Today, I plan to share the investment insights Benjamin Graham, Warren Buffet’s mentor, gleane...
Trading with Harmonics
01/17/2013 1:00 pm EST
Kerry Szymaski is the owner of HarmonicEdge.com. Kerry is both a day trader and swing trader who looks for Fibonacci points, harmonic patterns, and Gartley patterns to find trading opportunities in the S&P e-mini contract and also euro currency futures. He also trades the S&P ETF (SPY). Here, we discuss what he looks for in the markets including why he monitors TICK divergence as an indicator.
Play in Windows Media format
Play in RealPlayer format
Play mp3 stream
Direct link to mp3 file
Tim Bourquin: Thanks very much for joining us for another interview today. My guest today is Kerry Szymanski and we're talking to him about how he finds good opportunities in the markets.
So Kerry, do you have a general way or overall philosophy of the way you approach the markets each day to find money-making trades?
Kerry Szymanski: I do. Basically, I'm looking at the overnight range. This is for my day trades. I'm looking at the overnight range and the S&P and then I'm looking for expansions of that that I can save. So generally speaking, what I do is I'll find the highs and lows and then look for a Fibonacci expansion of 1.27 to 1.618 of that range. I find that that generally is a pretty good opportunity there to get in and make a few points. And then if it moves beyond that a lot of times if you go to the day session, the previous day session, I'll look for that same thing, an expansion of that range and then if you can familiarize yourself with some of the harmonic patterns that occur in these markets and have one of those complete in range, you usually have a very high-probability trade.
Tim Bourquin: Now, harmonic patterns, is that the same thing as Fibonacci?
Kerry Szymanski: Harmonics are—I'm going to use that term loosely because it can refer to a couple of things, but one thing that it refers to is the cycles, the link of the cycles themselves that tend to repeat within a given market. In the S&P, that number seems to be around five points. So basically, that's one way to look at it is for a continuation of that cycle or an expansion of that cycle. And then the other thing is you can have harmonic patterns. Probably, the best examples of those would be Elliott Wave or if you're familiar with Larry Pesavento's work, Gartley Patterns, butterfly patterns, three drive patterns.
Tim Bourquin: Now, when you're looking for those overnight ranges and we're looking at the previous day, are you looking at an hourly chart or is it just a daily chart? What is it?
Kerry Szymanski: I generally use a five-minute chart to take a look at the overnight range because you're dealing with a longer period of time, so that gives you the ability to see all of that data on one chart in front of you. If you're looking at the previous day's range, I use the three- or four-minute chart.
Tim Bourquin: Now, are you typically trading for S&P E-mini contracts or full S&P contracts?
Kerry Szymanski: I use the E-mini contracts for my day trades. For my short-term to intermediate-term trades, I generally use the exchange-traded fund SPY.
Tim Bourquin: We've talked to a lot of people the last couple of weeks, and I don’t know if it's just coincidence, but they all seem to use Fibonacci in one way or another. I mean, it's always been popular, but for some reason over the last couple of years it seems to be seeing a little bit of a resurgence in active traders using this. Any particular reason for that?
NEXT PAGE: Why Patterns Work Better with SPY |pagebreak|
Kerry Szymanski: No, I can't really speak to that. I mean, I've been using this—I started trading in 1998 and my background is as a real estate broker got interested in trading, stated scalping “teenies,” is what we used to call them back them, 16th of a point. And then I met Larry Pesavento shortly after that who also lived here in Tucson and he introduced me to the Gartley Group, which used to meet here regularly, and we were fortunate enough that we had a number of market wizards in the area.
Tim Bourquin: Yeah, Tucson seems to have a lot of people out there that trade actively.
Kerry Szymanski: It does, yeah. We have Bob Miner here for many years of Dynamic Traders. Arch Crawford at Crawford Perspectives is here as well. So I spent a lot of time with those fellows. So I would say basically I am a cycle person and Fibonacci fits very, very well into cycle analysis. As long as you're good about controlling your risks, that's perhaps the Achilles heel of the method is that there's always another cycle, there's always another Fibonacci ratio. And if you're not good about controlling your risk, you can get yourself into some serious trouble.
