Harmonic Trading: Bullish and Bearish Three Drives

Harmonic trading is a trading technique recognizing a specific pattern with the Fibonacci ratios. The technique assumes the patterns repeat themselves.

Harmonic trading is to identify these patterns and to identify when to enter or exit a position based on the historic cycles in the patterns.

The patterns are not 100% accuracy in connection to the Fibonacci ratios but approximately to the numbers. The important is to recognize the pattern.

The technique is useful to any time frame.

The Fibonacci Numbers
Harmonic Trading is based on the Fibonacci ratios. The primary ratios are the numbers 0.618, 0.786, 1.27, 1.618 and the secondary numbers are 0.382, 0.50, 1.00, 2.0, 2.24, 2.618, 3.14.

The most used numbers are the primary numbers; the ratios 2.24, 2.618, 3.14 are considered as extreme numbers.

The ratios are used to identify the cycle in the historical pattern and to identify the entry point, exit point and stop loss.

The Three Drives
A three drive is a 3 wave pattern following the Fibonacci numbers. The pattern could be a bearish or a bullish pattern.

A Bearish Three Drives
The pattern is illustrated in the image

The image illustrates a three wave cycle; the impulse waves are the Fibonacci numbers 1,27 / 1,618 and the corrective waves are the 0,618 / 0,786. At the point (3) the pattern will end and the price curve will be bearish. Point (3) is the exit point.

Calculation - Fibonacci numbers 0,618 and 1,27
An example; the price is 40 and rise to 50; the pattern rise with the numbers 0,618 and 1,27; the calculation is

0 – 1 (corrective wave)
40 – 50 =  10 * 0,618 = 6,18
50 – 6,18 = 43,82

1 – 2 (impulse wave)
40 – 50 = 10 * 1,27 = 12,7
43,82 + 12,7 = 56,52

1 – 2 (corrective wave)
40 – 50 = 10 * 0,618 = 6,18
56,52 - 6,18 = 50,34

2 – 3 (impulse wave)
40 – 50 = 10 * 1,27 = 12,7
50,34 + 12,7 = 63,04

63,04 is the exit point if the Fibonacci numbers are 0,618 and 1,27.

A Bullish Three Drives
The pattern is illustrated in the image

The image illustrates a three wave cycle; the impulse waves are the Fibonacci numbers 1,27 / 1,618 and the corrective waves are the 0,618 / 0,786. The pattern will end at the point (3) and the price curve will be bullish. Point (3) is the stop loss point and the entry point.

Calculation - Fibonacci numbers 0,618 and 1,27
An example; the price is 50 and decrease to 40; the pattern decreases with the numbers 0,618 and 1,27; the calculation is

0 – 1 (corrective wave)
50 - 40 = 10 * 0,618 = 6,18
40 + 6,18 = 46,18

1 – 2 (impulse wave)
50 - 40 = 10 * 1,27 = 12,7
46,18 - 12,7 = 33,48

1 – 2 (corrective wave)
50 - 40 = 10 * 0,618 = 6,18
33,48 + 6,18 = 39,66

2 – 3 (impulse wave)
50 - 40 = 10 * 1,27 = 12,7
39,66 - 12,7 = 26.96

The entry point and stop loss are set at the price level 26,96 if the Fibonacci numbers are 0,618 and 1,27.