precisely confirm harmonic pattern opportunities with "environmental technical indicators" that optimize all situations. I have been reluctant to write another book, as I knew that it would take quite a bit of time to put together a comprehensive advancement of the existing material. Although I have been aware of many of these techniques for years, I have not shared these with too many people. Initially, I needed a great deal of time to test each strategy and completely refine the rules to effectively complement the basic Harmonic Trading approach. This book is comprised of nearly 80% new material that builds upon the existing strategies and optimizes specific pattern situations to improve overall results. The advancements presented in this material represent a new stage in the evolution of the Harmonic Trading methodology. The material in this book picks up right where Harmonic Trading Volume 2 left off, and defines unprecedented situations that are as distinct as harmonic patterns themselves to improve the effectiveness of the entire approach. Although many of these strategies can be learned as individual concepts, I reference much of the material from Volume 1 and Volume 2. Simple pattern rules, trade execution strategies and other guidelines serve as the essential model for the trading process. This book represents an advancement of that process, especially in the area of trade execution and trade management. Although the first few books detailed effective strategies to comprise the identification aspect of the Harmonic Trading approach, this material coalesces a variety of individual techniques to assess a more comprehensive perspective of critical measures. My evolution of measuring the market has led me to realize that my primary source of material information for trading decisions must be derived from the price movements themselves rather than any outside influences. Although most traders will consider a variety of sources of information to formulate a strategic approach to define opportunities, ultimately every participant is trying to profit from price movements. Therefore, the business of trading is inherently a game of skill and strategy that must predict future price direction and profit from the buying and selling of these defined opportunities. Thus, financial reports and news stories become less relevant over time Harmonic Trading Volume 3: Reaction vs. Reversal  15  as signals for trading opportunities. After reaching this point, traders begin to base decisions upon the readings of the market. Harmonic patterns provide a strategic approach to measure these opportunities and they can define those exact price levels where to pinpoint the parameters of the trade. Other technical measures can help us monitor secondary readings, where the total market bias is reflected in something other than price. All of these techniques are designed to gauge some sense of order within the chaos and randomness of price movements. I believe patterns provide that order, especially since all parameters are defined in advance and measured based upon the market's historic price action. In addition, analysis of Relative Strength readings is one example that helps to monitor the environment in which patterns complete. We will look at this integration in detail later in this material. We will examine price behavior with measured technical environments and show those conditions that possess the optimal characteristics for positive confirmation.  The Harmonic Learning Curve Personally, I still feel there is room to improve optimization but this actually made one of the easier tasks within our process once the coordination of variables has been established. Despite my attempts to simplify all of this, I know that I am overloading everyone with a great deal of information. Please take your time to review my notes and look at the resources provided for a greater understanding. For anyone that is new to this perspective, I like to use the phrase "live with it for a little while" where you walk through the analytical steps to create a greater awareness of these relationships. The common experience for most is a "light bulb" that goes on and the relationships become almost obvious. Therefore, I recommend a full comprehension-n of identification strategies first to reach a level of basic awareness that is required to integrate more complex measures. I will thoroughly explain details and finer relationships that will answer most questions that typically arise in the discovery phase of these strategies. The common experience for most Harmonic Traders is a clearer comprehension of all relationships after mastering the identification of exact scenarios.  Consistency in the Application of Identification One of the important broader principles always to be mindful of is the fact that Harmonic Trading is a defined and quantifiable technical model to define opportunities in the financial markets. This means that the prescribed measurements merely serve as a minimum framework upon which the actual expression of real trading must be compared. I emphasize this point in an attempt to reduce unrealistic expectations of patterns as signals on their own and implore traders to intelligently assess other market conditions that clearly contribute to the overall understanding of the harmonic opportunity. Furthermore, the true advantage of these identification strategies is founded upon the consistency in the definition of what is a potential opportunity. Harmonic Trading Volume 3: Reaction vs. Reversal 16  Specifically, each pattern has its own set ratios. Regardless of the timeframe or the price of the structure, each situation is defined by the relative harmonic measurements that validate random price movements as specific opportunities. It is important to note that these ratio alignments identify opportunities differently than other structural approaches to the market such as Elliott Wave, which is continually counting three and five segmented price structures. Unfortunately, practitioners seem to be reworking wave counts all the time. This is a profound difference than the identification of harmonic patterns. Valid harmonic opportunities must possess the prescribed structure and ratio alignments to validate structure. Regardless of size or price range, the proportional aspects of the structures are uniformly measured and analyzed. In doing so, we can assess multitude of markets that possess such ratio proportions and compare them uniformly across all time periods. Furthermore, these rules create distinct classifications that are precisely quantified. Harmonic Trading strategies can be applied to all markets on any timeframe uniformly. That is, all techniques possess the same interpretive qualities and must be applied in the same manner in every market and on every timeframe. From stocks to futures to currencies, Harmonic Trading principles possess the same implications in all markets. Although some argue that certain markets may behave differently than others, our primary concern with analyzing price action is to discover consistent relationships that can be derived without differentiation. This is critical because the strategies are