Larry Pesavento Fibonacci Ratios With Pattern Recognition Traders PDF
Larry Pesavento Fibonacci Ratios With Pattern Recognition Traders PDF
Larry Pesavento Fibonacci Ratios With Pattern Recognition Traders PDF
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PATTERN RECOGNmON
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Larry Pesavento .
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ro uox 6206
Greenville, SC 29(106
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TABLE OF CONTENTS
I Preface
2 Introduction
10 Entry Techniques
I I Appendices
12 Additional Readings
INCORPORATED
PO BOX 6206
Greenville, SC 29606
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Please write or call for our current catalog describing these and many other books and gifts of interes
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This book
is dedicated to Benida.
You are the reason I am still here to
enjoy all of my friends and family. Everyone
deserves to have someone love them this much in a lifetime.
6
7
PREFACE
Over the past 20 years the use and misuse of These patterns repeat w i t h a great deal of
the Fibonacci Summation Series proliferated regularity. My best students have been air-
to the point that commentators on the nation's line pilots. They seem to approach trading
TV business channels now present them- like they approach flying, following a flight
selves as resident experts. 1 lay no claim to plan. The similarities to trading are numer-
being an expert. However, my studies always ous.
included an extensive e x a m i n a t i o n of Fi-
bonacci numbers. My pragmatic position on Finally, one of my goals in writing this book
anything I learned is t h a t it I could not use is to expose you to the subject of ancient ge-
what I was studying to help in trading, then I ometry. Fibonacci numbers are an integral
was not interested in pursuing it any further. part of the numbers that make up the subject
If this m a t e r i a l s t i m u l a t e s your interest in the of ancient geometry. It w i l l be of interest to
subject, then introducing you to it w i l l be some of you that many of these sacred ratios
worthwhile. A word of caution, this material trace their origin to the cosmos. 1 w i l l not
is based on the probabilities of trading. The spend a significant amount of t i m e relating
art of trading is one of risk management. my experiences in astro-harmonics research.
Amos Hosteller, one of the founders of Com- The subject is too vast for me to consider.
modity Corporation in Princeton, New Jer- More importantly, it is not necessary for prof-
sey, used to say, "take care of losses and the itable trading.
profits will take care of themselves." 1 refer
to this quote a lot because it is very impor-
tant!
Leonardo de Pisa de Fibonacci 21, 34, 55, 89, 144 to infinity. Dividing one
and Beyond number by the next after the eighth sequence
yields 21/ 34= .618. This just happens to be
On the eastern seaboard about an hour's drive the relationship of the height of the Great
from Florence, Italy lies the town of Pisa. It Pyramid to 1/2 its base. This additive series of
was here that Fibonacci was born. He was a numbers is based on the equation
thirteenth century m a t h e m a t i c i a n who prima- I
rily worked for the royal families of Italy. The I
work for which he is most famous is the I
Libre Abaci (Book of Calculations). His I
I
award for t h i s work was the present day I
equivalent of the Nobel Peace Prize. Fi- I
,.618
bonacci was largely responsible for the use
I
of arithmetic numbers versus Roman numer- I
als. Before Fibonacci, the number 30 was
written XXX. After his Libre Abaci, it was
written 30.
Phi + 1 = Phi squared
Legend describes his journey to Egypt as one (0 + 1 = 02).
of great discoveries. He went to Egypt to Base = 2.00
study the mathematical relationships con- Half Base = 1.00
tained in the pyramids. Height = .618
Slope = 1.618
Those of you who really want to study the
math contained in the pyramids should read
Peter Thompkin's book The Secret of the Diagonal = 1.902 V(2.618+1)
Great Pyramids. It is not my intention to ex-
plore all of the geometry in the pyramids, only
the Fibonacci Summation series. Fibonacci
found this series when he studied the Great
Pyramid at Giza. The series is the sum of the
two previous numbers 0, 1, 1, 2, 3, 5, 8, 13,
I0
c N A
?"'
to Cairo
= ).:-<, causeway
Sphinx E
w ,.....____. •- ~
~ i
e<:S1 ----1
, :.;
f
Sphinx Golden Cross
/
P ~) Mcnkhure
Length of cross
= 35 17 .5 meters
N Width of cross
"ZERO" == 2173.5 meters
0
uw = 0 (phi) 600
(1li1111tti1J
meters
55
F B M L z
The Golden Spiral 34
is formed by the
Fibonacci numbers p ..--~!'"'"'Or't
' 89, 55, 34, 21,
~ J 3, 8, 5, u .._..~ .......-'-------t
:.>~ Cb 3, 2, and l. Q Y K
~
('I-?
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G s J
f-moN/\C<'I RATJo.~ WITll PAnHIN RF< 01<Nrr10:-.1 II
What Fibonacci did for me was to open my What this book is going to do is illustrate
eyes! These are the relationships that are how to use the Fibonacci ratios, their
constantly in the market. I first started square roots, and their reciprocals to deter-
using Fibonacci numbers in 1974 at the mine the structure of wave vibrations. Of
urging of John Hill, Sr. of the Commodity all the books I have in my library, none of
Research I n s t i t u t e of Hendersonville North the Elliott Wave material covers this impor-
Carolina. I read all of lilliott's papers and t a n t concept. I am going to keep it as
his correspondence w i t h Charles Collins. simple as possible. If you can glean only
Years later, Frost and Prechter wrote the one or two concepts or patterns, then this
book Elliott Wave Theory, which explained material w i l l not have been written in vain.
the wave structure and the use of Fibonacci I can promise you this much. II you study
numbers. It concerned me that not all the the ratios and patterns shown here, you w i l l
waves were .382, .500, .618, 1.618. It was realize that markets have a d e f i n i t e pattern
not u n t i l 1988 that I began using the square hidden within their chaos. Sorting through
root numbers of the Fibonacci series SQ(.618) t h i s chaos can e n l i g h t e n you. The goal here
= .786 and SQ(1.618) = 1.27. Armed w i t h is not to try to predict the f u t u r e or even to
these two square root relationships, the know what is going to happen n e x t . No one
wave structure can be more easily ex- knows that! (Well, there is One who knows,
plained. Bryce Gi1more's first book, but He doesn't trade.) It is not necessary to
Geometry of Markets brought the ratios to know what is going to happen in 5 days.
the public's attention. The Elliott Wave What is necessary is to determine how
Newsletter never used these ratios. I used much risk and profit potential is available
to fax information to them on the square in the next 5 days. Probability is the name
root numbers, but they never responded. of the game. Risk control is of tantamount
Robert Miner of the Dynamic Traders importance. Winners think in terms of how
Croup in Tucson, Arizona, uses all of the much they can lose. Losers focus on how
harmonic ratios. It is my opinion that his much they can win. "Take care of your
newsletter and technical work is the best in losses and the profits will take care of
our business. If you don't have the time to themselves." —A.B.H.
do the work, Robert Miner, one of the best
technicians on this planet, w i l l do it for you By end of the book, I hope you see the
at a small monthly cost. This reminds me correlation of geometric patterns to the
of one of my favorite quotes from my ratios and proportions illustrated. It is going
friend and fellow trader, Jim Twentyman to be as simple as I can make it for you.
