Harmonic Patterns
Purely Subjective Approach to Trading Elliott Waves
The presenter does not assume any responsibility whatsoever for the actions of any person viewing or reading the contents of this presentation. The presenter may or may not hold positions in the financial instruments discussed. Trading and investing involve high levels of risk. Future results can be dramatically different from the opinions expressed in this course. Past performance does not guarantee future performance. This presentation is provided for informational and educational purposes only and does not constitute any type of investment advice. There are no implied guarantees for the accuracy of information or warranties associated with any representations made in this presentation and the presenter shall not be held liable for any inaccurate or incomplete information or for any improper or incorrect use of the information contained in this course.
Bio – About Us -
Alex Bernal, CMT President & Chief Analyst Aether Analytic LLC. Quantitative Analyst and Trading Strategy Architect Previous Positions - Bear Stearns, M&N Trading, Allston Trading
Aether Analytics Current and Past Client List Includes - Goldman Sachs - Gambit Trading - Facet Capital Partners - Breakwater - Westridge Capital - IB Group - Obsidian Analytics - Sardonyx Capital - PCLA Group - Ameriflex Financial - Skylark Capital - Lido Isle Advisors - GTA Group
We believe that the structure of neighboring waves in price action tend to be related by geometric & mathematical harmony… And we also believe that most financial systems have select moments within a regime that have very high predictability.
Brief History of EW and Harmonic Patterns HM Gartley
RN Elliott
Carney
Pesavento
Traditional Classic Elliott Wave Model
Copsey Modified Elliott Wave
Fractal Dimension
Universal Dogma 4 : The laws of nature are fixed. They are the same today as they were at the beginning, and they will stay the same for ever.
How to Find & Measure Harmonic Patterns
How to Find / Measure Harmonic Patterns
Important Geometric Ratios - *Bryce Gilmore 0.09
0.236 – 0.146
2.00
4.00
0.146
0.236 ÷ 1.618
2.236
5.00 - Diagonal of two squares
0.236
0.382 ÷ 1.618
2.618
1.618 × 1.618
0.382
0.618 ÷ 1.618
3.14
Pi
3.33
2.618 × 1.272
0.414
2.00 ÷ 2 – Sacred square
0.486
0.618 × 1.50
4.236
2.618 × 1.618
0.50
1 / root 4
6.854
4.236 × 1.618
0.557
Reciprocal of 1.732
0.618
1.00 ÷ 1.618
0.685
0.618(0.786)
0.707
2.00 ÷ 2 - Sacred Cut
0.786
1 ÷ 1.272
0.886
0.786
1.0
1.618 ÷ 1.618
1.13
1.27
1.272
1.618
1.414
2.00 - Diagonal of a square
1.460
1.618(0.786)
1.618
Phi – Golden Ratio
1.732
3.00 - Diagonal of a cube
1.886
4.00
1.902
Diagonal of a Golden Rectangle
Æther Analytics
RISK MANAGEMENT
RISK MANAGEMENT
RISK MANAGEMENT
RISK MANAGEMENT
External Wave Structure
Focus Areas
Typical EW Trading Rules Trading Wave 1 (end of wave C) 1. Enter in Wave 2 (of 1) after ABC Down Reaches 0.618% of 1. 2. Stop loss @ low of wave 1 3. Exit after 5 wave up (end of wave 1) • • • •
Problem – Entering Counter Trend (fading) (low probability success) Problem – Stop loss is defined as price distance not volatility measure Problem – Risk Reward is not defined before trade is made Problem – No quantitative evidence to support thesis. Merely observational
1 B
1’
A
Entry 2’
C
Stop
Typical EW Trading Rules Trading Wave 2 (end of wave 1) 1. NOT Recommend by most EW practitioners 2. Stop loss @ high of wave 1 3. Exit after ABC or 0.618% of wave 1 • Problem – Limited Profit potential since next wave (3) is expected to be bigger opportunity • Problem – Stop loss is defined as price distance not volatility measure • Problem – No quantitative evidence to support thesis. Merely observational
