# Learn To Trade

# Harmonic analysis in Forex

01-02-2018 | No Views : 1140

**The objective of the Harmonic analysis lesson in financial markets**

Harmonic analysis is one of the most important types of analysis used in financial markets, as it represents patterns indicating that the trend is close to a reversal. These models are highly credible because of their reliance on Fibonacci ratios.Harmonic analysis can be used for good results when combined with other analysis tools. Many technical analysts and traders combine the harmonic trading with classical analysis. It is also important to take into consideration the Japanese candlestick patterns. For example, if one of the Harmonic models is completed, Japanese candlestick behavior is reflective, here the upside potential for price reversal.

Although harmonic trading patterns are reversible, this is not evidence of a change in price direction when forming, but sometimes a signal that the price needs some correction, and the pattern may be completed in the general direction. The trend is bullish but the price has fallen to correct and at the end of this decline the pattern has been completed, then it is a sign that the price will return to the upside and continue in its current direction after the correction has finished.

Some people have difficulty understanding this type of analysis and see a mechanism as complex. Here we will discuss how to use harmonic analysis in a simplified way. At the end of the lesson, you will be able to extract harmonic models.

**The relationship of harmonic analysis to Fibonacci ratios**

Harmonic models are composed of price waves in most models, which are four waves. These waves are produced by Fibonacci ratios. For example, it is possible that the first wave in the pattern is bullish, and the second wave comes down to the corrective level of 0.382 Fibonacci. We will talk about the Fibonacci ratios used with Each model is more detailed below.
**Fibonacci ratios used in harmonic analysis**

Although Fibonacci ratios are important in the harmonic analysis, they are also important in extracting potential reversal places in technical analysis and are used by many technical analysts to extract important support and resistance positions.Dear reader, if you are unable to set Fibonacci levels on the chart, you can go back to the Fibonacci ratios in the money markets to be able to draw Fibonacci levels on the chart, before completing the lesson in order to reach the greatest benefit.

**These are the ratios that we will use to extract harmonic trading models:**

- 0.382 - 38.2%
- 0.50 - 50%
- 0.618 - 61.8%
- 0.786 - 78.6%
- 8886 - 88.6%
- 1.27 - 127%
- 1.618 - 161.8 &
- 2.24 - 224%
- 2.618 - 261.8%
- 3.618 - 361.8%

**Harmonic models**

Harmonic models are reflective models coming in both ascending and descending directions. Each model has a different shape and characteristics and we will start with the most popular model, AB = CD
**AB = CD model in harmonic analysis**

Gartley was the first to describe this model in 1935 in the Book of Profits in the stock market, and pointed out the model of rapid lightning but the model spreads in the name AB = CD.
**Configure the form AB = CD**

- This pattern is formed in the bearish direction from a descending wave, with four points in the form of three sides, the first descending leg starting from point A and ending at point B, then the second leg ascending from point B and ending at point C, then the third and last Point C ends at point D, which represents the end of the form as shown in the attached image.
- When the pattern comes in the upside, the first leg comes from the point A and ends at point B, then the price falls to be the second leg that starts at point B, ends at point C, then the price rises to be the last leg that starts at point c and ends at Point d.

**Fibonacci ratios in the harmonic model AB = CD**

- 0.618 - 61.8%
- 0.786 - 78.6%
- 1.27 - 127%
- 1.618 - 161.8%

**Fibonacci ratios of BC leg**

- 0.618 - 61.8%
- 0.786 - 78.6%

**Fibonacci ratios of CD leg**

- 1.27 - 127%
- 1.618 - 161.8%

**Notes on the ideal model**

- When point C comes at a corrective level of the AB leg, a signal that point D will come at 161.8% Fibonacci of the BC leg.
- Also, if C is at 78.6% Fibonacci retracement of wave AB, it is a sign that point D will be at a correctional level of 127% Fibonacci of the BC wave.
- The length of the AB leg is equal to the time period in which the CD leg is.

The stop loss for the bearish pattern should be the top of the D point and the pattern completes, and below the D point in the bullish pattern.

**Confirm Form AB = CD**

The model AB = CD is not used before it is completed and it reaches point D. The completion point of the form is completed. Before it is complete, the configuration form is called incomplete, and it is preferable not to rely on it alone.Japanese candlesticks or technical indicators can be combined with harmonic analysis to reach the best reversal areas and reduce risk to profit.

**Example of model AB = CD**

This is an example of the bearish AB = CD pattern in the harmonic analysis on the EUR/USD chart on the 4 hour time frame. Looking at the chart in the attached picture, we see the price reversal and decline after the harmonic trading pattern is completed.We see the beginning of the rise of the price from point A to point B component of the first leg, and then fell to point C, representing 61.8% Fibonacci of the wave AB, and the price rose to 161.8% Fibonacci of the leg BC, reaching point D to complete the model.

We also noted a confirmation of the reversal with the emergence of negative price behavior on the Japanese candlesticks called Inside Bar. There was also a negative signal on the Stochastic Momentum indicator, where we note the negative cross of the two lines of the index after reaching the level of saturation 80, and this was confirmation of the bearish AB = CD model In the fall of the price after.

Dear reader, we have completed the first lesson of the Harmonic Analysis Series in the financial markets, which will deal with all the harmonic trading models, the famous ones and the unknown patterns to be fully aware of this distinctive type of analysis, which helps you execute high quality transactions, Expect future price.

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