Ratios & Harmonics: a Different Way to Trade

Gio watch Damian's recap video from today or most any day for that matter as he discusses harmonics at length. While I've had my share of success since following Damian, I'm not the one you want offering advice at this point.

Mr. Pip, I had a suggestion. I know a few years back you did a segment video on swings BUT if you can you should do an updated one.

I was thinking this since in the trade analysis you did today you emphasized about the correct swing you were trading but putting your stop higher around the 27239 area because you felt the buyers would be present.

I also put my stop in that area but I treated that as my main swing with the idea that I was trading a shorter term order flow so I felt like that a updated lesson like that would be cool. I think you mentioned excluding past order flow to trade the intraday on July 16th trade breakdown vid because the main swing was large.

Hi Mr Pip and all,

I just watched the recent post trade session and have learnt a lot as I usually do from Mr Pip. However, as I am relatively new, I failed to follow the reasoning behind the positions taken. From watching the nine lessons on Youtube, I understand how to take trades based on NSH/NSL being formed and then getting in on the pullback with confluence. However, in the recent post trade session, the trades were took of harmonic confluence instead. I was wondering if someone could point me in the direction of the video explaining this as I couldnt seem to find something like this in the 9 video lessons on the channel.

Thank you!

Hello Damian
I have been wondering for quite some time, the 127 projection of the AB leg, starting from the A point, that you use as an indication of where price will possibly find exhaustion in an ABCD, and where you start trailing, is that projection something you invented or discovered yourself? Because (and I may be wrong) I can't seem to find it in Harmonics books, it doesn't appear to be used anywhere else except by you, is that correct?

Also, I noticed you do the same thing when drawing ratios in advanced harmonic patterns. For example the bat pattern in the 7/18/2019 post trade session video. If I'm not mistaking, the standard way is to project the BC leg in the opposite direction to get the D point, which should be a 161.8 at minimum and should align closely with the 88.6%. But I see you project the AB leg instead, starting from the A point.

Now, in the case in the video, where the BC leg corrects 88.6% of the AB leg, both projection methods project 161.8 that are pretty close to eachother. But when the pattern has a shallower correction of the AB leg, the projected 161.8s of both methods are very different.
And since harmonic patterns are strongest when they are precise, it's kind of important to know which is the best projection method. Am i doing it wrong? Is your projection the standard way to do it or an alternate method?

Can you please shed some light on this because I'm confused thanks

I will make a short Q& A video on this post.

Hello Traders,

With all the help coming into this forum there was one area that I have not seen addressed as pointedly as should be, especially if your attacking the market with a small account. The first pillar is your trade plan, which will be your manual containing the specific things you look for that will provide an edge, your Alpha in the market. Mr. Pip has and continues to provide guidance and content that is beyond reproach. This post will focus on the other pillar, money management, with the intent to augment the topic as covered by Mr. Pip's discussions of Smooth Ratio Money Management and Fixed Ratio Money Management.

Without further adieu lets dive into RISK of RUIN. As our job as traders is one of managing risk, this is without a doubt a topic that should be a part of your trade plan or at the very least conscious of when establishing position sizing. Why should this be in your plan when so few reference the topic? The simple answer is so we don't fall victim of our human propensities of greed. It is very easy to open positions that if they fail take to much capital from our account, therefor drastically impacting our ability to participate at the same level or worse taking us out of the market all together. Everything we as traders build a framework around is based in the world of probabilities and expectations. Once you know the expectancy of your trading you can then calculate the probability of finding the account in certain drawdowns and even what odds are associated with blowing the account, ending in ruin.

The first one you need to have established is what can be expected from a particular trade setup. For this discussion we will use the threads commonly used numbers of 70% win rate with a 30% fail rate. The other variables we will define are that we are using the YM instrument with intraday margin of 500 US dollars. For simplicity sake our trade plan puts us in for a one to one risk to reward of 20 points. Using this will allow losses to be $100 and wins being the same value. We will not scale up the contracts as this can be accomplished with following the money management spreadsheet posted in the thread. It is taking the assumption that you have already started with the appropriate account size for the instrument your trading in regard to single point value, margin requirements, and expected point value requirements for where the stop has to be.