Tim Bourquin: Kerry, what happens when you have something that you're looking at on, say, an hourly chart that looks like a good cycle, a pattern is emerging and you see this as an opportunity but it may not be confirmed on a shorter-term chart or a longer-term chart, do you look at different time frames to find confirmation in several of those?
Kerry Szymanski: It depends on the type of trade that I'm trying to make. If it's just a scalp in the S&P, I'm looking for, say, 2 to 5 points, those seem to work pretty well independently what's happening in the larger timeframes. But if you're looking at something that you want to be in for a day or a few days, then you want to have something that's got some convergence for multiple timeframes. At least that's the way I do it.
Tim Bourquin: Okay. So if something is showing a good pattern on a daily chart, obviously when you get into that you're assuming that it will be a longer-term trade perhaps, whereas if something shows on a 15-mintue that looks promising and obviously could be a shorter term trade is that…
Kerry Szymanski: Yes, that's right.
Tim Bourquin: Okay. So how many of these positions do you have on at any given time and how many are day trades and how many are maybe swing trades?
Kerry Szymanski: Well, let's see. I would probably put on 1 to 2 short-term, intermediate-term trades a week in the S&P and usually I do those with the exchange-traded fund SPY. So those would be trades I'd be looking to hold for anywhere from—it might be as short as a day if the trade does not work out particularly well or if it moves in my direction and perhaps three days, three to five days. Day trades in the S&P, that's usually just one or two a day, and I do occasionally trade the euro as well bonds and notes.
Tim Bourquin: And what is it about the S&P that you favor? Is it because the patterns work nicely for it? Are you able to recognize them easily?
Kerry Szymanski: It's a very liquid market so you're never going to have a problem getting a feel and sometimes that's just as important when it comes time to getting out as it is to getting in, and it's very harmonic. So if you study those swings in the S&P, you'll see that they repeat with great consistency and that if you're going to be trading for a living that's very important. You want something that you can depend on. You're going to get a pattern that you can trade probably everyday or perhaps twice a day, and that's one of the few markets that really offers that kind of opportunity.
NEXT PAGE: Patterns Work Well with Other Markets |pagebreak|
Tim Bourquin: Does ETF, the SPY, ever lead or vice versa the E-mini contracts? Do you have one that shows something before that you can take advantage of in the other?
Kerry Szymanski: That's a great question. I wish I had a good answer for you on that. I don’t see any really consistent pattern though.
Tim Bourquin: Okay. Anything you do use for leading indicator at least to give you some idea of direction?
Kerry Szymanski: Leading indicator, I do look for momentum. That's one thing that's pretty helpful in the patterns as far as filtering them, if you can look for some momentum divergence. Frequently, you will find tick divergence is a good indicator showing you when the market is running out of steam. For example, if I'm looking to fade the S&P, I would prefer that the ticks not be making new highs if there's diversions there as the S&P is making a new high. Well, then that tells me that the ticks are failing to confirm, the broad market is failing to confirm that high, and that increases the probability that your trade is going to work at least on a short-term basis.
Tim Bourquin: You mentioned trading some currencies as well. You use the same harmonic patterns, looking for those same things and those charts as you do with the E-minis?
Kerry Szymanski: I do in the euro. That's really the only currency that I trade myself and that's not something that I trade everyday, although I have been playing with that recently, and the research I have in the process of completing suggests to me that that market would trade very well as a vehicle for someone who is looking something to day trade repeatedly.
Tim Bourquin: Now, some of these Gartley Patterns especially like the ones you talked about with Mr. Larry Pesavento—I consider him a friend. He's spoken at our Expo a couple of times. He's actually one of the only guys who is willing to trade live in front of an audience and give half his profits away to the audience if he makes money. But some of these things get pretty complicated. How long has it taken you experience-wise to really get a feel for these charts and get a feel for these patterns?