"Defy Human Nature—Do the work your- Should you want more elaborate reading
self." material it w i l l be listed in the bibliography.
12
The material here has proved exciting to Bryce Gilmore and Robert Miner were
me and my fellow traders who also sub- discussing T-Bonds. They both came up
scribe to this approach to the market. In my w i t h different Elliott Wave counts. They
opinion, it answers the question "can there humbly admitted that they were both right!
he order in I he chaos of the market?" I And these are two of the best technicians I
wish I had known t h i s much about the have ever met. Bryce introduced the t e c h n i -
market 20 years ago! cian to the true geometry of the market,
with his software program and book, Wave
One more thought about the square root Trader . I count him as one of my very
n u m b e r from the golden mean. These n u m - good friends and 1 w i l l always be indebted
bers were first revealed in W i l l i a m Garrett's to him. A l t h o u g h E l l i o t t Wave devotees
incredible book The Torque Analysis of may cringe at this thought, you need not be
Stock Market Cycles. This is hands down overly concerned with wave labeling, but
t h e best book on cycles I ever read. There the square roots and t h e i r reciprocals can
were only 200 copies sold in 1972. The go a long way to a n a l y s e a wave in the t r u e
remainder were destroyed by Prentice Hall Elliott sense.
due to lack of interest. The book has re-
c e n t l y been republished by R u f f P u b l i s h i n g U s u a l l y , when I w r i t e about a s u b j e c t . 1
(509-448-6739). An excellent choice for include the works of other authors. 1
every library. thought about doing this for a long t i m e but
decided to leave the m a t t e r alone. There are
There are a lot of charts in this book. I great many technicians all over the world
know of no other way to illustrate these who could and should be mentioned here.
concepts. Charts were selected from all There are even more private traders of
areas, from commodities to the Dow Jones equal or greater skill that no one ever hears
Stocks. Several different time frames were about. It is out of respect for these un-
Selected because these patterns are found in known artists that I w i l l refrain from men-
all time frames. tioning names. I would have left someone
out anyway and if it would have been a
Do not be disappointed if you do not see friend of mine-—well, you know the feel-
the traditional Elliott Wave pattern labeling. ing!
It is not neccesary when you use short term
pattern recognition. What is important is The material presented here is not to be
the ratio and proportion of each wave, considered as a trading system. It cannot
frankly, I never felt too comfortable about stand alone. It is an approach to trading the
exactly identifying the precise Elliott Wave markets. Judgement and discipline are
count. This was brought to my attention necessary. And if they can be mastered, the
most v i v i d l y several years ago at my trad- trader has the potential for financial free-
ing house in Pismo Beach, California. dom. True f r e e d o m can only come with
discipline.
A CLUE FROM THE COSMOS
ary trader W.D. Gann was an avid propo- Each year there arc 12 or more hard aspects
nent of astrology, as was Bernard Baruch. of Venus and Uranus. A hard aspect is one
Baruch's comment that "millionaires don't of 30° or multiples thereof:
use astrology, hid billionaires do" always
fascinated me. He employed his own full Fortunately, I had stock market data going
time astrologer/astronomer, Evangeline back to 1896. All I needed to do was get the
Adams. What really drew me closer to the Venus-Uranus aspects for all the years from
subject were some of my earlier readings. 1896 to 1986. Those 90 years gave me
Both Albert Einstein and Isaac Newton more than 1000 samples of the Venus-
were both avid astrologers/astronomers. Uranus aspects. Jim Twentyman, my good
Once, at a very important meeting, Newton friend and fellow trader at Commodity
was debating the subject with Johann Corporation, helped me with this study
Kepler, the father of modern physics. After under Ruth's watchful eye.
a heated exchange Newton remarked "the
difference between us, dear sir, is that it is The research on the Venus-Uranus aspect
quite apparent that I have studied the sub- yielded excellent results. It now has more
ject matter extensively and you have not!" than 100 years of data and the statistics
have held up. The accuracy of timing 3 to 8
The first cycle Ruth revealed to me was the day moves in the stock market is truly
Venus-Uranus cycle. She knew I had stud- amazing. Stocks seemed to be pulled
ied Fibonacci extensively and my interest upward or downward by this cycle into the
was guaranteed. Venus takes 255 days to date of the aspect.
circle the earth and pass through the 360°
aspects with Uranus. If you divide 255 by
365 the result is approximately .618 of a
year. Since this was the golden mean, I
became very excited.
PLANETARY ASPECTS USED IN TRANSITS
Conjunci;on 0°
Senile 6()0
Squ>r~ 90°
Trin, 120°
Oppositior. 180 0
flnot'ACCI RA110s wmr PATTERN RECOC1N1n<1N 15
(Artis!'s conaplfOOJ
The Commodity Traders Almanac lists these aspects as they occur throughout each year.
+
J... ~ 3700.00
3760.00
3710 .00
I
0
I 3720.00
3700.00
3680.00
3660.00
3610.00
3620.00
t 3600.00
3583.00
3560.00
3510.00
I included the section on Harmonic and offices so we could talk without using the
Vibratory numbers early in this book so the phone. Jim had just moved from Conti
reader w i l l begin to think in terms of repeti- Commodities where he was a very success-
tions and swings. ful broker/trader. He was now helping me
manage my C.T.A. firm, A.V.M. Associ-
Reluctance to share some of their most ates. J i m purchased a Wang computer in
precious trading secrets is probably inher- 1977 to do research on cycles and numbers.
ent in all traders. I am no exception. What He also took a two year sabbatical to study
you will observe in this chapter is, in my the works of the legendary trader W.D.
opinion, one of the best kept secrets in Gann.
technical analysis. These harmonic, or
vibratory numbers as I refer to them, can be I had access to the library of the Investment
incredibly useful for profit projection and Center Bookstore in West Los Angeles.
stop placement. Every commodity, stock, or This library had the finest collection of
speculative instrument has its own vibra- books I had ever seen. Any book I ever
tory number. It is as natural as each ele- heard about was there, including rare astro-
ment on a chemical chart having its own logical books and old technical books from
number. Traders who specialize in trading the 1920s and 1930s. Once you go through
one speculative vehicle use these numbers this vintage material you w i l l realize there
all the time. They don't know why, except is not a lot that is new to technical analysis.
that they repeat day after day. The next few Most assuredly there are new concepts and
pages and charts will describe these num- ideas, but most material can be traced back
bers and illustrate their usage. Make no to earlier traders. I think you will agree that
mistake about this section: it could be one the concept of harmonic or vibratory n u m -
of the most effective tools you can use as a bers fits into the "new idea" bracket.
trader.
