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[start]  [ 2 ]                                                                                             
driven the price down is very close to ending. Quite often, the harmonic techniques identify trades at or very close to the exact reversal point. When these trades yield valid reversals, you will realize the true cyclical nature of price action.
It is important to note that harmonic analysis works on any time frame - hourly, daily, weekly or monthly stock charts. I believe the clearest trade opportunities, or "set-ups," appear on daily charts for position or swing trades. However, hourly charts provide excellent set-ups for shorter-term or day trades, It is also amazing that these methods work on longer-term charts, as well. Weekly or monthly charts are excellent measures of historically critical areas for stocks. As you will see, these methods will gauge price action effectively in any situation.
The most important concept about harmonic trading to remember is that you are respecting the natural cycles of the market. Once you are able to identify these turning points and execute these trades effectively, you will realize that stock price fluctuations are merely cycles of growth (rally) and decline (sell-off). Since these cycles can be quantified by Fibonacci numbers and Price Pattem recognition techniques, it is possible to execute trades with respect to the natural rhythm of the market. In addition, you will realize that such analysis is truly the only means to understand a stocks price action and to define potential trading opportunities.
Potential Reversal Zone
An Area of Convergence
History has proven that a convergence of Fibonacci numbers and price pattems provides a highly probable area for a reversal. When such a congregation of numbers occurs, it is possible to assess an optimal point for taking a trade, while defining a loss limit that it is very small relative to the potential profit. This area of convergence is called the Potential Reversal Zone.
The key to utilizing these harmonic measures when analyzing a price chart is to determine the area where the greatest amount of numbers congregate. When three, four or even five numbers come together within a specific area, you must respect the high probability for some type of reversal.
It is important to closely examine price action in the potential reversal zone. When a congregation of numbers occurs, a stock tends to act quite uniquely from past price action. If a reversal does occur, often the stock will literally bounce off the area, holding in the reversal zone for only a short period of time. However, if the reversal zone is invalid, the price action usually will be extreme and will provide clear signals that this trade opportunity is to be avoided.
The stock charts in this book illustrate how a convergence of harmonic numbers has an unusual effect on price action. It is almost uncanny that these stocks act in such a manner. Although I can not explain why these stocks act in this way, I know from studying thousands of charts that a convergence of harmonic numbers has a profound effect on price action.
"A Feel for the Numbers"
Once you leam these techniques, the potential reversal zone can be easily calculated. If you can add, subtract, multiply and divide, you can determine the potential reversal zone. However, determining which number within the reversal zone is the best entry point for a trade can be a tricky task. Developing "a feel for the numbers" within the harmonic area takes practice and experience. But, there are general rules of thumb that will help optimize the execution within the potential reversal zone.
Fibonacci numbers are very peculiar because in a reversal zone that contains several harmonic calculations, it is difficult to know which point will end the trend. Although these rules are generalizations, I believe that there is a certain degree of weighting to the numbers.
In general, the bigger the number, the better. This means that the Fibonacci number that is calculated from the largest price leg is usually the most significant, as an entry point for a trade in a reversal zone. Another mle of thumb is the bigger the pattem, the more significant the potential reversal. For example, a pattem that develops on a weekly chart will be more significant than a set-up on a daily basis. Also, if there is a smaller pattem within a larger pattem, the larger pattem usually will be more significant.
Another important consideration involves the harmonic numbers within the potential reversal zone. The more numbers that exist within a specific area, the more harmonic the potential reversal zone. This is an important rule of thumb because a very harmonic area will indicate a great deal about a stocks direction. For example, if a potential reversal zone contains four or five numbers, the area should be considered very harmonic. If a stock reverses from this area, the potential reversal zone could be considered as an important tuming point. But, if a stock does not reverse, it would indicate that the predominant trend is quite strong.
The potential reversal zone should be considered even more harmonic, if the numbers are very close to each other. When a congregation of harmonic numbers is within a point, the area should be considered very
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