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How Harmonic Forex Patterns Work

The key questions are: how - and why - do harmonic forex patterns work?

No-one really knows why they work. But we know they do based on observation and empirical evidence.

We can see for ourselves patterns based on Fibonacci ratios occurring throughout nature.

This has been known for many thousands of years ago, long before Fibonacci came on the scene.

The key Fibonacci ratios are - the golden mean 1.618, its reciprocal 0.618, plus their square roots 1.272, 0.786, and their fourth roots 1.128 and 0.886.

The Fibonacci ratios are related to chaos theory. Traders will be familiar with the following characteristics of the forex market :

  1. Long-term correlations and trends (a persistence or "feedback effect" - the past influencing the present)
  2. Erratic markets under certain circumstances and at certain times
  3. Fractal structure - smaller timeframes look the same as higher timeframes.
  4. Sensitive dependence on initial conditions - less predictability the further out in time we look.

These are properties of non-linear dynamic systems, from chaos theory.

And within the chaotic markets are identifiable, frequently recurring patterns based on the Fibonacci ratios. That is not theory - it's fact and easily observable.

For more details read the Edgar Peters, Benoit Mandelbrot books - you can find them all on this link - Further Reading

Harmonics patterns based on Fibonacci ratios are everywhere in nature - plants, sound waves, light waves, music, weather patterns, the movement of planets. And, they are also in the financial markets.

paulPatterns in Nature - Birds

After all, the forex market consists of hundreds or thousands of traders worldwide, some of them institutional, others retail or individual. Each one independently making decisions about and reacting to market prices.

Because people are creatures of habit they react consistently to repeating circumstances based on fear and greed. It's the combined actions of all those individual traders, seemingly random actions, that produces the predictable order of recurring price patterns.

Using this knowledge of how harmonics work, traders have been using this natural phenomena as part of a strategy to gain an edge in trading for over 75 years.

For more details of the individual forex patterns, link to:

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Further Reading

harmonic forex trading books Good Books for Harmonic Traders