The easiest way to describe why harmonic
My first interest in these harmonic or vibra- numbers work the way they do is to use an
tory numbers occurred in 1979 while I was analogy. Suppose you were to drop a rock
operating the commodity department for into a pool of water. Once the rock hits the
Drexel Burnham Lambert in southern water, waves will vibrate from the center of
California. Jim Twentyman was working impact until the thrust of the rock h i t t i n g
with me and occupied the adjoining office. the water dissipates. There are four things
A small window was located between the that will determine the consistency and
18
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34 LARRY PF.SAVl!NTO
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38
J-
---
-=--.....
.....
.
--
._.......
•
__
........
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FtooNACCI Rznos wrm PATTERN ROC'OONmoN 39
Technicians use price charts to interpret what the next move is most likely to be. Let us
consider the following:
)
With two triangles of equal height
[.27(\fl.'618)
) )
It also contains a pyramid and a circle
1.00)
Geometric Principles
(by Bryce Gilmore)
the Earth and Moon and their combined
Philosophical Geometry movements around the Sun. The pyramid
demonstrates the binding relationships
Ancient philosophers taught pupils the arts between the SQUARE, CIRCLE and the
of SACRED GEOMETRY in order to GOLDEN MEAN.
develop their faculty of INTUITION.
If the Moon and the Earth were placed side The radius of the circle 5040 (1080 + 3960)
by side, the distance between the two cen- as a factor of the Earth's radius is equal to
ters would be equal to the sum of the radii, 5040:3960 or 1.2727:1.000. And 1.272 is
i.e., 3920 plus 1080, which equals 5040 mathematically the square root of 1.618.
miles. A circle drawn using the combined
radii of 5040 would have a circumference of Squaring the Circle
2 Pi R or 2 x 22/7 x 5040, which equals
31680.
This geometric exercise is known as squar- If we call the base of the triangle the Earth's
ing the circle. Pi is the Pythagorean measure radius, i.e., 3960, then the hypotenuse
of 22/7 used to calculate the dimensions in a 6409.6 as a ratio of the base 3960 is
circle or sphere. In decimal form Pi is the 6409:3960 or 1.618:1.000.
irrational number 3.14159.
42
The irrational number 1.272 is the square Harmonic Ratios from the Square
root of 1.618, i.e., 1.272 = The Diagonal of the Square
(Root 2 = 1.4142)
It can be demonstrated by this exercise
where the designers of the Great Pyramid of The square is bounded by four equal sides at
Giza procured their measurements. It can right angles to each other.
also be seen that the irrational numbers of
0= 1.618 and PHI = 3.14159 are related. Using the Pythagorean theorem we can cal-
culate the diagonal length. This number will
J/4 (3.142) s: 0.786 (l;yJj[8) always maintain the same relationship to any
side of the square (1.4142:1).
1/4 is the harmonic ratio from the square
and 1.618 is the Golden Mean. A square with sides equal to 1.000 has a
diagonal of: which is
1.4142.
Expanding a square by the ratio of its diagonal produces the Harmonic Ratio Series.
This section discusses the primary patterns importantly it also reiterates that it is not
I use in trading. Many of my students ask necessary to know what is going to happen
me why I share this information. It is quite next. What is necessary is to know the risk
simple and has a two part answer. First, all on the trade. Since we are dealing with
of these patterns were found by someone mathematical relationships, the control of
else over the past 70 years. Second, every risk can be quantified easily.
trader has his own time frame that he likes
to trade, so the chance of a self-fulling I spent the better part of 30 years looking at
trade expectation is very remote. these patterns. My sources originated from
Don Mack at the Investment Center in
One very important difference will emerge Santa Monica, California and John Hill at
from this section on pattern recognition. the Commodity Research Institute in
That difference is that all of the patterns Hendersonville, North Carolina. I do not
discussed will be illustrated using the math- think I overlooked anyone who ever de-
ematical ratios of ancient geometry, of scribed a price pattern. There are two books
which the Fibonacci Summation series is a that I highly recommend:
part. What I tried to do is show how you
can use only four numbers of the 1. Profits in the Stock Market by H.M.
Fibonacci Summation series to mathemati- Gartley (1935). This was Gartley's Stock
cally identify these patterns. I always Market course in the 1930's. It cost $1500
thought that the mathematical relationship which was equivalent to 3 Ford automo-
of these price swings is what the originators biles at the time. On pages 200 to 250 most
of these patterns failed to bring up. This is of the patterns ever discussed are found.
especially true for the Elliott Wave theoreti- More trading systems were rediscovered
cians. I studied the Elliott Wave principle and sold from this book than any other
extensively from 1974 to 1978.I thought book. This includes: The Tubbs Stock
his tenets on wave patterns were more like Market Course, The Trident Strategy, The
guidelines than immutable laws. To this Reversal Point Wave, and many others. The
day, if you get 12 Elliott Wave theorists in a book is more than 700 pages and comes
room you will end up with 24 or more with huge wall charts illustrating the action
interpretations of the price action. There is of the stock market in the 1920's and 30's.
nothing wrong with that. It is just another It can be purchased for under $100 from
way of showing that no one knows what is Traders Press in Greenville, SC, 800-927-
going to happen next in the markets. More 8222.
44
If you spend some time looking through my Patterns 1 and 2 were first described by
bibliography, you will see that a great num- H. M. Gartley in Profits in the Stock Mar-
ber of authors are covered. I always felt that ket on page 249. It is the basic pattern in
each of them contributed to the science of the theory of parallel channels.
technical studies.
PRACTICAL USE OF TREND LINES
- --
-- ;v
SELLING POINT
· ...
-~--
IF PENETRATED
~
UPTREND LINE
Patterns 7 and 8 are extension patterns. It Patterns 9 and 10 are the most difficult to
was this pattern that changed my approach find on daily charts. They are found more
to trading. As I was trading from frequently on intraday charts (5 min., 30
Switzerland, where I had spoken to a group min., etc.). William Dunnigan described this
of Swiss bankers, almost every trade I put pattern in Dunnigan's One-Way Method and
on over the last several days had been the Dunnigan Thrust Method. The three
stopped out on a penetration of point X. In drive pattern should be very esthetic to the
my hotel room, I was calculating why my eyes of the trader. It should jump out at
stop was right at the high/low of the day. I you. If you find that you are forcing the
had placed my stop right at the 1.27 move pattern to fit three drives, it is probably not
of X to 1. It was upon hitting the square correct.
root button on my calculator that I first
began to see the importance of the 1.27 The most important thing to keep in mind is
ratio symmetry. The waves should be symmetri-
cal in price and time.