1
2
Typical EW Trading Rules Trading Wave 3 (end of wave 2) 1. Enter @ beginning of wave 3 (wave2” of wave 3) Or 2. Enter @ breach of wave 1 High 3. Stop at Wave 2 low 4. Target is at least 1 : 1 Length of wave 1 (3 never shortest • Success – Defines Risk Reward Before Trade • Success – Trades With Trend (best wave to trade) • Success - Quantitative evidence to support this edge • Problem – lose profit distance needed to confirm
1
Entry
Entry
2
Stop
Typical EW Trading Rules Trading Wave 4 (end of wave 3) 1. 60% -70% of the life of Markets are consolidating Problems – Complexity, Rule Exceptions. Problems – No Definable Risk Reward Problems – Shorting against Strongest Wave (3)
Typical EW Trading Rules Trading Wave 5 (end of wave 4) 1. (after ABC) by at 2” of 5. 2. Stop loss @ low of 4C 3. Exit after 5 waves complete 5th () • Problem – pinpointing the end of a complex wave 4 is very difficult (whipsaws) • Problem – No specific profit objective (wave 5s often can be 3 waves) • Problem – Theoretically buying end of trend move • Success – In ideal wave, can be profitable
3 B
1”
Entry
2”
A
4 C
Entry Stop
Typical EW Trading Rules Trading Wave A (end of wave 5) 1. Enter when wave 5 = length of wave 1 or. 2. Enter on breach of wave 4” of the 5th wave. 3. Stop loss @ high of wave 5 or undefined 4. Exit after 3 waves to complete ABC • Problem – pinpointing the end of a complex wave 4 is very difficult (whipsaws) • Problem – No specific profit objective (wave 5s often can be 3 waves) • Problem – Theoretically buying end of trend move • Success – Large Profit Potential 5” 5 Stop • Success – Quantitative evidence
3”
3 B
4”
1”
2”
A
4C
Entry
Typical EW Trading Rules Trading Wave B (end of wave A) 1. NOT Recommend by most EW practitioners 2. Stop loss @ low of wave 1 3. Exit after 5 wave up (end of wave 1) Problem – Same Complexity problems as wave 4 Problem – Limited profit potential (buying the last gasp) Problem – little quantitative evidence
• • •
B
5
C’
B
A’
Entry
A
B’
C
A
Stop
Typical EW Trading Rules Trading Wave C (end of wave B) 1. Enter on wave 2’ or breach of wave 1’ after ABC 2. Stop loss @ C 3. Exit after C completes ABC or length ratio to A • Success – Defined Risk Vs Reward • Success – First macro opportunity to enter new trend with lower risk • Success – Strong quantitative evidence of edge • Problem – Loss of distance to confirm
B
C’
5
2’
B
A’
A
1’
B’
C
A
Stop
Entries
Typical Elliott Wave Rules – Problems (Personal opinion based on AE research) 1. Arguably SUBJECTIVE process due TO THE ANALYSTs interpretation of complex rule set (Linear based thinking on a non-linear dataset) • Rules too rigid and No consistent rules for exceptions • Subject to constant reinterpretation : If they cant find waves they look backwards and recount. Discrediting all work up to that point. “….just kidding moments” • Much evidence to disconfirm rules 2. MULITPLE Counts?! – backup counts to continue to be RIGHT 3. Ratio Lengths have too much leeway (Sometimes, typically, often…fibs. etc) 4. Difficult to define RISK / Reward in certain scenarios 5. Little Quantitative / statistical evidence of a definable edge : Still a Theory Harmonics – Isolation Approach 1. Does not Aim to explain all markets or human behavior. When approached with a Chaos Theory / Complexity Theory Foundation allows for unlimited possibility. 2. Only 1 OBJECTIVE “count” or definitive rules on each patterns ratios and turning points • Creates Binary Decision Tree (true, false) 3. Compliments the Aims of trading with Elliott Wave (Waves, 2, 5, B favored) 4. Risk management built into the structures (Clear Risk Reward) 5. Patterns also prove to work without consideration of overall EW count 6. STRONG QUANTATTIVE / statistical evidence of a definable edge : Provable System