hence standardized, and define market opportunities in the same manner. Furthermore, the same relationships that occur on a daily or weekly chart can be found on intraday or even tick price movements. Some structural market approaches have a tendency to adjust their analysis and fit derived results to conform to the overall picture. This type of interpretive analytical approach is dangerous when it comes to assessing price action because such variation of measurements leads to inconsistent results. Harmonic Trading employs proportional measurements that can be deciphered regardless of the price range. This is one of the true advantages that separates Harmonic Trading from all other methodologies. Finally, such universal application possesses enormous strengths in deciphering market movements that can frequently diverge from the norm. When this happens, traders tend to adjust their analytical findings and begin to create a biased assessment of what is happening. Essentially, when a trader is confused they start guessing and nothing is more expensive than trying to guess which way the market will go. Nine times out of ten that guess will be wrong. Therefore, any market approach must have the ability to be uniformly applied and assess price action from an unwavering basis. There should never be any divergence or adjustment for the abnormal case, as these conclusions are flawed and often wrong. This has been one of the guiding principles throughout my research. I am always looking for the market relationships that consistently and clearly present readings that can reliably defined probable future price action. Many of the market methodologies that I have studied make room for slight variation of the application of their principles. However, I found that these circumstances led to incorrect assumptions and created Harmonic Trading Volume 3: Reaction vs. Reversal  17  more confusion within the trading process. As I mentioned previously, Elliott Wave is a prime example where traders will conform their structural counts to best fit the current market environment. In fact, the "Elliott recount" that readjusts structural calculations in the event that the market does not adhere to the ideal situation creates inherently flawed structural signals.  Founders of M and W Structural Analysis There are many people whom have discussed price patterns in the market. However, few assigned ratios to the structures. Robert Prechter and A.J. Frost advanced wave analysis and were among the first to discuss 61.8% and 1.618% ratios with price structures. But, as most people know, Elliott wave counts are quite subjective. For me, I never understood Elliott Wave sufficiently to use it as an accurate and consistent predictive system to trade the markets. Yes, it's a great structural model but it is very difficult to predict accurate waves and trade off that information. Regardless, the real focus of the history of Harmonic Trading must credit those predecessors that laid the foundation for simple structural analysis. It is incredible to think that 100 years ago people first started writing about the stock market and various strategies to profit from market movements. These were more anecdotal stories but many of the basic technical methods such as Dow Theory were the first to describe market movements and ratio measures. Later technicians focused more on simple percentage moves and also try to identify simple trendline formations. It is important to understand that Technical Analysis has not evolved too far from the simple trendline/channel analysis established over 100 years ago. Some of the more prominent methods such as Relative Strength, Stochastics, harmonic patterns, Elliott Wave, ratio analysis and other measured techniques have advanced strategies that quantify market movements. Despite this history, I feel there is plenty of room for advancement and for an evolution of Technical Analysis to focus on the realization that market movements possess all of the answers traders need to facilitate trading decisions. It is within this principle that I believe Harmonic Trading derives its greatest strength.  XABCD->Harmonic Patterns There are a number of technicians over the past century whom have presented individual concepts that have inspired Harmonic Trading discoveries and provided the primary foundation of market research to advance harmonic concepts. Harmonic Trading encompasses parts of many theories and expands upon a variety of basic technical measurement strategies. I have studied most of the prominent technicians of the past hundred years and I have learned a great deal from their initial insights. I believe that it is imperative to recognize these individuals for their contribution. They  Harmonic Trading Volume 3: Reaction vs. Reversal 18  have created a basic science around the recognition of market movements, and these works have created the body of knowledge that is Technical Analysis today. Harmonic patterns are an advancement of a vague identification strategy that labeled structures as five-point XABCD formations. Although the initial tenets of fivewave price structures was first prescribed by R.N. Elliott, the notion that a complex price formation contains relevant predictive value of future price action has been refined by many other technicians since then. Furthermore, the application of ratio measurements has evolved ever since Charles Dow first introduced his rules for Dow Theory that analyzed the market in relation to 1/3, 2/3. Other practitioners of Technical Analysis have added to this foundation and expanded the envelope of understanding over the past hundred years.  Historic Technicians (1890-1970s) Once I was committed to the study of Technical Analysis, I researched the oldest materials I could find. Historic market insights that were presented decades ago have relevance to modern-day markets. In fact, many of the forefathers of Technical Analysis were keen to emphasize the importance of price analysis over advisor opinion. Illegal speculation and manipulation were rampant 100 years ago and a motivating factor for these pioneers to uncover the truth from price analysis. The following technicians must be sought out and researched. Most are known for a seminal book or method that distinguished their work from many others. In fact, most people do not know that there are dozens of technical pioneers whom have presented amazing work but they never realized much recognition. I mention a few of these individuals throughout this material and recommend them as well. • • • • • • • •  Charles Dow & Dow Theory R.N. Elliott Elliott Wave Principle (Prechter and Frost) W.D. Gann Richard Wyckoff H.M. Gart ley "Profits in the Stock Market" Arthur Merrill (& Edward Levy) = Merrill Waves Welles Wilder  Modern Day Technicians (1980-Present) • •  Robert Miner "Dynamic Trading" Bryce Gilmore "Geometry of Markets"  Harmonic Trading Volume 3: Reaction vs. Reversal  19  There are numerous individuals whom have put forth a dearth of resources but most have simply regurgitated the works of the past masters. It is important though that I recognized two individuals whom have immensely inspired my work with Harmonic Trading. Robert Miner's Dynamic Trading (1997) is an Elliott Wave masterpiece that introduces new applications of the standard rules, including unique time and price projections. I have had the pleasure of meeting Mr. Miner one time at a presentation he generously gave to the Gartley Group. Bryce Gilmore's Geometry of Markets (1989) is another must-have technical book that correlated ratios with wave analysis in an unprecedented manner. Mr. Gilmore's application of Gann-style ratios and trendlines were applied to his thorough explanation of the XABCD framework. In fact, he presented some interesting combinations of the structures but did so to identify multiple types of complex five-wave Zig-Zag formations. Additionally, his Wave Trader was the first program to scan for M & W-type formations. Bryce Gilmore deserves the primary credit for establishing the general measurement principles for XABCD structures. I am immensely grateful for his contributions and I recognize his work as a direct forerunner to Harmonic Trading.  