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82

This potential reversal zone contained five harmonic calculations that all converged around 33. Such a harmonic set-up is a highly probable reversal area. The convergence of these numbers and the obvious volume spike indicated a significant area for a bounce.

Although the price action was quite strong on the day it hit the potential reversal zone, the price action and the volume exhaustion indicated a significant reversal in the works. Even ifyou waited a day for clear confirmation of the reversal, the set-up projected an important bottom in the stock.

Volume spikes frequently indicate a state of exhaustion. Although volume spikes will not appear in every set-up, such a phenomenon complements a harmonic set-up very nicely.

Utilizing these other signs will help determine the validity of a potential reversal zone. Although they do not occur in every set-up, charts with other time frames, prior gaps and volume extremes can improve executions. When these signs coincide with a harmonic area, they can provide greater assurance of a successfril trade.



Scanning for Stocks

I maintain a group of several hundred stocks that I review throughout each week. Although this might seem like a large list of stocks to follow, it is not too time consuming to review once your eyes are trained to identify pattems. In fact, most Intemet sites allow users for no charge to maintain a portfolio of stocks to track. In addition, advanced stock software programs permit users to just point and click on a list of stocks to pull up charts. So, I recommend that you utilize a good chart service that makes screening a large population of stocks very feasible.

The pattems will become easier to identify after some time of study. The more charts you examine the more the pattems will begin to jump out at you. Once you are able to identify the basic pattems, the scanning process becomes rudimentary. It is important to remember that you will not fmd trade set-ups every day, or even every week. This methodology requires patience. If there are not clear set-ups available, I recommend that you just wait for them to materialize - because they will.

When there are no clear set-ups available, it is important to resist the urge to trade. These pattems should become so ingrained in your trading mentality that harmonic set-ups represent the onlv opportunities available. Mark Douglas, author of the Disciplined Trader, suggests: "think of not trading as putting money in your pocket." I agree with him.



Without the reliable harmonic set-up, any trade that is not executed in accordance to the trading rules becomes a random event. You are straying from the trading plan. On many occasions, I have put on "seat-of-my-pants" trades, buying or selling on a haunch. Honestly, my performance with these trades as compared to harmonic set-ups is miserably poor. In fact, when I buy or sell on an impulse I am usually wrong! Therefore, when there are no harmonic set-ups available, DONT TRADE!

Once you are able to quickly identiify potential pattems, the entire scanning process becomes simple. Each stock that you examine will take only a few moments to determine whether or not a potential set-up exists. The most important clue that I look for is some type of AB=CD pattem that appears to be developing. Since the AB=CD is a basic pattem that exists within all of the complex pattems, it is an easy way to quickly scan stocks. In addition, the AB=CD pattem should "stick out at you," where the legs of the price movement are very clear. Again, it is important not to force the pattem.

After you notice a potential pattem developing in a stock, you can proceed to calculate some Fibonacci retracements to determine the reversal zone. A reversal zone should have at least two numbers within a specific area, although I prefer three. After you develop some experience in calculating the Fibonacci numbers, your eye will be trained to look at the general area of where the retracement percentages are located. For instance, you will be able to differentiate between a .618 versus a .786. Or, you will be able to look at a price chart and determine if an extreme price move has exceeded the 1.618. Training your eye "to gauge the numbers" will fiarther facilitate the screening process.

After you define the pattem and the potential reversal zone, it is important to study past price action. Although this does not require calculating every price move on the chart, it might be helpfiil to see if the stock has acted harmonically in the past. Also, it is important to see if there are some Fibonacci numbers that are more prevalent reversal points than others. When certain numbers reoccur throughout a price chart, it will help identify potentially higher probability trade set-ups.

If a stock seems to possess all of the characteristics of a harmonic setup, it is important to prepare for a potential trade. First, print out the chart; then draw the basic framework of the pattem that you have identified. After drawing the pattem, illustrate the set-up by connecting the actual points with



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