Section 2 Advanced Analysis of Harmonic Patterns
Structure Ranking External Vs Internal
Internal • What is going on Inside the pattern. • Specific price / volume behavior on each leg • Angle & Ratio Measurement of Cross Angles • Time Symmetry External • Where the pattern is appearing in context of larger term trend • What type of wave structure terminates at X point • Does X confirm in a high probability mean reversion zone. *Median Absolute Deviation
Internal Angles
Æther Analytics
ABC
Too Obtuse? Too Acute? ABC : XBD Angle Ratio
XBD
Cross Angle & Length Ratio Measurement’
A
C
B
D X
Æther Analytics
Harmonic Time Analysis
Time Ratios – Detailed Structure
Æther Analytics
Indicators in Harmonic Trading Focus on only Non- Linear Indicators ….The problem with virtually all indicators is that they are causal. That means they directly depend on data for their computation and signaling. As a result, the computation cannot be accomplished until after the data arrives, and - as a result - all causal indicators have lag – DR Ehlers PRICE ALMOST ALWAYS LEADS INDICATORS, BUT PREDICTIVE INDICATORS DO EXIST Focus only on Very Low or Zero Lag predictive functions Assistance in execution – Quantitative Signaling & Confirming Reversal Assistance in measuring momentum – Fractal Dimension and time & price deceleration Assistance in measuring trend continuation – Regime Monitoring - *Most Smoothing Adds Lag
Sample Statistical Study All time frames
% Failure Rate Per Tier of Pattern Rank
Pattern Type
# found
NO Ranking
Below 25% 25%-75%
Above 75%
95%+
Gartley
200,173
16%
14.48%
8.84%
5.59%
3%
Butterfly
215,616
19.5%
16.21%
7.54%
4.25%
2.58%
Crab
298,455
24.01%
20.59%
16.58%
8.59%
3.56%
Deep Crab
164,589
26.05%
22.05%
17.21%
9.59%
3.86%
Bat
189,584
17.89%
12.47%
7.68%
3.99%
2.52%
Cypher
226,458
17.25%
11.89%
6.45%
3.45%
1.97%
Shark
152,484
28.54%
21.22%
15.33%
8.87%
4.01%
5-0
176,548
22.25%
16.48%
11.85%
5.58%
3.39%
Sample Data set : Minimum 4 Years Tick Data – 2013 Updated Success Defined as a % of patterns that reached target 1 or Moved Enough ATR to adjust stop to breakeven
Harmonic System Backtest Performance Futures & Forex Only In Sample Period
2000-2013
Forward Test Period (Tracked Live Trades)
Apr 2013 - Present
Profit Factor
2.50
Percent Profitable
54.18%
Sharp
0.68
Expectancy
0.5571
Average DD
8.177%
Return
54.18%
Max DD
21.70%
* Past results are no indicative of future performance
Harmonic System Performance
Takeaways
• Markets are provably Chaotic Systems. Constantly moving across the path of least resistance in repeating fractals. Always moving from a regime of a balanced state to trending state. • We can measure these market regimes with non-linear based models. Hurst Exponent & Fractal Dimension • Harmonic Pattern trading adds an objective systematic approach to trading subjective Elliott Wave Patterns or forecasts. • Not all harmonic patterns carry the same probability of success • Analysis of internal & external important • MOST TECHNICAL INDICATORS HAVE PROVABLY LOW OR ZERO EDGE Contact Info Alex @ AetherAnalytics.com Twitter : @interestratearb AetherAnalytics.com Skype : alexbernal0 Old Reports Old Newsletter User Guide In Development : Automatic pattern scanner, Automatic trading algo
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Quick Pattern Reference Guide
Target 2 1.272 – 1.618 of XA
Ideal Bullish Gartley A C
Target 1 0.618 – 0.786 of XA
B
D
0.786
PRZ
X Æther Analytics
Ideal Bullish Gartley X D