Scenario One: The minimalist, opens an account with $600 and life changing dreams! This example is important not in saying this is someones plan but that the math is very strait forward to establish a baseline. With $600 to open and $500 margin that leaves $100 or the minimal 20 point loss. Simply put you have a one and done shot and with our example trade plan's expectancy that puts it at 30% chance of failure or risk of ruin. Great odds for a single trade but horrible for a career as a trader.

To discuss the next scenarios a basic understanding of the probability calculation being used is helpful. This will be probability of independent events, where two events are independent when the outcome of the first event does not influence the outcome of the second event. It is written as P(X and Y) = P(X)*P(Y). As we would answer the question what is the probability to have to failing trades back to back it would be .3*.3 = .09. Where .3 is the conversion of percent to a decimal and the inverse of the answer .09 becomes a 9% chance to see back to back failures.

Scenario Two: I have $900 and drafted my two week notice for my employer! Okay, maybe a little over zealous to be going full time trader but lets look at the expectation for risk to ruin. With this start value we have 80 points until our broker sends the margin call and with the above assumptions that gives 4 losses until bust. Bringing in the numbers: Ruin = .3*.3*.3*.3 = .0081, rounding to 1% chance. I leave it to you to decide if this is acceptable to hinge the account on. However, due consider that there are expectations and then the required flexibility of meeting reality. Such as following the way we trade here does not incorporate a static stop. It is what it is based on the swing traded. The expectancy plays out, yet that doesn't account for mistakes in reading the order flow. There is also the unknown impact of command decisions that are executed based on a on the fly deviation to the trade plan. Some of this may improve the odds, but the assumption should be that they will be adverse to the trading performance and therefor require a degree more cushion to accommodate and return back to green points.

Scenario Three: Mr. Pip's small account project starting at $5100 and trading at two contracts to start. We will also say that he will scale to one if the account hits $4500. Another assumption will be that the average point loss will be 50. That number is not based on the performance so far nor anything he has stated and is only being used to provide a calculus on the projects risk of ruin. Smaller average stops will allow for more losing trades before ruin while taking on larger stops will accelerate the possible risk to ruin.

Starting out we know that there are 60 points at two contracts before needing to scale down ($5100-$4500=$600/$10per point=60 points). Allowing two trades hitting full loss will put the account value at $4100. The margin being $500 means there is a remaining $4100 – $500 = $3600, or $3600/$5per point = 720 points to ruin. Since our trade plan is assuming max risk of 50 points it is prudent to only use 700/50 or 14 failed trades, leaving the excess 20 points as a cost of tissues to wipe up the tears. In total Mr. Pip allowed this project to weather a string of successive failures 16 deep before it would end in absolute disaster. Bottom line that comes to a probability risk of ruin of: .00000043%. In his words: not going to happen.

Some parting notes to consider. Probability is an interesting thing in that if your staring at the beginning of a sequence the odds can be low. Such as the chance to have two successive failures being 9%. However, after you have one failure and you are about to take the next trade you no longer have a probability of 9% that the next one makes this a two failure streak. That next trade is still 30% chance of failing, and as such means that with a previous failure already having happened you now have a 30% chance that this will be the back to back failure. In short the odds change as you lock in events as to what the current string of events will be. This also means that as you trade you can have some very unique possibilities arise in the sequence of events. Such as seeing three failures in a row, a success and then possibly a back to back failure. In net this would be five losses minus one win, equating to four losses. We know the probability of that specific event is very low. However after experiencing the 2.7% probability of having three losses in a row the odds of seeing two failures in a row is still sitting at 9%. Remember that the next trade does not know that the last one or two were a loss, nor does it care that if it becomes a loser it would create a string that is an exceptionally low probability event.

Hopefully the above has provided value and was written in a manner that allowed clarity in the points being conveyed. If there are questions I will do my best to answer with what knowledge I have. Also, this in the document attached so it can be found in the files section of the thread.

