Harmonic Patterns

Purely Subjective Approach to Trading Elliott Waves

The presenter does not assume any responsibility whatsoever for theactions 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 bedramatically 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 Pesavento

Carney

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

0.09 0.236 – 0.146

0.146 0.236 ÷ 1.618

0.236 0.382 ÷ 1.618

0.382 0.618 ÷ 1.618

0.414 2.00 ÷ 2 – Sacred square

0.486 0.618 × 1.50

0.50 1 / root 4

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

2.00 4.00

2.236 5.00 - Diagonal of two squares

2.618 1.618 × 1.618

3.14 Pi

3.33 2.618 × 1.272

4.236 2.618 × 1.618

6.854 4.236 × 1.618

Important Geometric Ratios - *Bryce Gilmore

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

Stop

EntryA

B

C

1’

2’

1

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

2 Stop

Entry

Entry

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

2”

4

3

1”

Entry

Entry

StopC

B

A

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

• Success – Quantitative evidence

2”

4

3

1”

Entry

Stop

C

B

A

3”

4”

5” 5

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

Stop

Entry

A

B

C

A’

B’

B5

A

C’

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

Stop

Entries

A

B

C

A’

B’

B5

A

C’

2’

1’

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 Approach1. 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 RankingExternal 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

Too Obtuse?

Too Acute?

ABC : XBD Angle Ratio

ABC

XBD

AC

B

X

Cross Angle & Length Ratio Measurement’

Æther Analytics

D

Harmonic Time Analysis

Time Ratios – Detailed StructureÆther 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

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

Sample Statistical Study

Harmonic System Backtest PerformanceFutures & 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

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Quick Pattern Reference Guide

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XAIdeal Bullish Gartley

0.786 PRZ

Æther Analytics

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XA

Ideal Bullish Gartley

0.786 PRZ

Æther Analytics

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XABullish Gartley

0.707

0.786

0.886

PRZ

Æther Analytics

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XA

Bullish Gartley

Æther Analytics

0.707

0.786

0.886

PRZ

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XAIdeal Bullish Butterfly

1.13

1.272

1.618

PRZ

Æther Analytics

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XA

Ideal Bullish Butterfly

Æther Analytics

1.13

1.272

1.618

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XABullish Butterfly

1.13

1.272

1.618

PRZ

Æther Analytics

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XA

Ideal Bullish Butterfly

Æther Analytics

1.13

1.272

1.618

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XABullish ‘Gar-fly’

1.13

1.272

1.382

PRZ

Æther Analytics

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XA

Bearish ‘Gar-fly’

Æther Analytics

1.13

1.272

1.618

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XAIdeal Bullish Bat

0.886 PRZ

Æther Analytics

A

C

B

DX

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XA

Ideal Bearish Bat

Æther Analytics

0.886 PRZ

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XABullish Bat

0.886 PRZ

Æther Analytics

A

C

B

DX

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XA

Bearish Bat

Æther Analytics

0.886 PRZ

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XA

‘Alt’ernate Bullish Bat

PRZ

1.00

1.13

1.272

Æther Analytics

A

C

B

D

X

Target 1

0.618 – 0.786 of XA

Target 2

1.272 – 1.618 of XA

‘Alt’ernate Bearish Bat

Æther Analytics

PRZ

1.00

1.13

1.272

A

C

B

D

X

Target 1

0.618 – 0.786 of CD

Target 2

1.272 – 1.618 of CD

Bullish Deep Crab

PRZ

1.50

1.618

1.786

Æther Analytics

A

C

B

D

X

Target 1

0.618 – 0.786 of CD

Target 2

1.272 – 1.618 of CD

Bearish Deep Crab

Æther Analytics

PRZ

1.786

1.618

1.50

A

C

B

D

X

Target 1

0.618 – 0.786 of CD

Target 2

1.272 – 1.618 of CD

Bullish Crab

1.50

1.618

1.786

Æther Analytics

A

C

B

D

X

Target 1

0.618 – 0.786 of CD

Target 2

1.272 – 1.618 of CD

Bearish Crab

Æther Analytics

PRZ

1.786

1.618

1.50

A

C

B

D

X

Target 1

0.618 – 0.786 of XC

Target 2

1.272 – 1.618 of XC

Bullish Cypher

PRZ

1.04

0.786

0.886

Æther Analytics

D

Target 1

0.618 – 0.786 of CD

Target 2

1.272 – 1.618 of CD

Bearish Cypher

Æther Analytics

PRZ

1.786

1.618

1.50

A

C

B

X

A

C

B

D

X

Target 1

0.618 – 0.786 of CD

Target 2

1.272 – 1.618 of CD

Bullish Shark

PRZ

1.13

1.272

1.382

Æther Analytics

D

Target 1

0.618 – 0.786 of CD

Target 2

1.272 – 1.618 of CD

Bearish Shark

Æther Analytics

PRZ

1.382

1.272

1.13

A

C

B

X

1

Buy Stop to Entry

Bullish Three Drive – Wolfe Wave

3

2

A

B

Target 2

1.272 -1.618 A3

Æther Analytics

1

Sell Stop to Entry

Bullish Three Drive – Wolfe Wave3

2

A

B

Target 2

1.272 -1.618 A3Æther Analytics

X

Bullish 5-0 Pattern

D

B

A

C

Target

1.00 -1.618 BC

Æther Analytics

X

Bearish 5-0 Pattern

D

B

A

C

Target

1.00 -1.618 BC

Æther Analytics

Complex Harmonic Patterns

&

Misc. Wave Fractals

A

C

B

D

X

‘Kane’ Pattern

Æther Analytics

Target 1

B - Point

Bullish Crown Pattern

G

A

B

Target 2

1.272 -1.618 BC

C

E

D F

X

1.00

Æther Analytics

Target 1

B - Point

Bullish Crown Pattern

G

A

B

Target 2

1.272 -1.618 BC

C

E

D F

X

1.00

Æther Analytics

AC

B

D

X Length of A-D = 0.5 * BC= 0.618 * BC= 0.786 * BC= 0.707 (sometimes)

* Price & Time Symmetry

Gilmore ‘False Breakout’

Continuation

Cypher Symmetry

Æther Analytics

A

C

B

D

X

Length of X-C = Length of A - D* Price & Time Symmetry

Gilmore ‘Double Cross’

Shark Symmetry

Æther Analytics