0.786
PRZ
B
Target 1 0.618 – 0.786 of XA
C
A Target 2 1.272 – 1.618 of XA
Æther Analytics
Target 2 1.272 – 1.618 of XA
Bullish Gartley A C
Target 1 0.618 – 0.786 of XA
B 0.707
D
0.786
PRZ
0.886
X Æther Analytics
Bullish Gartley X D
0.886 0.786
PRZ
0.707
B
Target 1 0.618 – 0.786 of XA
C
A Target 2 1.272 – 1.618 of XA
Æther Analytics
Target 2 1.272 – 1.618 of XA
Ideal Bullish Butterfly A C
Target 1 0.618 – 0.786 of XA
B
X
1.13
D Æther Analytics
1.272 1.618
PRZ
Ideal Bullish Butterfly D
1.618 1.272 1.13
X
B Target 1 0.618 – 0.786 of XA
C
A Æther Analytics
Target 2 1.272 – 1.618 of XA
Target 2 1.272 – 1.618 of XA
Bullish Butterfly A C
Target 1 0.618 – 0.786 of XA
B
X
1.13
D Æther Analytics
1.272 1.618
PRZ
Ideal Bullish Butterfly D
1.618 1.272 1.13
X
B Target 1 0.618 – 0.786 of XA
C
A Æther Analytics
Target 2 1.272 – 1.618 of XA
Target 2 1.272 – 1.618 of XA
Bullish ‘Gar-fly’ A C
Target 1 0.618 – 0.786 of XA
B
X
1.13
D
Æther Analytics
1.272 1.382
PRZ
Bearish ‘Gar-fly’ D
1.618 1.272 1.13
X
B Target 1 0.618 – 0.786 of XA
C
A Æther Analytics
Target 2 1.272 – 1.618 of XA
Target 2 1.272 – 1.618 of XA
Ideal Bullish Bat
A Target 1 0.618 – 0.786 of XA
C
B
D X
Æther Analytics
0.886
PRZ
Ideal Bearish Bat X
D 0.886
PRZ
B
Target 1 0.618 – 0.786 of XA
C A Target 2 1.272 – 1.618 of XA
Æther Analytics
Target 2 1.272 – 1.618 of XA
Bullish Bat
A Target 1 0.618 – 0.786 of XA
C
B
D X
Æther Analytics
0.886
PRZ
Bearish Bat X
D 0.886
PRZ
B
Target 1 0.618 – 0.786 of XA
C A Target 2 1.272 – 1.618 of XA
Æther Analytics
‘Alt’ernate Bullish Bat Target 2 1.272 – 1.618 of XA
A C
Target 1 0.618 – 0.786 of XA
B
1.00
X D
Æther Analytics
1.13 1.272
PRZ
‘Alt’ernate Bearish Bat D
1.00 1.13
X
PRZ
1.272
B
Target 1 0.618 – 0.786 of XA
C A
Æther Analytics
Target 2 1.272 – 1.618 of XA
Bullish Deep Crab
Target 2 1.272 – 1.618 of CD
A C Target 1 0.618 – 0.786 of CD
B X
1.50
D
Æther Analytics
1.618 1.786
PRZ
Bearish Deep Crab D
1.786 1.618
PRZ
1.50
X
B
Target 1 0.618 – 0.786 of CD
C A Æther Analytics
Target 2 1.272 – 1.618 of CD
Bullish Crab
Target 2 1.272 – 1.618 of CD
A C Target 1 0.618 – 0.786 of CD
B
X
1.50
D
Æther Analytics
1.618 1.786
Bearish Crab D
1.786 1.618
PRZ
1.50
X
Target 1 0.618 – 0.786 of CD
B
C A Æther Analytics
Target 2 1.272 – 1.618 of CD
Bullish Cypher
Target 2 1.272 – 1.618 of XC
C
A
Target 1 0.618 – 0.786 of XC
B 1.04
D X
Æther Analytics
0.786 0.886
PRZ
Bearish Cypher A D
1.786 1.618
PRZ
1.50
B
Target 1 0.618 – 0.786 of CD
X
C
Æther Analytics
Target 2 1.272 – 1.618 of CD
Bullish Shark
Target 2 1.272 – 1.618 of CD
C
A Target 1 0.618 – 0.786 of CD
B
1.13
X D
1.272 1.382
Æther Analytics
PRZ
Bearish Shark D
1.382 1.272
PRZ
1.13
A
B Target 1 0.618 – 0.786 of CD
Target 2 1.272 – 1.618 of CD
X
Æther Analytics
C
Bullish Three Drive – Wolfe Wave
Target 2 1.272 -1.618 A3
A B
1 Buy Stop to Entry
2
3 Æther Analytics
Bullish Three Drive – Wolfe Wave 3 Sell Stop to Entry 2 1
B A
Æther Analytics
Target 2 1.272 -1.618 A3
Bullish 5-0 Pattern
Target 1.00 -1.618 BC
C
A
D
X
B
Æther Analytics
Bearish 5-0 Pattern B X
D A
C Target 1.00 -1.618 BC
Æther Analytics
Complex Harmonic Patterns & Misc. Wave Fractals
‘Kane’ Pattern A C
B
X
Æther Analytics
D
Bullish Crown Pattern
Target 2 1.272 -1.618 BC
X
B
Target 1 B - Point
D
A
1.00
F
E C
Æther Analytics
G
Bullish Crown Pattern
Target 2 1.272 -1.618 BC
X
B
Target 1 B - Point
D
A
1.00
F
E C
Æther Analytics
G
Gilmore ‘False Breakout’ Continuation Cypher Symmetry C
A
B D
X
Length of A-D = 0.5 * BC = 0.618 * BC = 0.786 * BC = 0.707 (sometimes) * Price & Time Symmetry
Æther Analytics
Gilmore ‘Double Cross’ Shark Symmetry C A
B
X Length of X-C = Length of A - D * Price & Time Symmetry
Æther Analytics
D
