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A Few Notes on Harmonic Trading, Volume Two

| | Posted in: Technical Trading

In his 2010 book entitled Harmonic Trading: Volume Two Advanced Strategies for Profiting from the Natural Order of the Financial Markets, author Scott Carney “offers unprecedented strategies that identify the areas where overall trend divergence and harmonic pattern completions define the most critical technical levels. In addition, the new ideas presented in this material advance the basic theory of price pattern recognition by requiring other technical conditions to exist to validate potential opportunities with improved accuracy. Specifically, the advancement of the RSI BAMM separates the minor reactive moves from the more substantial trading opportunities and provides extensive technical information regarding the future potential direction of the price action. …Essentially, the integration of other measures has resulted in even more accurate projected reversal points for trade executions and hence, more reliable technical information regarding the state of potential price action. …The advanced techniques outlined in this book incorporate only the most pertinent technical measures that substantially increase the accuracy of harmonic patterns to identify the critical turning points in the financial markets.” On a chapter-by-chapter basis, key points from the book are:

Chapter 1, “Contemporary Market Case Studies from a Harmonic Trading Perspective” (Pages 13, 48, 54): “…a pattern is more a signpost of potential future action and not an ‘end all, be all’ signal for trading. …Developing this ‘intuitive feel’ for the markets is where the lines of the art and the science of trading merge. …the ‘feel for the markets’ must always be based upon the established principles and technical rules that define the Harmonic Trading approach. …In essence, the ability to understand and to interpret ‘the big picture’ of the overall technical condition of any market is an essential aspect of successful trading.”

Chapter 2, “Harmonic Impulse Waves” (Pages 57, 71): “Harmonic impulse waves are unique price movements that exhibit specific ratios that can be extreme and temporary in nature. Harmonic impulse waves respond to specific ratios and establish the initial price legs of complex patterns. Although these formations typically possess only three simple harmonic ratio points, they offer reliable and consistent indications of future price action. In much the same manner that complex patterns define areas of potential support and resistance, harmonic impulse waves can provide a great deal of technical information and can signal trade opportunities. …these formations can be defined well in advance to define profitable short-term trading opportunities.”

Chapter 3, “New Harmonic Patterns” (Page 109): “The new patterns presented in this chapter help to further the existing identification strategies within the Harmonic Trading approach. …these patterns should be employed only in specialized situations, as they require precise conditions to validate their structures.”

Chapter 4, “Harmonic Patterns Relative to the Trend” (Pages 111, 140): “There are many situations where a well-established trend has persisted for such a long time that a potential opportunity may seem to have passed long ago, only to experience price action that continues in the predominant direction for a substantially greater move. …In situations like these, the formation of complex harmonic patterns within the limits of the established trend can act as a signpost or signal of a significant continuation at hand. …harmonic patterns provide reliable technical signals, regardless of the extent that a trend has persisted.”

Chapter 5, “BAMM Theory” (Pages 141, 159): “BAMM is an abbreviation for Bat Action Magnet Move. …There are many types of BAMM or ‘magnet move’ phenomena that occur within many of the structures of harmonic patterns…where the potential completion of a particular pattern is first recognized and effective strategies can be employed to capitalize on obvious harmonic price action.”

Chapter 6, “RSI BAMM” (Pages 162, 164-165, 270): “From a harmonic pattern perspective, the structure is as important as where it completes relative to its prior price history. Therefore, the importance of the relative structural alignment led me to the Relative Strength Index (RSI)… Of the vast array of indicators and oscillators available that I have researched, RSI represents the most effective measure in relation to the completion of harmonic patterns. …The RSI BAMM is a method that examines the state of the indicator before considering the structure of the price action. …it is imperative to have confirmation of multiple approaches to yield the most pertinent information for the best technical decision regarding any trade. …The combination of the RSI BAMM approach with the completion of harmonic patterns creates a unique divergent situation that defines immensely accurate trading opportunities.”

The author relies on selective sampling (examples) to illustrate the potential effectiveness of the methodology presented. This sampling approach is susceptible to data snooping bias (especially for intricate rule combinations) and confirmation bias, and leaves any sense of profitability implicit. In general, the author asserts but does not quantify on either a per-trade basis or a portfolio level the statistical and economic significance of featured timing methods and patterns. Examples of such assertions, in addition to the above excerpts, are (underlining added):

Page 6: “…the Harmonic Trading methodology offers some of the most reliable and pertinent technical information to identify profitable opportunities and interpret price action.”

Page 9: “…I only release strategies that I have tested thoroughly in real trading situations that have produced consistently successful results for me.”

Page 54: “…the new techniques presented in this book…enhance the ability of existing strategies to effectively decipher price action and define profitable opportunities.”

Page 57: “Although these formations typically possess only three simple harmonic ratio points, they offer reliable and consistent indications of future price action.”

Page 154: “…the BAMM phenomenon offers a great deal of evidence about the state of the predominant trend and a reliable completion target for the price move.”

Page 162: “Although many technical indicators were advantageous in my research, within the framework of this approach, certain measures offered more relevant and reliable predictive information.”

Page 212: “Although waiting for this extra RSI signal to execute a trade may result in paying a slightly higher price, the Acceleration Trigger does provide a reliable sign of a valid reversal at hand.”

Page 240: “When a variety of technical measurement tools yield the same result, the technical information being provided is typically more reliable and accurate.”

Page 272: “…the advantage of defining specific ‘technical entities’ such as the RSI BAMM within the context of harmonic price behavior has yielded consistently reliable information regarding the potential state of future price action.”

The author could greatly strengthen these assertions by presenting rigorous statistical evidence that they translate to consistent, material profitability at the portfolio level (sufficient in both frequency and typical profitability of trading opportunities).

In summary, Harmonic Trading: Volume Two combines other technical indicators with an approach to developing expectations for the behavior of financial asset and asset class prices based on patterns governed by Fibonacci ratios. Although the book offers many examples of combined indicator-pattern analysis, it does not quantify any benefits of such analysis in terms of per-trade or portfolio level profitability.

See “A Few Notes on Harmonic Trading, Volume One” for background.

For discussion of rigorous empiricism, see “Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals (Chapter-by-Chapter Review)”, which quotes author David Aronson: “[Technical analysis] must evolve into a rigorous observational science if it is to deliver on its claims and remain relevant.”

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