A good rule of thumb is to wait for a candle-
stick pattern such as a doji or hammer Note: Linda Bradford Raschke refers to this
(pg.118) when point A is reached. Remem- pattern as her Three Little Indians in her
ber that this pattern is an extension pattern book, Street Smarts.
and there are no guarantees that the swing
cannot go much higher.
f'lB()tlACO RATIOS wm1 P>.Tl1!RN RECOONmoN 47
Characteristics of Patterns
PATTERN #1
Tune
r----,
I B
7 periods up
I
I
I
7 periods up
-
.t..
P@
I
-----
--c::::>-
01 \
---c:::r-
~~ \
,,,....... I ~\
'..D.
.....= r
l
/' \ \
e \
0
\C
"-'
~
G) 0
·.5- .s.... ~
E .~ <:
co p@I
~\
.s».
~
~
E ..... 0.. c+-..
I \@
00 ~ oo- ol
s... uu~ .§I
a) ~ II II II r-. r
,,Q CCI CO U I
s
a)
<: <: co
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~
p
u
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a)
--------
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--
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-<==J
-
___ .... - . . -
-.- . . ...
-c
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---
------ -C>
@~
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1~~~~.
cP
\
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\
50
u
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u 0 00
oo-
11 \0
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UQ
CQu
-- --------
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--
--c::>
c:=:::::>-
51
PATTERN #2
Time
---, D
v -,
v
1. Price swing from A to B will be equal to
CD 60% of the time. The other 40% of
the time CD will be 1.27 or 1.618 of AB.
~~~~~~~~~~~Q~~~~~Q~~~~~~
. . . . . . . . . . . . . .
~~Q~~~Q~~~~~~~Q~~~~~~~~~
. . . . . . . . . .
,,-.....
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FmoNAC<l Rsnos wrm PATTERN REOOONmoN 53
-·
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c= Q~
Uo
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Cl ~.g
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Q,.
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54
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FmoNAca RAnos wmr PATrStNROCX>ONmoN 55
~~(S)(S)CS)CS)CS)(S)(S)(S)(S)(S)CS)(S)(S)(S)~(S)CS)~(S)(S)CS)CS)
. . . . . . . . . . . . . . . . .
Lf) c;;) Lf) CS) LI) CS) LI) CS) Lf) (S) Lf) CS) LI) (S) Lt)r Cs:) LI) ~ Lt) ~
. . . . .
Lf) CS) Lf) CS)
u
co
(.+....,
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UC"')~
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II II II
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l() j'.:Q N,_ Q
<( - u
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I
. :s::r--
56
PATTERN #3
BULLISH
GARTLEY "222"
A
x
1. The swing down from point A will termi-
nate at point D. This will be at the .618
or .786 retracements 75% of the time.
The other 25% of the time, the
retracements will be .382, .500 or .707.
_ __·
_¢--
__.,
:r::::--
~
~...;........o._
-- ....
_.___,
__
_.____i;:;
58
c;
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en cL)
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(,) a.. ~
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62
u <co
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63
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64
PATTERN #4
BEARISH
GARTLEY "222"
x
-- --
-- ·618
·786 --
--
A
1. The swing up from point A will termi-
nate at point D. This will be at the .618
or .786 retracements 75% of the time.
The other 25% of the time, the
retracements will be .382, .500 or .707.
·~_-
,..... ....... (+....
~ Q.,. ....... 0 0
~ ...... x --:i..,_ u 00 00
~
Q.> t~ ~
~
,r:;:--' ....,.
H\ I'°.
<
=
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u<
n n
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l: ...,
~ l:S
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r
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-To'-
66 LARRY PEsAV[!l"TO
·--
~
~
(":
E
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--
-----
-----
~
--c::::::J
~ 0---
~
'-' ~ ......
{I.)
{I.)
~ t~ ~ •
~
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=
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----
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--
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1'1oONACcr RATIOS wrru PAnURN Rr:eocNmON 67
-'f
......---'-
~ -r--'-
I
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·::i::::;.
~
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-
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~
@
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t "°·\
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~ ~
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~
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x
68
. . . . . . . . . . . . . . . . . . . . . . . .
'
N
I \
--- ·-==co~
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N I
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-- 11')
-==("-
--CO~
-==:N ..
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.
69
2. There are no swing patterns present 9. The minimum price objective should be
between points 1 and A. the same distance from point A to 1.
.----- ........
I
..,......._
,...-&-
....___
---..--'-
___._,.
~
......__,
__._,_
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~ ..,....._
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F1BONACO RAnos wrm PATil?RN Recoosmos 71
r
72
~
===
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cll)
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t c
8.
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::r::
74
3. When the move from X to 1 is very 9. The minimum price objective should be
explosive, the pullback to point A may the same distance as point X to 1.
only retrace to 38.2% or 50% of IX.
~~~~~~~~~~~~~~~~~~~~~~~~
. . . . . . . . . .
~~~~~~~~~~~~~~~~~~~~~~~~
ro~N~~M~~~~ro~N~~~~~~~ro~N~
. . . . . . . . . . . . . .
~~~~~~~~~~~m~NNNN~~~~~~~
~~~~~~~~~~~~~~~~~~~~~~~~
-~-
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bL) ~
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c::::::::>-
-c:::=:::::::i
-
76 LARRY Pll.'>AVflN'to
PATTERN #7
5. There should be no price swings between
point 1 and point A. If there is a price
swing Pattern #6 becomes a Gartley
222 pattern.
. . . . . . .
QQQQQQrorororororoQroroQQQQroQrororo
. .
~Q~Q~Q~Q~Q~Q~Q~Q~Q~Q~Q~Q
. . . . . . . . . . . . . . .
Go)
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78 LARRY PE.SAVEN'n)
....
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FlDONACCl RATIOS wntl PATll:RN RECOONTTlON
79
~~~~~~~~~~M~~MNNNN~~~~~~
NNNNNNNNNNNNNNNNNNNNNNNN
80
PATTERN #8
5. There should be no price swings between
point 1 and point A. If there is a price
swing, Pattern #6 becomes a Gartley
"222" pattern.
x
6. This is a very important pattern when
day trading because point X is often the
opening price of the day.
1
1. The time frame between X and point A
will be 5 and 13 time bars (i.e., 5 min.,
30 min., daily). On rare occasions 21
time bars.
~~~~~~~~~~~~~~~~~~~~~~~~
. . . . . . . . . . . . .
~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~~~MMNN~~~~~
. . . . . . . . . . .
~~~~~~~~~~~~~~~~~~~~~~~M
~~~~~~~~~~~~~~~~~~~~~~~~
,,-.....