Kerry Szymanski: Well, let's see. How long has it taken me? I can tell you I've been trading them since 1999. That's when I started trading Gartley Patterns. I don’t think it's a difficult pattern to trade. You just need to know where it fits in a larger scheme of things. I don’t think it's an ideal pattern for day trading, but it's a tremendous pattern for short-term to intermediate-term trading. And if you can get a good feel for market position or if you can frame a market out, it fits extremely well to Elliott Wave as a Wave 2 or B completion or a Wave 4 correction.
So if you can get yourself a Gartley Pattern particularly in the Wave 2 and you can see some confirmation that that is correct in a larger term, those put you in a good position to catch an impulse Wave 3 and those can be very, very profitable moves.
Tim Bourquin: Now, I'm sure there are some books and things that have been written on it. You've got at a site at harmonicedge.com. We'll talk about that in a second as well as where you show these patterns and you show these charts and you see these things forming. Is that correct?
Kerry Szymanski: Yes, that's correct.
NEXT PAGE: Prep Work & Homework |pagebreak|
Tim Bourquin: Okay. Any books that you read when you first got started that helped you? You mentioned Robert Miner, one of his books or others?
Kerry Szymanski: Yes, Dynamic Trading by Robert Miner is an excellent book. I'd strongly recommend that for someone that was interested in learning about practical Elliott Wave strategies, and Larry's book is very good too, Fibonacci Ratios with Pattern Recognition. I would say those are probably the two best books that I've come across on the subject.
Tim Bourquin: Have you ever tried implementing these things on stocks?
Kerry Szymanski: I have. In fact, I do that on a regular basis. And they do—they work pretty well on stocks. Probably not quite as good as they seem to work on futures. So if you get any really highly liquid market, though, they seem to work very well.
Tim Bourquin: Okay. So you're looking for stocks probably that have pretty significant volume in order to get an accurate signal in these things.
Kerry Szymanski: Yeah, that's right.
Tim Bourquin: Okay. Well, what's ahead for you? I put people on the hot seat just a little bit here at the end of the interview to talk about opportunities that are coming up in the short and long term. Anything you're looking at right now in terms of trading opportunities you see coming maybe from today's trades, for tomorrow, or whatnot, anything like that you can share with us?
Kerry Szymanski: Well, I'm just—the market just closed so I'm just sitting here getting ready to start my research and plan my trades up for tomorrow. So right this moment, no, I don’t, Tim. I'd have to get my work done first.
Tim Bourquin: Well, actually that's a good question I had next, how much time are you spending on homework at the end of each trading day?
Kerry Szymanski: It takes, I would say, a good hour to two hours for me to get everything done and look at all the things that I'd like to look at in preparation for the next day.
Tim Bourquin: Okay. Well, that's quite a bit of dedication in the markets for sure, but I guess it's what's necessary to be consistent these days.
Kerry Szymanski: It's necessary for me anyway.
Tim Bourquin: Okay. What software do you use to do all these charting?
Kerry Szymanski: I use Ensign software.
Tim Bourquin: Okay. We'll have the link to that in our show notes as well. Kerry, thanks very much. I appreciate you taking the time to talk to us. Talk about—I want to give you an opportunity to mention your site, the harmonicedge.com. Can you talk about that?
Kerry Szymanski: Yeah. The Web site is basically a vehicle to educate individuals who are interested in learning about harmonic trading. So you're able to come in there and see examples of harmonic patterns in the indices, in the sector funds, as well as stocks and futures. And for those who are interested in learning to trade those patterns, we have a real time trading room and you can actually come in there and watch us trade the S&P in real time. We put all the patterns in there, the ones that work and the ones that don’t work, and there's every chart that we've ever posted is still there in the archives. So those are good learning tools.
Tim Bourquin: Excellent. Well, listeners, you'll definitely have to check that out. And Kerry, thanks so much for your time today. We appreciate it.
Related Articles on STRATEGIES
I spend a lot of time talking about block trades. These are the huge trades that show up on your opt...
I have been tracking a set-up for the SPDR Gold Trust ETF (GLD), which I analyze as a proxy for the ...
AllianzGI Equity & Convertible Income Fund (NIE), which yields 6.8%, invests in convertible equi...