HT Combines Two Schools of Technical Thought It is important to outline the basis of measurement for harmonic structures. The strategies borrow from two general categories of technical analysis. Harmonic Trading employs ratios with structural analysis in a unique manner but resembles many of the primary strategies from the past masters.  1.  Wave Theory-Market Structure (R.N. Elliott/Charles Dow+Others)  Charles Dow was among the earliest of technicians who categorized market movements and proposed general percentage retracements (1/3, 1/2, 2/3, etc.) in his articles for The Wall Street Journal. A few decades later, the writings of R.N. Elliott were some of the most comprehensive structural analysis ever presented of his time. His classifications of three and five wave price phenomena were the first prescribed structural analysis that identified the importance of multiple segments. Although the initial work with these structures lacked precise ratio measures, the general wave count rules provided an effective framework to assess the state of the larger trend. In the same manner, Harmonic Trading distinguishes structural opportunities in the markets. The refinement of M&W-type patterns was a significant step forward in the structural analysis of five-wave price formations. The proprietary concepts of harmonic patterns advanced the primary body of knowledge as it relates to structural analysis of price segments in the same simple differentiation principle as the following:  Harmonic Trading Volume 3: Reaction vs. Reversal  20  Does this  Does this  look like this  look like this  I have outlined this concept in prior books but this key recognition of structural differences is the essence of harmonic pattern analysis. When validated by specific ratio alignments, these structures quantify all relevant parameters in the determination of the trade.  2.  "Sacred Geometry" Ratios (W.D. Gann)  William Delbert (W.D.) Gann presented numerous measures that have become a primary foundation within Technical Analysis. Tools such as Gann angles, Square of 9, Hexagon, and Circle of 360 became his primary market forecasting methods. Although I agree with many of his Geometric principles, Harmonic Trading has nothing to do with his other areas of study, most notably Astrology. Although cyclical in nature, Astrology has little relevance to exact prices structures, regardless of what its proponents might argue! In my opinion, the Gann mystique is overblown while I feel his basic technical measures do not receive the credit due. W.D. Gann can be considered as the forefather of ratio differentiation, as he effectively refined concepts from Ancient Mathematics into trend analysis. In this regard, harmonic patterns and their measurements respect the natural phenomenon of cyclical movements of growth and decline in the same manner as Gann's principles. When related to the market, Harmonic Trading also considers trendline analysis similarly, as well. Therefore, immense respect is due to Mr. Gann.  H.M. Gartley Most popular of all harmonic patterns, the origins of the Gartley have been mired in a haze of misinformation and misrepresentation. I have discussed this previously in a variety of materials, including an article entitled "The Great Gartley Controversy." (Google it) First let me say, I have the utmost respect for his book, Profits in the Stock Market {1935). This masterpiece was ahead of its time and it is one of the most detailed technical resources I've ever read. The problem that I had with the initial interpretations of the Gartley pattern was the lack of precision to define exactly what  Harmonic Trading Volume 3: Reaction vs. Reversal  21  constitutes valid trading opportunity. This was not Mr. Gartley's fault, especially since he mentioned little in regards to patterns and did not integrate ratios with their measurements, despite contrary opinion. The Gartley pattern that many improperly attribute to his book does not resemble anything to what the industry standard is today. Since I have been unable to obtain permission to feature a copy of the entire page from his material, I have presented the following illustration that resembles his initial structural presentation from his book, Profits in the Stock Market (1935). I encourage all serious students of the market to invest the money and buy this rather expensive resource. The painstaking detail and explanation provide accurate technical insights that are still relevant to this day. Place Stops  A  Profits in the Stock Market (1935) Gartley, H.M. Lambert-Gann Publishing, p.222. This illustration represents what he presented in his book. No harmonic ratios. No AB=CD. This was the extent of his identification of patterns structures. I have studied this book intensely and learned much from his work. However, the core focus of his material has been more on cycles and general wave structures. This is immensely important as a clarification of the source of harmonic patterns. Although others have presented various interpretations, the personal breakthrough in my first book, The Harmonic Trading Volume 3: Reaction vs. Reversal  22  Harmonic Trader integrated the M and W-type structures on an unprecedented level. Whether I fully understood the uniqueness of this integration or not, the complex rules that defined harmonic opportunities advanced the general XABCD knowledge to convert this structural analysis into predictive trading capabilities.  Arthur Merrill & Merrill Waves Arthur Merrill in his book, Filtered Waves; Basic Theory: A Tool for Stock Market Analysis (Analysis Press, 1977) presented illustrations of a few dozen different M&Wtype structures these were more Zig-Zag formations and lacked any ratio measurements. The number of classifications that Mr. Merrill presented seems to have the intention of structural differentiation. It seemed to me he was trying to identify those wedge and consolidation formations that resemble the rules of Elliott Wave. In fact, on page 11 of the book, Mr. Merrill outlined one of the earliest definitions of an ABCD Filtered Wave. Although others have presented this illustration around the same time, I have yet to find a more precise presentation that preceded this work. Regardless, his work has been an important bridge between the writings of R.N. Elliott and the modern-day advancements of the XABCD structure.  "Filtered Waves, Basic Theory: A Tool for Stock Market Analysis" pg. 46 Analysis Press, 1977  Harmonic Trading Volume 3: Reaction vs. Reversal  23  Welles Wilder I believe it is important to clarify the focus of the meaning of "technical environmental measures" as more than just indicator analysis. I have long cited Welles Wilder for his ground breaking work with the Relative Strength formula. He presented the indicator in his book New Concepts in Technical Trading Systems (1978). He is a pioneer in the field of indicators and developed some of the most popular tools used today. In that one book, he presented Average True Range, the Relative Strength Index, Directional Movement, Parabolic Stop & Reverse, Pivot Points, and Volatility among others measures that are available on every major software platform, including my own. His work has been an immense inspiration to me and it was a driving force behind the creation of the Harmonic Strength Index. The Relative Strength concepts were revolutionary when he released it nearly 50 years ago. He is to always be lauded for these remarkable contributions. Although it may have been difficult to foresee the magnitude back at this time, he did freely share a wealth of knowledge that has been a game changing perspective on the markets. You could call him a disruptor long before disrupters existed. Furthermore, I personally learned from his work that an integrative perspective will always find new relationships and clarify analysis moving forward. It is essential to learn upon mistakes and proactively optimize these measures, especially with the technology capable today.  Harmonic Patterns > Harmonics The evolution of my research led me to realize that a more precise classification of market movements was required to further my understanding and improve consistency of my analysis. From a technical side - that is, the pure analysis of price action - I was disappointed in the vagueness of many well-popularized methods of the day. Over the past 30 years as a student of the market, I adapted concepts and combined new ideas to create a greater standardization of price structure. As they say, "Necessity is the mother of invention." For me, I realized that price action history could be measured and categorized. Initially, the categorization of price structures as harmonic patterns created specific guidelines for the identification of a trade opportunity. Beyond this, my analysis evolved as I was able to further define unique states of price action, especially relative to measured price environments. This has defined a larger analytical science of structural wave behavior of price action in the financial markets that possesses unique technical conditions as measured by harmonic ratio formulae. These pattern rules and larger technical measures have become collectively known as the study of Harmonics in the financial markets.  Harmonic Trading Volume 3: Reaction vs. Reversal 24  Theory of Market Mechanisms My journey into Technical Analysis was the result of following daily stock prices. This was long before the internet and for most beginners if you wanted to create chart analysis you had to track the prices by hand and plot the results manually. As charting technology was introduced in the late 80s and early 90s, the ability to quantify market movements expanded rapidly. Well-known concepts such as Elliott Wave, wedge patterns and standard indicators could finally be automated. I know that sounds like talking about ancient history but in relation to what is happening today, yes those were antiquated markets. Now, the awareness has shifted. Traders are more statistically driven to look at those strategies that can be mathematically proven. Anything that can have a definable edge is of value. Gone are the days of gossiping stock tips. Technology has removed many blatant inefficiencies and the next generation of online trading will eventually replace the need for a physical exchange. Maybe someday the New York Stock Exchange will be a museum? The pace of technology is helping to facilitate this revolution and the focus of market analysis has shifted to unlock those characteristics that define consistent situations that have predictive value. There is some standardization required in markets analyzed - mostly is important to stick with the markets with the highest liquidity. However, the price action in most major markets expresses unique technical conditions that define predictive opportunities. Market mechanisms such as pattern structures, RSI BAMM combinations and other distinct confirmation strategies provide the analytical tools to interpret price history for an accurate assessment of future prices. Harmonic patterns are one example of a multi-segmented structure that possesses unique expectations unto the pattern. Other singular measurements provide technical insights especially when combined with distinct indicator strategies. All of these definable phenomena are micro price action mechanisms that facilitate the functional buying and selling that makes the market go. The collection of various technical events manifested by the population of price data provides the relevant signals to define the possibilities of future trend direction. Remember, it is not essential to have every possible harmonic phenomenon to validate an opportunity but the recognition of the primary elements regardless of type will always confirm a trade opportunity.  The Natural Harmonic Reaction Principle The Natural Harmonic Reaction is the mechanical response of trading behavior at prescribed measurements of ratios that are related to the Fibonacci sequence, and the structural assessments that possess basic wave properties in the same manner as manifested throughout nature. I believe this to be the common characteristic all Harmonic Traders initially realize but it is a concept that needed to be labeled to better understand this phenomenon. Simply stated, correctly measured harmonic patterns provide important inflection points - whether temporary or permanent in their strength Harmonic Trading Volume 3: Reaction vs. Reversal  25  - defining material cyclical points that affect natural growth processes and trend changes in the market. Depending upon the structures themselves, the simple phenomenon of the Natural Harmonic Reaction exhibits a pausing behavior at the completion of patterns that can be quantified to determine its potential in advance. That is, there are important structural areas that measure the extent of how far any market can go in one direction without some type of countertrend. This is simplifying the theory. However, this is the basic structural harmonic measurement technique to provide a uniform means of quantifying random price structures. The key to determining patterns with the greatest potential begins with the understanding that all price moves can be categorized to technical classifications. A potential opportunity as defined by harmonic patterns will always provide either an early signal of impending failure or demonstrative confirmation in most harmonic states of price action.  