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84
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FmoNAOO RATIOS wrm PATTERN Rscoosrnox 85
-
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Those of you who follow the standard trading pattern discussed in technical analysis may
find this section interesting. I have selected the four more common patterns traders en-
counter. If the trader will analyze the pattern using the ratios discussed in this book, it
will most probably be enlightening besides increasing probabilitites of a profitable trade.
4. Dynamite Triangles
94
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BONUS PATTERN
THEBUTTERFLY
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109
THEOPENINGPRICE
I first met John Hill of the Commodity trading commodities and especially to those
Research Institute in Hcndersonville, North involved in day trading. It puts a tremendous
Carolina in late 1974 or early 1975. At that advantage on your side when you're trading
time, I was recovering from a tremendous in the direction of the opening price.
loss in cattle, soybean oil and soybean meal.
I was long many contracts during the 1974 The principle behind the importance of the
October break. I started with nothing, but ran opening price probably stems from the fact
it up to a great deal of money. I then realized that the markets arc open only six hours a
that I had the ability to make that kind of day. That leaves 18 hours for decision mak-
money. However, I neglected to realize that ing to occur. When you consider the fact that
I confused success with a bull market and I the foreign markets are open in Hong Kong,
was unprepared when the bear market finally Tokyo, Singapore, Sidney, London and Am-
came. sterdam, you get an even greater flavor of
what occurs during the 18 hours when our
During these last 14 years, John and I re- markets are closed. It is my opinion that de-
mained good friends and shared numerous cisions are made during the 18 hours that af-
good trading ideas. In 1982 I went to John's fect the opening of our market. I realize that
ranch in Hendersonville and spent two weeks most of the volume is not done on the open-
with him looking at various ways to trade ing— it is done during the complete day. How-
the markets. One of the best discoveries we ever, to explain how the opening price is so
made was a computer study which revealed significant, one must remember that these
to us the principle called Trading in the Di- people have been making thought decisions
rection of the Opening Price. We worked and analytical decisions during the past 18
two solid weeks in several different markets, hours in order to come up with strategies for
relating the opening price to the price action the following days.
of that day. It is one of the most amazing
discoveries I used as a technical indicator The Opening Price Principle is this: the
in trading commodities. opening price will be at or near the high or
low of that day 85-90 percent of the time. In
Several years later, Earl Haddady of the other words, the price at the opening will be
Haddady-Sibbett Corporation published the either within 10 percent either the high or the
same statistics in a book called The Impor- low of the day on that particular day. There
tance of the Opening Price. We heartily rec- are two ways that you can prove this prin-
ommend this book to anyone interested in ciple to yourself. First, take a commodity chart
110
tion they are holding, resulting in a loss. When Standards and Poors and just about any other
you are day trading, you should be out on the commodity. Good volatility is essential when
close. If you are position trading, you should day trading. Trade the markets that arc quite
position yourself for a longer term move volatile and highly active with a great deal
somewhere in the neighborhood of three days of volume. This will be covered in greater
to three months, depending on your style of detail in another section.
trading.
The second example of how to use the open-
The first example of how to use the opening ing price is illustrated on page 113.
price is illustrated on page 112; this chart Note the opening price. The market breaks
shows the market opened at Price A then be- rapidly and then starts to rally back toward
gan to react downward and continue down. the opening price. Again, the market rallies
People who bought near the high of the day back to the Fibonacci number, (.618), and then
are now concerned whether the market is go- resumes its move to the downside. These two
ing back up through the high or have a key examples demonstrate that if a trader is pa-
reversal to the downside. As you can see, af- tient and waits for this particular pattern to
ter a period of time, the market reached sup- unfold, the probabilities are in his favor in a
port. This support is at a major Fibonacci twofold manner. First, he is trading in the di-
number, the (.618) retracement off the open- rection of the opening price. It meanders in
ing price. The market has held there and has the direction the trend is going to be in. It will
now started to move higher. be in his favor seven or eight times out often.
Secondly, he's trading in the direction of the
One of our favorite day trading techniques is trend and selling into a rally at a very strong
to buy that (.618) retracement from the open- mathematical point where the risk is quanti-
ing price with a stop at the (.85) retracement. fied because, if the market continues to go
In other words, if the market dropped more up, it will be stopped out with a very small
than 25 percent below the (.618) you would loss. The probabilities of these particular pat-
be able to say that you were wrong; your stop terns working are better than seven out of 10.
limitation is very small and you would be able
to profit as the market moved higher. As evi-
denced in this example, the market did, in
fact, move higher and you turned a profit at
the end of the day.
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118
ENTRY TECHNIQUES
Here are some of my favorite entry tech- important at the end of a geometric
niques used in conjunction with the geo- pattern. This is also true when
metric patterns. They are listed in their they occur after very volatile mar-
order of importance (importance to me!) kets. It is a sign that ALL of the
market players —bulls and bears-
1. The Shapiro Iteration as described in are nervous.
the following pages.
C. Hammer's - The hammer is a
2. Limit Orders - Placed a few ticks above period when the market has met
or below the exact geometric price mea strong support after a sharp sell
surements. A predetermined stop loss off. It gets its name from "ham
(approxiamtely $600) is placed at the mering out a bottom." A hammer
same time. should be twice the length of the
candle. Hammer should be estheti-
3. Candlestick Patterns - These patterns cally easy to see. If you have a
graphically display the importance of doubt, it is probably not a ham
the trading range for that time men
emphazing the opening price. Here are
four usable patterns: D. Shooting Stars—These are ac-
companied by an upside gap on
A. Tweezers - This formation is the the opening with the market clos
equivalent of a double bottom. ing near the lower end of the trad
Tweezers occur when 2 lines have ing range. These are particularly
equal highs or lows in succession. useful entry techniques at the end
They help to quantify risk at the of the geometric pattern. They
completion of the geometric appear as the opposite of the hang
patterns. ing man.
B. Doji's - The market opened and Many of the candlestick patterns may be
closed at the same price after mak- helpful as well. I only use these four be-
ing the highs and lows. They oc cause they seem to go hand in hand with
cur when the market is in transi the geometric patterns.
tion from bullish to bearish mode
or vice versa. Doji's are even more
F1DONAca RATIOS wrm PATTl!.RN Rl!COONmON
119
The result is too often what appears to be for my emotions to drive me to make the trade
the vengeance of the trading gods. We have at exactly the wrong moment, in five minutes
all had the experience of struggling with our- I would observe a noticeable change in trend
selves about placing such an order, and when in the price action, proof that I should not
we finally make the decision to do it, almost have put on the trade.
as soon as we put the phone back in the
cradle the price action changes. We almost When this is the case, the amount saved usu-
believe that the market was active and alive ally turns out to be substantial. This is true
and just waiting for the exact moment we for two reasons. First, when the price reverse
put on our one or two contracts to reverse after a fast move in one direction, it is often
the price movement. an equally speedy and sizable retracement of
the previous move. If I placed a close stop
It is especially important at these times to to limit the loss, it is usually hit rather quickly
remember that when this happens, the mar- If a stop was not put on, it became a de-
ket is not alive or right or wrong, and it is not structive game of playing catch up and pos-
punishing us for doing the wrong thing. The sibly letting a small loss that should not have
market simply and always just is. It is we occurred in the first place develop into a large
who are right or wrong. It is we who punish loss. When this happens your focus usually
ourselves for anger, or greed or indecision follows the loss instead of looking for an
or not doing our homework. other profitable situation.
