thoughts on harmonic patterns?

[spectastic]

The only real edge you have as a retail trader is that you can fill quickly once you’ve made a decision. That’s a logistical edge. Charts, patterns, etc., are not going to help at all. Top traders should be looking at a win rate of 55-60%. You should avoid factor and beta risk and instead focus on more idiosyncratic plays. If you are day trading, that means you can only really trade intraday momentum or reversals -- which again, are more about the slope of ROC than a chart or pattern. If you are a "swing trader", rebrand yourself as a "catalyst trader" and focus on events on the calendar -- such as corporation actions, spin offs, divestitures, odd lot buyouts, m&a arb spreads, earnings, and other big events. You need to become very well versed on how to analyze those trades, which needs about a week of training (read a corporate finance textbook and learn how to put together an earnings waterfall or sum-of-the-parts analysis).

sounds like you're a momentum trader at an institution, maybe prop? you see range expansion with volume, and buy the breakout. put the stop in the green and let it ride until momentum begins to fade. It makes sense. But it can't be the only thing available to trade for retail investors. and where did 55-60% win rate come from? I know there are plenty of traders who have win rate in the 30s and still be highly profitable because their trade setups have highly asymmetric r/r.

One realization I've had recently about edge is simply that it's something you do really well compared to other traders, whether it's spotting momentum, trading the same patterns, tickers, catalysts, and/or macro trends over and over. This is why the most successful traders I've seen built their wealth on a select few strategies or patterns. So it's not the patterns that have edge, but the traders' ability to identify and trade those patterns they see, along with perspectives in psychology, trade management, what news is legit vs fud, etc. correct me if i'm wrong.

what edge do institutional traders have, aside from having access to information more quickly from their bloombergs and capital to potentially manipulate thinly traded markets ?

 

[easymon1]

built their wealth on a select few strategies or patterns.

traders who have win rate in the 30s and still be highly profitable because their trade setups have highly asymmetric r/r.

Daytraders, Who Likes Their Stops So Tight They Squeak ?
https://www.elitetrader.com/et/threads/daytraders-who-likes-their-stops-so-tight-they-squeak.347290/

 

[MKTrader]

It's kind of intriguing, and I've found some patterns to have worked... but vast majority of people I've asked the question make fun of it. oh well

Define "have worked." Have you systematically tested them either in backtesting or live testing over a long period including all market conditions (bull, bear, sideways)? Or do you just mean they "work" here and there when you randomly try it? I've seen strategies that seem to work brilliantly with sporadic testing, but they always fail long-term significant tests. Instead of complaining about being made fun of, do the work. Oh, and forget "intriguing." The bottom line is making money. Many get drawn into esoteric stuff like harmonics, Fibs, Gann, Elliot and other nonsense because it's "fascinating" and promises some "ancient mathematical" code or pattern that the markets follow. That's irrelevant. Markets are made of humans (and algos designed by humans) and aren't constrained by patterns, formulae or precise ratios. People buy when they think something is going up (based on trends, manias, news, etc.) and sell when they're afraid or satisfied with their profits. End of story.

 

[SunTrader]

...People buy when they think something is going up (based on trends, manias, news, etc.) and sell when they're afraid or satisfied with their profits. End of story.

People do, traders don't.

 

[MKTrader]

People do, traders don't.

Immaterial. The bottom line is whether you're a "person" or a "trader" (most of whom lose money), you don't buy or sell in a way that creates neat, almost perfect patterns that other traders can exploit. Show me a harmonic that predicted the sudden crash in early 2020. Patterns, cycles, ratios, etc. are powerless over events, manias, panics, etc.

 

[longandshort]

sounds like you're a momentum trader at an institution, maybe prop? you see range expansion with volume, and buy the breakout. put the stop in the green and let it ride until momentum begins to fade. It makes sense. But it can't be the only thing available to trade for retail investors. and where did 55-60% win rate come from? I know there are plenty of traders who have win rate in the 30s and still be highly profitable because their trade setups have highly asymmetric r/r.

I highly doubt people can have a low win rate and make money, and would consider claims of such to be untrue. Finding trades that have an asymmetrical payout is a huge edge in the first. I'm not a momentum trader myself -- though I spent some time at a hedge fund that did heavy research in the momentum factor.

One realization I've had recently about edge is simply that it's something you do really well compared to other traders, whether it's spotting momentum, trading the same patterns, tickers, catalysts, and/or macro trends over and over. This is why the most successful traders I've seen built their wealth on a select few strategies or patterns. So it's not the patterns that have edge, but the traders' ability to identify and trade those patterns they see, along with perspectives in psychology, trade management, what news is legit vs fud, etc. correct me if i'm wrong.

True to some degree. Good traders are good within a strategy or asset class, and it's hard to "port" your skillset over into other types of strategies or asset classes. This is because good traders are experts in the strategy and asset class they trade. E.g. If you have a PhD in rocket science it doesn't mean you can easily win a Michelin star. You'd need to become expert in cooking as well.

what edge do institutional traders have, aside from having access to information more quickly from their bloombergs and capital to potentially manipulate thinly traded markets ?

To start, there is so much disinformation in trading/markets, that a significant advantage on the institutional side is that traders are generally just more informed as to how markets function and where they can make money. I should note that just because you know where to make money does not mean you will make money.