The Reaction Mechanism In the financial markets, this harmonic reaction is the natural mechanism of buying and selling that makes it possible for the entire system to exist. This natural mechanism that makes the financial markets go is the exact process that creates opportunity. A market can only move so far in one direction within a certain period of time. Price action must go up to go down and vice versa. Price action must fluctuate to create opportunities for participants to buy and sell. This behavior is cyclical and finite. This price action exhibits a frequency over time that can be charted, analyzed and categorized to define opportunities that possess our probability reactive properties. What does that mean? Essentially, it is possible to look at a market's trading history, analyze critical turning points that have previously dictated predominant trends and seek to capitalize on this repetitive nature. Within the framework of harmonic patterns, these ratio measurements effectively quantify the finite nature of price action. It is possible to measure the market within such a model and optimize those situations that possess the ideal technical elements to define those price levels that precede significant profitable moves. The patterns present "signposts of future price action" that provide a framework to separate the noise from the meaningful signals in the market. In fact, most price action is merely a reaction within the larger reversal or continuation of a predominant trend. The reaction of price movements can be affected by a number of technical levels that define mini-cycles that play "Tug-of-War" between buyers and sellers as the market attempts to discover equilibrium. The culmination of all my years of work has led me to realize the market provides measurable natural reaction opportunities, where the market can move only so far within a certain period of time. These patterns and larger measurements encompass that limitation and exploit the "finiteness" of any market situation within a certain period of time.  Harmonic Trading Volume 3: Reaction vs. Reversal  26  Reactive Rates This has led to the ability of programmers and researchers to quantify statistically what we can expect from each pattern. This has been a goal of mine for a long time. The technology has progressed to the point where we have the functionality and access to data that makes it easy to crunch these numbers. I spent a great deal of time analyzing and specifying situations that provide proof that certain conditions are more favorable than others. There are many combinations of technical factors that can be considered in an attempt to find the best situations. This too has been apparent process. Nothing is absolute and the understanding of statistics like these must be mindful of the importance in considering any real-life event. That is, anything can happen at any time during the trading process. Therefore, if an aberrational event occurs affects you positively or negatively, it is essential not to lose sight of the fact that nothing is 100% guaranteed. With that in mind, the research that I sought out was geared with the notion that it is important to provide some type of reliable baseline of EXPECTATION regarding the rate of success for each pattern. In addition, other complex conditions do offer higher degrees of accuracy but require patience since these situations take time to develop. The major breakthrough that Harmonic Trading presented was the notion that the market can be structurally measured to a more complex degree. The differentiation of price formations that appear similar but possess different ratios resulted in a specialization that identified pattern-specific strategies. In essence, the refined structures needed to be treated differently. Once categorized, it was important to discover exactly which measurements were most important for each pattern. The classification of harmonic patterns provided this. After many structures were distinguished, other complementary measures were discovered and optimized to improve the accuracy of the patterns. Throughout all of the refinements of this methodology, the ability to decipher information more effectively has been the primary goal. Historically, market opportunities were defined by two basic types - fundamental and technical. When we examine all of the news disseminated about the markets including analysts' reports, media commentators and company announcements, there is no clear-cut analysis of these information sources. They can be interpreted and twisted to fit whatever analysis is desired. In particular, fundamental information such as earnings and business forecasts may possess the same progress report but their meaning depends upon the market environment. The markets are easily influenced by news headlines and media coverage. Regardless of the exact trading history, one consistent conclusion of such commentary seems to always point to the next potential problem - whether real or imaginary - that could tank the market's current progress. These varying assessments influence market participants who continually argue a biased bearish or bullish opinion. But, this is what makes a market! The most intriguing part from this process can be found in the prevailing wisdom derived from the recognition that certain sources of market information do not necessarily represent the Harmonic Trading Volume 3: Reaction vs. Reversal  27  true trend of the price action. This is where the comparison of actual analysis of trading history deviates from media mantra. In terms of technical expectations, the importance of measuring the history of price action has less variability and greater reliability. Although accurate technical information may be applied improperly, the purity of the mathematical expression that the harmonic perspective encompasses provides a more unbiased means of assessing the character of the market than relying on subjective data sources.  The Quest for Equilibrium The market is always seeking to find value. Buyers and sellers are competing against each other because of perceived value. One participant may believe that a certain asset is worth more in the future while another may believe that same asset will be worth less. This is what drives the market's pricing mechanism in action. Therefore, the willingness of buyers and sellers to put a value on to the market comprises the process of price action where the equilibrium value that satisfies all participants is constantly pursued. I say pursued because equilibrium is never actually fully achieved. If it was, there would be no price movement and no desire to participate due to lack of potential opportunity - or even better stated, perceived opportunity. This is the eternal market struggle. The market moves up and down seemingly in a random manner while other times it does nothing at all. This can be confounding to those market participants who do not understand that these are merely phases that have definable characteristics within each opportunity. Some of the most fundamental impacts on the way that trading is executed and