To your success!

~Jason Bieling

Though i'm still a newbie when it comes to advanced harmonic patterns but starting your labeling from XA instead of AB will help clear some confusions. For Instance the below picture is a DAILY chart of USDJPY showing a potential BAT pattern...


point B is formed at 38.2% to 50% retracement of XA (Black colored Fibonacci)
point C is formed at 38.2% to 88.6% retracement of AB (LimeGreen colored Fibonacci)
while point D is formed at 161.8% to 261.8% projection of BC (khaki colored Fibonacci) aligning closely with 88.6% retracement of XA (Black colored Fibonacci)

Like I said earlier i'm still a newbie, so let's wait for Damian's input but I believe the point you made about the standard way to project BC is correct.

Hello BlacMoni
My confusion has nothing to do with the X point.
I intentionally left out the X point, because the question was about the AB and BC leg projections.
I wanted to keep the focus on the problem, which is the potentially huge difference in projection of the 161.8 and other projections between the BC leg reciprocal projection and the AB leg straight projection.

My bad, I'll probably watch the post trade session video to understand. Meanwhile let's wait for Damian to make a short video addressing this...

Amazing post and extremely valuable information. You did a great job and to be honest this is not my strong suit. I could not have explained it as well as you. Thank you really. This is also very very important. Money Management is more important than the strategy and emotions stronger than all three components that make up a well rounded consistently profitable trader.

Thank you Jason

Damian, could you please talk about absorption and accumulation in your one of your future videos? Which are the zones that matter, where there are empty candles and so on.
if you could do that for small swings (corrective ones) wil be great.
What amezes me is how you can know that the buyers/sellers are out of money and where is the strenght all the time.

thanks.

Doing some chart study this morning of price action dissection. US30 index H1 time frame. feedback welcome.

I too have had this question. The terms fib extension, expansion and projection are used here and in Scott Carney's book, but I am not sure of the exact definitions. I have gone with Damian's explanation, because it.is consistent and obviously works.

OK, OK we will break this down step by step. I a video I’m going to put out soon. Great topic and we are going to demystify and prioritize fib extensions, harmonic projections, confluence and tiring it together for a kick ass profit target and or kickass AOI

I am also looking forward to your videos. I too, feel a bit confused with drawing confluence correctly with confluence. I have gone through the first 2 volumes of the Scott Carney books and have tried to replicate his 3 numbers, but my numbers never match up with his. And then the harmonic pattern master CNTrader, he has 2 youtube channels, where he is drawing patterns with very high accuracy, but no explanation. So, I am looking forward to your step by step explanation.

By the way, I really like your recap videos.

I spent a few hours going over your excel spread sheet DCAST Money Management. And you are right, that it is pretty cool and can help with emotional control as well, when one knows that those little loses won't dent the account as long as we are not greedy and can grow it consistently.

One thing that I noticed is that no matter which starting capital I use in the excel spread sheet, it always starts me off at 1 contract. Is that on purpose?

Thanks for your guidance in advanced. I hope all is going well for you and your family. Have a great Sunday.

Hey FiftyFibFX I think it looks good.
I corrected 1 NSH which I think was not in the right place because it was not corrected deep enough yet.
Because of that, there is also no NSL/expectation failure.
Rest looks good

Edit: I'm assuming that the swing "NSH HTF & LTF" was corrected 38.2%.
Otherwise it is technically not a HTF NSH. May have missed it by a few points I can't measure it..

Please include trading shorter term swings in the presence of larger swings. You also had the same larger swing issue in your homecoming July 10th stream.

Ok, thanks, I see it now

Pair-me-up,

The spreadsheet uses Day 1 and Day 2 lines to begin the initialization of the main formulas, and is using a slightly different calculus there. On the line Day 3 the full formula comes in. If you want the contracts on lines 18 and 19 to change then you need to change your initial contracts not the starting equity value. This is a similar result that you see in the videos with Mr. Pip in that on Day 3 the main formula calculation takes over and drops him to 1 contract.

~Jason