Excerpted from ‘Trade What You See, How to Profit From Pattern Recognition’Authors Larry Pesavento and Leslie Jouflas
My good friend and trading buddy Jim Twentyman brought the concept of harmonic numbers to my attention. Jim had taken a sabbatical to study the works of WD Gann. He labored more than 12 months into the works of the legendary trader. Jim was very intrigued by the number 54. Intrigued was an understatement! To this day, Jim has never told me the significance of 54 and this is a man who has shared everything with me. I know that it is a metaphysical number but the exact meaning is still unsure with me.
Harmonic numbers are numbers that occur over and over again on a chart. They can be found easily by examining 30-minute charts over a 30-day period. Statistically, you need 100 samples to get one valid harmonic number. After a hundred samples one swing will appear prominent. All the swings on the 30-minute chart will relate to the harmonic number by the ratios we use; .618, .786, 1.00, 1.27, 1.618, 2.00, etc. Once this number is ascertained it can help you in trading several different ways. First, it can act as the first profit objective. Second, it can act as a maximum stop loss on a trade.
Harmonic numbers are one of the more difficult concepts to grasp (much like the opening price principle) but once you see how they can be applied the mystery becomes the trader’s friend.
Markets vibrate up, down, and sideways all the time. They repeat this pattern for all eternity. Think of the market as a giant tuning fork that vibrates constantly. Once a trader discovers this vibration he has an edge over the market, albeit a small one. But it is still an edge just the same! Study the harmonic numbers of your favorite stocks and commodities. It will pay dividends as time goes by!
Here is the primary harmonic number for the S&P 500. This started on the first day of trading, April 16th, 1981 (Elvis’ death). It has remained this all along.
540 x 1.27 = 685
540 x 1.618 = 8.70 (8 pt stop)
540 x 2.00 = 1080
Minimum contraction in S&P 500 is 350. 350 is .618 of 540.
Use these #’s to take profits and use them for maximum stop protection!
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Best wishes for successful trading!
Leslie Jouflas, CMT