After acting more times than I care to admit If in fact the trade still looked good five min-
on this emotional impulse to place the right utes after my emotions told me I couldn't
trade at the wrong time, a very simple con- wait a minute longer, then all I did was lose a
clusion presented itself. Because the time little of the profit that was still to be made. In
between actually putting on the trade and the either case the net is still a gain.
time the market seemed to reverse was so
small, (often it seemed to happen simulta-
neously no matter how hard I tried to "out-
smart" or "beat" the market), the only logi-
cal way to deal with this seemingly insur-
mountable temptation was to write down the
exact time and price when I finally decided
to make the trade, and force myself to wait
atleast five minutes, 300 seconds, before ac-
tually initiating it.
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127
APPENDIX I
TRADING RECORD
TRADE PLANNING SHEET
APPENDIX II
This is the description of the Gartley "222" liquidation is terminating, a minor rally like
pattern exactly as it appears on pages 221 B-C sets in, with volume expanding on the
and 222 of his book, Profits in the Stock upside. And when a minor decline, after can-
Market. celling a third to a half of the preceding mi-
nor advance (B-C) comes to a halt, with vol-
One of the Best Trading Opportunities ume drying up again, a real opportunity is
presented to buy stocks, with a stop under
In the life of those who dabble on Wall street, the previous low.
at some time or another there comes a yearn-
ing— "just to buy them right, once, if never In eight out often cases wherein each of these
again." For those who have patience, the specific conditions occurs, a rally, which will
study of top and bottom patterns will provide provide a worthwhile profit, ensues. In the
such an opportunity every now and then-the other two cases, only small losses have to be
chance does not arise everyday, but when it taken. In trading this formation, the observer
does, a worthwhile opportunity, with small is depending upon the probability that either
risk becomes available. a head-and-shoulders, or double bottom,
Figure 27 - A which are the two reversal patterns which oc-
© cur most frequently, is developing.
-,•' C
The art in conducting an operation of this kind
lies in:
d. Having the courage to get out with a fair to all the computer trading desks around the
profit (10-20 per cent), or at least protect world. During Gartley's era, the Western
it with stops. Union tickertape was the method of
communciation. As I wrote that last sen-
Hourly charts of the averages, available for tence, I realized that is how I learned to
guiding the operation, repay the market trade soybeans with Dave Nelson on his
student for all the efforts he puts into keep- Trans Lux ticker tape.
ing them day after day, when they are of
less practical use. Thousands of new stocks and commodity
markets have been introduced since
Similar opportunities occasionally develop for Gartley's time. Most of these are very liquid
that small part of the trading fraternity that and easy to gain access to the chart pat-
the intestinal fortitude and temperament to sell terns. This is particularly true for the
stocks short. The case in reverse is laid out intraday charts. In this section of the appen-
in of Figure 27(B). dix, I have selected some intraday charts
illustrating these patterns.
PJace Stops
Included in the appendix is the page on my
monitor that shows what commoditites and
stocks I follow. Each has a monthly, daily
and intraday chart pattern. Intraday charts
are 2 minutes, 5 minutes, 30 minutes, 60
minutes as well as a tick chart to record
every tick. This is helpful to gauge whether
or not you are filled on your order and at
@ what price.
Figure 27 (B)
As one reads the "222" pattern described
Gartley's book was written in the 1930's by H. M. Gartley, three basic virtues are
and things have changed dramatically about suggested for trading.
the markets. Not the markets themselves,
but the way they are reported. Communica- 1) Patience to wait for the market formation
tion is now instantaneous because of the to develop.
statellite dishes around the world connected
130 LARRY PESAVEN'r<)
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F100NACCI RATIOS '''ITU PATl"ERN ROCOONTTION
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l ij~') - - - --786
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_,,, <e· --Opening Price 718.00
A 717.00
S&P stalled at .786 retracement for about 20 minutes before exploding to the upside. A 716.00
short sale was suspect for 3 reasons:
715.00
J. Prices 12 points above the opening price
2. AO-CD move was not symmetrical in time bars
3. There were only two hours left in the trading day.
"These reasons are in their order of importance!
FteoNAcct RATIOS wrm PATTJ:RN REOJONTTION
149
APPENDIX III
PORTFOLIO PAGE
This is the portfolio page I use each day. From these speculative vehicles I search
for the various patterns.
* The Transportation, Cash S&P, and Tick Indices are used as confirmations of the
patterns. The same patterns are present in the cash indices.
APPENDIX IV
The first thing I was ever told about Larry no stars or half moons. At first glance he
Pesavento was that he traded stocks using looked just like everybody else, u n t i l you
the stars. Being a self proclaimed pseudo- noticed the constant twinkle in his eye that
intellectual liberal from the East newly ar- spoke of living life, loving it and inviting the
rived in a small central coast California observer to share the ride. No magic, no
town, I immediately pictured a wizened old mystery. Just a nice guy who liked people/
guy with a long white beard who wore a He appeared to be generous and giving.
large, black pointed hat and cloak, both And he was.
covered with white glistening stars and half
moons. Maybe he even walked around Don't be fooled by appearance was the first
carrying a large staff and tapped it on the lesson I learned for LP. (As our friendship
ground for support as he walked. grew he came to call me "Doc" and I would
call him LP.) The moral here is: watch your
At the time, I recently came west to accept expectations. Better yet, don't have them
a teaching position at California Polytechnic and they won't be violated. With respect to
State University (Cal Poly) and was still in the markets, don't look for something you
the process of meeting people. One of want to be there. Learn to see what the
them was Michael Weintraub, the gregarious market offers and respect what's there. Put
owner of a store that sells excellent fur and more succinctly, don't look for what you
leather goods in San Louis Obispo. This, WANT to be in a trade, learn to see what
in a small town where the mean annual there IS in the trade. This was a lesson that
temperature was 70.2 degrees. The para- would haunt us both.
dox was amazing to me and so was
Michael. He likes to shock people and When Michael introduced us, he said to me,
when he asked me what I liked to do in my . "Go ahead, ask him anything you want," as
spare time and I mentioned traded com- if to imply Larry possessed some kind of
modities, he melodramatically told me about secret monopoly on the wisdom of mar-
Larry. kets.