assets are allocated are derived from the perceived expectations of market conditions. Within the entire trading process, the importance of defined possibilities and what to expect specifically from any opportunity is what dictates the outcome. This is an important basic concept that most traders fail to realize. Whether they know it or not, every person has a prescribed set of expectations when they come to market. This can be based on life experience, education or other factors that shape our world. The problem lies within the distortion factor that such preconceived outlooks present. For most, the general expectations of market performance are shaped by what they hear from other people. It may be a financial news channel or an investment advisor. Regardless, there is a problem that arises from a regurgitated analysis that does not properly assess the true possibilities within any situation. Therefore, professional traders develop their own skill sets and rely on their own decision framework to define opportunity in the financial markets. Besides, I have not met too many people whom have relied exclusively on others for investment advice with much success without needing to learn some trading skills.  Harmonic Trading Volume 3: Reaction vs. Reversal 28  Defining Bias The collection of Harmonic Trading measurement strategies is all designed to provide insight to the probable future price direction of the market being analyzed. One of the advantages of basing decisions upon measurements of the market's movements is the defined categorization of expectations that are derived from each ratio. For example, a price segment that reaches a 1.618 extension can be deemed as having moved too far in one direction. Although the price action can continue beyond a 1.618 level, the expectation to favor some type of retracement within this general vicinity will typically guide the proper trading decisions It is important to remember that these ratios are employed within the Harmonic Trading approach because they best reflect the natural growth cycles within many of life's processes. There are numerous examples of such natural cycles that manifest these ratio relationships. Applied to the markets, the analysis of price action considers the "living organism" that is the market. Comprised of buying and selling, the total sum of these actions possesses natural cyclical elements that can be measured. It is in this purest application of Harmonic Trading measurements that we can consistently define the state of the market and relevant targets that are comprised from future price action possibilities. As defined by the rules within the approach, each measurement possesses its own meaning to the overall technical picture. Whether it is a distinct harmonic pattern structure, a significant retracement/extension level or a combination of both, certain price formations and their relevant technical readings define an environment of what is possible within the realm of possibility.  Technical Entities A harmonic pattern must be regarded as a specific technical entity that possesses precise numeric ranges, where all elements, such as execution points, stop loss limits and profit objectives, are defined relative to the set-up. Reversals must be allotted a certain time period relative to the size of the pattern. In addition to the price parameters, all patterns possess ideal harmonic time constraints - as measured from the structure - that create a defined range of duration to gauge the action following the reversal. I have discussed this concept in previous material and have always stressed the importance of defining expectations within a specific limit to guide trading decisions. I believe this transition of converting analysis into concrete scenarios is an important aspect of Technical Analysis in general. Essentially, we must search for those overwhelmingly clear situations as defined by prescribed strategies that define future market movements in a consistent and effective manner with a high degree of certainty. One of the biggest mistakes by most students of the market is that they only look for the one the tool or one big software program that might lead them to the Holy  Harmonic Trading Volume 3: Reaction vs. Reversal 29  Grail. My perspective has always been realistic. In that vein, I have avoided those types of pursuits and have always sought to develop an arsenal of skills that are comprised of precise measurements that signal common characteristics that precede the most substantial price movements. Many of these confirmation strategies are often smaller complementary measurements that can tell a great deal more about the probabilities of a potential pattern. At a minimum, patterns with price levels that have multiple readings that are confirming each other provide a substantial advantage than a random structure. In fact, the harmonic pattern opportunities with the greatest potential are technical entities that include a conglomeration of market measurements that distinguish a unique environmental scenario. Later in this material, we will outline the exact conditions of that distinguish these distinct opportunities with favorable risk-toreward parameters. Harmonic patterns can be considered as the primary technical entity of the entire methodology. In this regard, the structural measurements represent the starting point for any opportunity and define the general price range that encompasses the totality of the pattern signal. However, other price action mechanisms such as trend considerations, indicator calculations and timeframe applications are essential in further categorizing these unique technical entities. In concert, the conclusion derived from the structural information provided by harmonic patterns can be clarified to an advance degree. One of my early challenges was simply respecting the information that the harmonic measurements provided. In fact, I frequently found myself in situations where my analysis of certain patterns tended to indicate price objectives and ultimate possibilities that were seemingly unattainable. For me, I had to change what I thought might happen and focus on the possibilities that the measured harmonic scenario presented to me. I know that many others have shared a similar learning experience. For many individuals learning these techniques for the first time, the basic ability to calculate harmonic patterns and predict their resulting possibility ignites an awareness of possibility. This typically leads to an experience where their ability in measuring these scenarios motivates them to further understand the harmonic phenomenon. I have seen this in numerous students and I have received many emails from people who begin to realize the importance of understanding these market mechanisms. Once they begin to put together the foundation of measurements, a broader understanding quickly emerges.  