Find Great Trades with Harmonics
06/30/2011 5:45 am EST
Leslie Jouflas discusses harmonics: Repetitive and readily identifiable patterns on price charts that allow swing traders to identify trades and manage risk in all markets and time frames.
Leslie Jouflas joins me today, and Leslie, we’re talking harmonics; what are they?
Harmonics is a fascinating subject in trading. It’s one that’s really not talked about a lot…yet.
It’s sort of when I learned trading back in the mid-90’s, “Fibonacci” was a term that really wasn’t in the mainstream yet, but I think “harmonics” is a term that traders will start to hear and learn more and more about.
Harmonics really are repetitive swings or vibrations that occur in the markets, and they can be found on price charts. Every market, every stock, has its own sort of vibration and harmonic that it tends to trade to.
Since markets are always in a constant cycle of contraction and expansion phases, the harmonics follow these, so you’re going to have smaller swings at times during contracting phases, and then eventually that’s going to be followed by a larger swing, or harmonic, into an expanding phase or trend type of phase.
How can traders use the harmonics?
Well by studying the markets that they trade or individual stocks, it’s important to really know the market that they are trading and simply go to the time frames that they trade most often and start to study the swings.
What they’ll find is that all of the swings are related and that there will be a few swings that are going to be repeating on a regular basis on that time frame.
Traders can learn the characteristic of the markets or stock by studying the harmonics. They can use it for trade entries, stop loss placement, and profit target taking, which is what every trader needs in their method.
Can it apply to all markets?
Absolutely. Harmonics, repetitive swings occur in all markets and on all time frames. Whatever time frame or market a trader trades, they can study the harmonics.
Can you give me an example?
Sure, I trade the S&P 500 on a regular basis, and I trade on an intraday time frame. Generally roughly about a five-minute chart. On that five-minute chart most days, there will be at least four, five, six swings of right around five points to six points in the S&P, unless it’s a trending day, which would be an expansion-type day.
On a regular basis, I can use those swings to determine turning points in the market and it will start to set up what my trading patterns are. I watch these swings every day and use them for my trade set-ups.
Can you also use it as a risk management tool?
Absolutely, because learning to place stop losses is as much of an art as it is a science. The repetitive swings in the market can help a trader place a reasonable stop loss that’s not too close—sometimes traders are getting stopped out frequently, probably because they’re trying to protect capital too much and not really looking at what the market tends to do on a regular basis.
Knowing these swings can help a trader to learn to place a good stop loss that shouldn’t be stopped out unless the trade is just wrong. The swing is starting to expand.