Structural edges that institutional traders do have are informational, analytical, and behavioral. They have access to better information (and take time to consider it), know how to effectively analyze the markets, and utilize risk management to enhance their return profile.

For retail traders, you either need to mimic the institutional approach (possible but hard/time consuming) or trade momentum (possible). Charts and patterns are not sufficient for either, but there really aren't many other ways to do it.

I currently trade my own account but aim to launch a fund. I focus on long/short equity trading on a 1-12 week time horizon (0-3months). I will make some macro bets as well but with a tiny fraction of the portfolio.

 

[spectastic]

I highly doubt people can have a low win rate and make money, and would consider claims of such to be untrue. Finding trades that have an asymmetrical payout is a huge edge in the first. I'm not a momentum trader myself -- though I spent some time at a hedge fund that did heavy research in the momentum factor.

kristian qullmaggie - swedish retail trader since 2011, and turned from 4 figures into now 8 figures swing trading high ADR momentum and shorting parabolics, claims 30% win rate. I've seen him trading live and his stops would cause big intraday wicks.

bob dunn - former floor trader at CBOT, now teaches futures trading. claims ~30% win rate.

peter brandt - former floor trader at CBOT, 4-5 decade experience trading commodities markets claims 30% win rate.

Those are ones I can think of off the top of my head. I want to read the market wizards that would lend more insight to legendary traders and what they do. But clearly you can do very well having low win%

For retail traders, you either need to mimic the institutional approach (possible but hard/time consuming) or trade momentum (possible). Charts and patterns are not sufficient for either, but there really aren't many other ways to do it.

I've had decent success trading just the chart patterns and reading what the buyers and sellers are doing, who's in control, which stocks/sectors are showing relative strength or weakness. in a way, it's watching what big money is doing, and jumping on the train. I spend most time on charts and so do the people I follow who seems to have success trading. at this point, my biggest problem is keeping risk managed and focusing too much on the $ and not enough on the process.

and fwiw, the "patterns" I trade are generally the same staircase behavior a lot of stocks have, where they fluctuate between periods of consolidation and periods of high volatility. (example below). kind of like what you suggest with the catalysts, except I don't care what the catalyst is. I just pay attention to price and volume. KISS

range bound for almost a month, fails to break down, as buyers reclaim key levels. showed relative strength as russell index was shitting the bed all week. ended up breaking out to 270 on friday

 

[Overnight]

Harmonic patterns in trading. Uh huh, sure. Maybe, possibly, if you trade with music in the background.

There is harmony only in music, not in "trading harmonics". Charts do not have harmony. Only the mind does.

 

[SunTrader]

Harmonic patterns in trading. Uh huh, sure. Maybe, possibly, if you trade with music in the background.

There is harmony only in music, not in "trading harmonics". Charts do not have harmony. Only the mind does.

They don't huh?

Quiet periods, loud periods. Rangebound (slow tempo), then off to the races (fast tempo).

Try listening with your eyes next time.

 

[longandshort]

I don't know why my last post quoted so strangely...

kristian qullmaggie - swedish retail trader since 2011, and turned from 4 figures into now 8 figures swing trading high ADR momentum and shorting parabolics, claims 30% win rate. I've seen him trading live and his stops would cause big intraday wicks.

bob dunn - former floor trader at CBOT, now teaches futures trading. claims ~30% win rate.

peter brandt - former floor trader at CBOT, 4-5 decade experience trading commodities markets claims 30% win rate.

A low win-rate is just not going to cut it. The only way to get around that is through creating unique payoff structures through options. But if you're trading stocks and are profitable with a low win rate, then you are just lucky. Low win rate profitability = luck.

I've had decent success trading just the chart patterns and reading what the buyers and sellers are doing, who's in control, which stocks/sectors are showing relative strength or weakness. in a way, it's watching what big money is doing, and jumping on the train. I spend most time on charts and so do the people I follow who seems to have success trading. at this point, my biggest problem is keeping risk managed and focusing too much on the $ and not enough on the process.

My contention with your process is that it is not very informative. E.g. you actually do not know if big money is moving or not, because 1) large traders obfuscate their trading 2) most trades are crossing dark 3) you do not know the direction of the trade unless you know what their initial position was 4) technical data (price, volume, etc.) is not enough to know the intent of someone.

Also, just know that every portfolio manager and their mother is trying to do this. And the most advanced ones spend hours on the phones talking to their sales coverage, buy side peers, and others in order to put their finger on the pulse of the market (e.g. positioning). When you are trading in the market, you are competing against some of the smartest people for each penny. You cannot cook a Michelin starred meal without the right ingredients, tools, and knowledge.

and fwiw, the "patterns" I trade are generally the same staircase behavior a lot of stocks have, where they fluctuate between periods of consolidation and periods of high volatility. (example below). kind of like what you suggest with the catalysts, except I don't care what the catalyst is. I just pay attention to price and volume. KISS

General stock directions are fine because they are a signal of momentum. There's a lot of autocorrelation in asset prices (e.g. momentum factor) and thankfully you don't need to be super sophisticated in order to spot a rising trend. However, true momentum is cross sectional, which means you can improve your results by ranking the stocks on your watchlist.

Going back to catalysts -- those are the things that really set the tone for a stock or create volatility. I would not buy a stock that is hitting ATHs after missing estimates & lowering guidance.