Confirming Structural Readings There are distinct signals that help define when to capitalize on structural opportunities but the general focus should always be on the immediate environmental scenario at hand relative to the price levels established by the pattern. In actuality, the entire concept of technical confirmation in Harmonic Trading is relatively new. Much of my work in this technical area did not begin until several years after the basic rules for harmonic patterns were defined. Once I was able to integrate effective measures, the Harmonic Trading Volume 3: Reaction vs. Reversal  30  importance of confirming pattern structures in this regard became more apparent. In the beginning, I was somewhat of a staunch purist - stating the importance of price action alone. However, the "student-of-the-market" in me always sought to research other perspectives and refine those consistent identifiers that provided reliable predictive capabilities. It is important to note that although many market measures can be applied to harmonic patterns, I have found most lack a consistent ability to filter the best opportunities. In Harmonic Trading Volume 2, I detailed the advantages of Relative Strength and presented new ideas that integrated harmonic measurements with basic structural interpretations. Furthermore, the concepts of Divergence and Confirmation have been expanded to quantify the exact technical environments that best foster the valid reversal of a harmonic pattern. This is achieved through the complex integration of indicator readings, individual price action and trendline assessments. These strategies serve the basic identification principles well, as they define unique conditions where pattern signals are most likely to yield profitable moves.  Triggers and Signals As I have defined the strategies within the Harmonic Trading approach over the years, I realized that certain points and specific subsets of data history frequently marked important turning points that signal potential future price action well in advance. One of the earliest strategies that I developed was the identification of individual price bars. Specifically, the Terminal Price Bar relies on one specific interval for the determination of behavior at that measured price level. I defined the Terminal Price Bar in Harmonic Trading Volume 1, primarily as a means to define the exact point where the opportunity becomes a LIVE TRADE because the execution process can be tricky at the completion of harmonic pattern. Also, it can be difficult to know which exact number is the most important within the specific range of Potential Reversal Zone (PRZ). Although I believe specific numbers in certain situations are more significant than secondary measures, the importance of analyzing the entire zone comes down to the ability in knowing exactly when the pattern has completed. In doing so, this definitive price point establishes expectations that go a long way to guiding the overall decision¬ making process. In the same way that defined patterns provide specific price levels to execute a trade, other aspects of this process must be defined to clarify the parameters and the probability of the opportunity. If the price action does not act properly at the initial completion of a pattern, the nature of this behavior in the area of these important technical measures usually provides a warning sign of something other than what is expected that is actually unfolding. It can be difficult to trust that individual price bars can have such an impact and signal potential future price action but the evidence is quite clear. We will look at precise situations that define these levels and the signals that initiate the anticipated price behavior.  Harmonic Trading Volume 3: Reaction vs. Reversal  31  It is important to note that the significance of the price action depends upon the nature of the structural measurements in that area. The best examples are found when extreme price action is realized at the completion of multiple important structural measurements. Other conditions that are not essentially at extremes still can describe the true character of a particular anticipated move based upon monitored readings and specific price objectives. In this regard, the arsenal of measurements used to explain the character of a particular market's action considers more than price conclusions. Therefore, the categorization of these situations provides a framework of substantial technical information that can reasonably define finite possibilities in any situation.  Conclusion As we examine the advanced material - especially trade execution and management strategies, the importance of uniformly defining pattern structures will become more apparent. I go to great lengths in this book to outline exact specifications for each pattern in an unprecedented manner. Much of this information I have not disclosed in any previous material, although I have been aware of these distinctions since the inception of harmonic patterns. It is important to share these details to define these structures as precisely as possible. Not to mention, the categorization of harmonic structures has effectively defined the proper expectations of price behavior. It is imperative to learn the pattern-specific strategies that require different treatment of situations depending upon the measures at hand. From an identification perspective, this book outlines those advanced measurements and goes to great lengths to describe why these specifications work in each situation. As you begin to study the following material, it is important to be aware from the start that we are quantifying immutable mechanisms of price action in the financial markets. The perspective of harmonic measurements provides a natural framework to assess market movements. Although markets can be influenced by a variety of factors and even manipulated for finite periods of time, the natural function of buying and selling experiences a variety of price behavior phases that are immutable. Simply stated, the market manifests harmonic pattern-related measures without regard to external influences including news events, analysts' reports and even artificial trading behavior. Any trader who understands the basic measurement parameters of harmonic patterns does realize this fact regardless of timeframe or market traded. The most important insight to it all is that our ability to succeed depends upon a framework of measures that reflect the very natural element we are trying to define. Therefore, the harmonic strategies employed cannot be altered or modified because they represent the essence of identifying these natural opportunities in action.  