When I met Larry in Michael's store on LP looked at Michael, who he knew loved
night after hearing about him, I was startled "to stir the pot." To reduce my awkward-
by his appearance. I was almost disap- ness and embarrassment at Michael's
pointed there was no pointed cap, no cloak, intentioned boldness Larry just
fmoNACCI Rxnos wnu PAnutN RtU>GNfl'tON 151
smiled his disarming smile and said, "Go 1000% that day trading one contract.
ahead, I don't' mind. I love what I do and
When he would say, "Let's put one on
love to talk about the market." now," or "Let's get out of it now," I would
invariably ask, "Why did you do that?" He
That began both my friendship with LP and would invariably reply, "Because it was the
a series of discussions that not only cov- right thing to do." "Come on. LP, could
ered the mechanics of trading, but virtually you be a little more specific," I would say,
every aspect of life and how it related to the feigning a mock annoyance with his cavalier
psychology of trading and trading as a
attitude. He would look at me with exagger-
metaphor for life. ated exasperation and tease, "Come on
Doc, are you kidding me? This is easy. By
Soon after we met, LP invited me to his now you should not only know this, but be
trading room to continue our discussions able to teach it." Then, of course, he would
and watch him trade. Being a late night tell me, slowly and carefully, always empha-
person at the time, there were few things I sizing the importance of never putting on a
was willing to get up to see at 5:20 AM. trade without a stop, and equally important,
Bonds and currencies start trading at that the value of knowing when to get out.
time on the West coast (8:20 AM NY time).
LP seemed so interesting and funny that I It didn't take long to see he was right. It
thought I would give it a try. It was one of was easier than I thought once I began to
the wisest decisions I ever made. We see the patterns. It really doesn't take long
would sit and watch the markets and LP to learn them and be able to pick them out
would tell me market "war stories" about on any chart just by looking. The tech-
his days as a stockbroker and floor trader, niques in this book work, but what doesn't
and what he thought was going to happen necessarily accompany that knowledge is
that day. I was delighted at how much he the wisdom to apply it properly.
knew and how funny he could be and how
often he was right about the markets. When I first started watching LP trade I
asked what I thought was a logical question,
Larry is the best pure trader I ever met or one that I since heard many times. "Does it
read about. One morning on a particularly work for everything, and how do you
slow trading day he turned to me and said, know?" When I first asked, LP just smiled
"I'm bored. Let's paper trade some bel- and grabbed a chart. He cut off the name
lies." Larry loves to trade pork bellies and and the scale so I didn't know what it was,
has an incredible knack for it. In a short
time he made 15 straight profitable paper
trades. On the basis of just one contract he
literally could have made more than
152
Perhaps the best examples of this process trade and therefore have to analyze) when
occurred a number of times with beginning all you have to do to make more money is
students who just learned to trade. increase the number of CONTRACTS? To
quote the old clich, ' if it ain't broke, don't
Larry would instruct him to choose three or fix it.' Don't make more work for yourself,
four different markets and pick one com- just more money."
modity from each to trade. When asked,
we usually suggested bonds, a metal and a The other example occured when a student
grain. would call and say "I just made ten ticks in
bonds" or "I just made 5 cents in beans,
After three months or so, students would what should I do? Should I close the trade
call back to tell us how their trading was or wait and maybe get some more?"
going. Often when students called, they
would report 30% or 40% profits for the Again we would laugh, and again, the stu-
period. Then they would ask if it was time dent would at first grow annoyed with our
to start trading three or four more com- laughter. One of us would ask how long the
modities. This question always made us trade took to happen. The answer was
laugh because we knew what was coming usually, "half an hour" or "an hour." We
next. We would respond with our own would laugh again and one of us would ask,
question, "What would happen if instead of "Is that what you were looking for from this
doubling the number of COMMODITIES trade? In response to a "yes," we would
you traded, you doubled the number of continue, "would you prefer the trade took
CONTRACTS you traded? Assuming four hours to make a profit? If you have a
everything continued about the same, how chance to make what your analysis sug-
would you change your percentage of gested what was there, take it and look for
profit? another trade. Would you rather get your
ten ticks in half an hour or half a day?"
Most of the time the student would take a What usually clinched it, was when we
moment to do some math and generally asked "If we told you before the market
answer, "I'm not sure." This would cause opened how to make ten ticks today, would
us to laugh again and purposely irritate the you do it and be satisfied?"
student. "Why are you laughing?" would
be the next question. If the answer was "yes," as it usually was,
we would tell the student to answer his own
"You're not listening," one of us would say. question about what to do regarding the
"The PERCENTAGE of profit would stay trade. It was an important part of the teach-
the same. The AMOUNT of profit would ing of the teaching process for the student
change. Why increase your amount of to be satisfied with his own decision, not
work (the number of commodities you
156
just ours. That helped develop a student's We once had a student who wanted very
confidence in trading. much to learn to trade the S&P profitably.
As we showed him what to do, he kept
Often a student defended the original deci- saying, "I understand what you're telling
sion and its result by adding, "But I me, but I don't do it that way."
t h o u g h t . . . " One of us would interrupt at
that point and gently say, "No, you didn't Finally one of us asked if he was making a
think, and that is what will cost you money. profit trading. "Not really," he replied. Our
Now what did you learn today?" The experience taught us he really meant he was
student would respond that he was at first losing his shirt.
annoyed by our laughter, and didn't think
the situation through. That is precisely the Then maybe you should try it another way,"
effect we wanted. It was unlikely in the we suggested. When he left he was still
extreme that the student would make that doing it his way.
mistake again. We all want to be right as
much as we want to make a profit. Some- Finally one of us asked him if he was mak-
times more so. And that's where the ing a profit trading. "Not really," he replied.
trouble begins. An accurate analysis and Our experience taught us he really meant he
proper entry can be easily ruined by an was losing his shirt.
emotional response that changes the rules.
Good technique, but bad psychology equal The anecdote illustrates the proper answer
a bad result. Students usually saw the to a very important question. "Would you
lesson, laughed with us about their first rather be right, or get what you want?"
reaction, thanked us and said goodbye.
They called us to ask about a specific trade, The reader is left to decide.
but we would try to turn it into a lesson and
get them to answer their own question. It This story also illustrates another point — it
usually worked. It was the equivalent of is only at the beginning of discovery that we
that old parable that teaches, when you give realize how great our ignorance. To this
a starving man a fish, he will eat for one end, Larry is fond of quoting a Confucian
day. If you give him a fishing line and teach proverb: When the student is ready, the
him how to fish, he will eat every day. teacher will appear.