Harmonic Trading Volume 3: Reaction vs. Reversal  32  Chapter 1 Core Principles of Harmonic Trading  The Foundation of Harmonic Trading This book establishes the foundation of the entire methodology to define each step in the trading process. The new strategies are designed to work seamlessly with the identification principles that establish trading opportunities. I think it is important, and I want to take a minute to review the established Harmonic Trading material. My initial work with harmonic patterns required a great deal of manual research to discover the optimal ratio combinations that defined structural signals. Although many of these techniques are common knowledge today, the basic measurement tools were quite limited back then, while few even back-tested their ideas to validate their sstrategies. The Harmonic Trader and Harmonic Trading Volume 1 were similar in nature, as they focused on the identification rules for harmonic patterns. Although there were concepts that provided strategies for execution and management, most of the initial material covered only identification of patterns. After nearly ten years of Harmonic Trading, I released Harmonic Trading Volume 2 in 2007. This was an important advancement of the identification rules. In fact, I was concerned during this time that many were overlooking the importance of confirmation strategies to validate harmonic patterns as trading opportunities. I wanted to share these insights as I discovered more about the relationships of harmonic measurements with respect to price action in the financial markets. In fact, I have been refining many of the new ideas presented in this book for the since then. As I tested new combinations of technical possibilities, I was able to unlock deeper relationships that function like automatic price mechanisms. Of course, many of these situations require a variety of conditions to be satisfied but the derived analysis has become as reliable as harmonic patterns. From a general standpoint, I have been able to clarify some important concepts within my own journey of market research that has guided my trading decisions in a more efficient manner. Starting from the primary assumption that the market can be measured, the more complex situations that were unfolding manifested characteristics that continually repeat. Many of these conditions were outside of the basic pattern strategies but have proven to be extremely effective when pattern structures are present.  Harmonic Trading Volume 3: Reaction vs. Reversal  33  The Market's Signal The important consideration in this pursuit is to understand that the market is providing its own answers every day. As traders, we must measure and define such price action phenomenon that consistently repeats. Understandably, it can be easy to get overwhelmed within this process but we must never forget that these signals can be unlocked. As I have previously mentioned, we can measure the market to discover the necessary signals of probable future price action. Although this is not an easy task, as many are overwhelmed by the pace of the financial markets, it is this type of chart analysis that separates the everyday noise from the decisive signals within price action trading history. All participants should be aware of the relevant price history of whatever market they want to trade. Although fundamental and quantitative analysts frequently cite disdain for technical methods, it seems short-sighted for these individuals to overlook the trading history of a particular market as irrelevant. Within this record of price history, charts clearly exhibit the material trading events that help to define important levels support and resistance. In my opinion, any technical information that helps clarify the total picture to facilitate the trading decision-making process must be considered. Beyond this, the collection of harmonic measurements provides this framework of reliable indications of future probable price targets. While other conditions must exist to confirm what any price measurement indicates, Harmonic Trading's predictive ability to define levels of support and resistance makes the difference between success and failure.  The Process of Reaction versus Reversal I think this one dilemma, one challenge, one conceptual framework - analyzing the difference between a price reaction and a price reversal - describes how to gauge the strength of any harmonic pattern opportunity. That is, what is the likelihood the pattern structure will yield a profitable reaction while assessing the potential for a larger result? I believe there are fundamental tactics that facilitate these assessments and effectively guide decisions in an effective and disciplined manner that optimizes the process. It is this extent of precision that I must emphasize to those traders whom are relying on harmonic patterns as a sole decision module for trade opportunities. It seems that many - especially traders with less experience whom encounter the harmonic pattern community, seem entrenched in the singular possibility of a "magic box" - a one trick pony approach to easily uncover the "home-run" trades unlike any other approach. Whether this is some hot story from The Wall Street Journal or a "Wolf of Wall Street" type scam outfit, it is easy for the uninitiated to fall into the trap of false claims. Although many of these people are actually promoting the harmonic pattern cause, they are doing more harm good by broadcasting unrealistic expectations Harmonic Trading Volume 3: Reaction vs. Reversal  34  with incomplete trading strategies. Yes, harmonic patterns provide some type reaction at the completion of the most distinct structures. In my opinion, this has a tendency to create an image of higher success than what is truly happening. Furthermore, the failure to adequately handle these situations will certainly lead to disappointing results. Much of the material in this book is geared towards the clarification and specification of precise scenarios to help traders understand the importance of a comprehensive execution and management plan as well as identification. I will cover the strategies in detail however, I must emphasize that blind execution of any harmonic pattern without regard to other technical considerations sows the seeds of failure. To truly distinguish those opportunities with the best chance for success, it is essential to analyze the larger picture relative to the pattern being considered. Furthermore, those who promote the notion of "Set-and-Forget" automatically executed trades ignore the majority of factors that must be considered to navigate the entire process profitably. A trading plan that is designed to automatically sell or buy a position based solely upon identification rules ignores the essential execution and management strategies that are required to understand when price is merely reacting as opposed to establishing a more substantial reversal. I go to great lengths to clarify these issues in this book but it is a fundamental issue that many new Harmonic Traders face. Obviously, traders will make mistakes as they integrate new strategies and this trading plan. However, I feel that many of the errors committed today are a result of distorted information rather than one's ability to execute the prescribed strategies. Therefore, I will emphasize these important points and stress a clear understanding of the concepts that distinguish smaller reactive moves versus substantial reversals. Without properly instructing or educating the full realities to turn this analysis into profitable trading, I believe that the identification strategies would eventually become distorted due to others' inaccurate interpretations. Throughout the process of writing this book, I have realized "how" traders are learning this material as much as "what" they are focused on. I have spent the past several years talking to dozens of traders to improve my own commu

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