When they called back a few months after A spiritual friend of ours once told me, "Go
that, we shared another laugh when they beyond the boundary of yourself to
told us their percentages stayed the same, know..." The technique taught in this book
but they were making more money and still allows the serious student to do exactly
making mistakes, but not THAT one. that.
FmONACCl Rxnos wrru Pt.m::RN Rn:x>0NmON
157
APPENDIX V
The second cycle principle is that of If the trader (analyst) will use the principle
nominality. Cycles usually repeat in equal of ratio and proportion it can leave valuable
increments. For instance, if there is a 9 clues to the validity of a cycle. Reminder—
period cycle it will usually repeat for at least we are dealing with probabilities only. Noth-
2 cycles = 18 periods. On occasion it will ing is written as absolute law.
repeat for more than 5 cycles (5 waves) but
then it will shift. The trader can learn two "Take care of your losses and your
valuable lessons from this phenomenon. profits will take care of themselves."
First, once the cycle has changed begin to
look for the new nominal cycle. Second, —Amos Hostetter
once a nominal cycle has been identified Commodity Corp.
keep using it until it stops working. That
certainly sounds simple enough.
931s
04 05 06 17 21 27 29 3 7 47 42 53 67 54 69 88 67 85 108
05 06oa 17 22 28 30 38 48 42 54 69 SS 70 89 68 86 109
06 07 ()() Ill 23 29 31 39 so 43 55 70 s6719o 68 87 110
06 08 IQ 19 24 JO 31 40 SI 44 56 71 S7 72 91 69 88 112
07 0911 20 25 32 32 41 52 45 57 72 57 73 93 70 89 113
OB lQ 13 20 26 33 33 42 S3 46 58 H SB 74 94 71 90 114
09 11 14 21 27 34 34 43 55 46 59 75 59 75 9S 72 91 116
09 12 is 21 28 36 JS 44 56 41 60 76 60 76 97 72 92 117
10 13 17 23 29 37 JS 45 57 48 61 77 61 77 98 73 93 118
II l 41s 24 30 38 36 46 SS 49 62 79 61 78 99 14 94 119
13 16 20 25 32 41 38 48 61 50 64 81 63 80 102 76 96 122
13 17 22 26 33 42 39 49 61 51 65 83 64 81 103 76 97 123
14 18 23 27 34 43 39 50 64 52 66 84 64 82 104 77 98 124
IS 19 24 18 35 44 40 51 65 53 67 BS 65 83 105 78 99 116
16 20 2S 28 36 46 41 52 66 53 68 86 66 84 107
11 07 04 36 22 14 61 38 23 86 53 33 112 69 4J 138 85 53
13 08 OS )7 23 14 6J 39 24 87 54 3) 113 70 43 139 86 .SJ
15 0906 39 24 IS 6S 40 25 89 55 )4 I IS 71 44 141 87 S4
16 1006 40 25 IS 66 41 25 91 56 35 116 72 44 142 88 .S4
18 11 07 42 26 16 68 42 2~ 92 57 ).S 118 73 4.S 144 89 SS
19 12 07 44 27 17 70 43 27 94 58 36 120 7 4 46 146 90 56
21 13 08 45 28 17 71 44 27 9S 59 36 121 75 46 147 91 56
2) 14 09 47 29 18 73 45 28 97 60 37 123 76 47 149 92 51
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165
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TC BOITOM ,,,,- - , ,
TAKE PROATS ON #2 CONTRACT
FAILS TO RETRACE ENOUGH '
AS TC PRICE OBJECTIVE JS MET TO ADD 3 CONTRACTS
EXIT #I CONTRACT
WITH $1,000 PROFIT
~UY
3 CONTRACTS
TC BOTTOM
//TCBOITOM
EXIT #1 CONTRACT
WITH $1,000 PROAT
/
,
_,...__,~BUY 3 CONTRACTS
TCBOTI'OM
This chart is courtesy of Walter Bressert, PO Box 8268, Indian River Shores, Florida, 32963-1014. Mr.
Bressert is a pioneer in cycle research and a director of the Foundation for the Study of Cycles.
The chart is presented to alert our readers to the importance of risk control in trading all markets.
167
APPENDIX VI
SOME MORE PRACTICAL TIPS
MONEY MANAGEMENT
1. Money management in risk speculation should be kept simple. Here are some "unbreakable
rules" and some "guidelines."
A. Unbreakable Rules
1. Never add to a losing position.
2. Never risk more than 10 percent of your trading capital on any one trade.
3. Always have a protective stop in the market.
4. If you don't have a profit in three days, exit the trade.
B. Guidelines
1. Never close a trade without a reason.
2. Take responsibility for your trades.
3. Markets that have higher lows are in uptrends. Markets that have lower highs are in downtrends.
4. Always do your analysis prior to the market open.
If the answer to all three of these questions is NO, then you must hold your position. If the answer to any
one of the three is a YES, then you may close the trade if you wish.
III. Observations
A. Calculate your trading capital and multiply by three percent. This will give you the amount of loss you can
take on any trade. Example: $10,000 x 3% = $300. You should only risk $300 on the trade.
B. As your account grows you must still use the three percent guideline, but you can trade more contracts.
C. If you are able to trade multiple contracts you should consider using a "trailing" stop on one of the positions.
This stems from the ability of the system to enter at major turning points in the market.
D. The trader must always protect himself from his own fallibility. Stops are placed for protection against
yourself. "Markets are seldom wrong; men often are!"-Roy Longstreet
The Volatility Stop calculates the volatility by using the average range of the price bar. It is
calculated by multiplying the average range bya constant. The value is added to the lowest
close when short, and subtracted from the highest high when long:
DANGER SIGNALS!
Markets are seldom wrong! There is one fact that is always present in the markets: If prices go up there
are more buyers; if prices go down there are more sellers! Here are a few technical indicators that suggest
a market may be changing character:
A. Gaps
A big price gap on a chart is indicative of a change in sentiment and deserves attention. Use
the Shapiro Iteration (wait one bar) before acting.
B. Wide Range
When price ranges become abnormally wide then price objectives are more likely to be
exceeded (1.618). You should know the average daily range of the commodity you are
trading.
C. Tail Close
Markets that close at the extreme top or bottom are indicating strength or weakness. Look
for several days of tail closes in the same direction.
1. Of all the speculative blunders, there are few greater than trying to average a losing
game.
2. Always sell what shows you a loss and keep what shows you a profit.
3. You cannot try to force the market into giving you something it does not have to give.
4. The courage in a specualtor is merely the confidence to act on the decision of his mind.
5. A loss never bothers me after I take it. I forget it overnight. But being wrong-not taking
the loss-that is what does the damage to the pocketbook and to the soul.
6. The man who is right always has two forces working in his favor—basic conditions and
the men who are wrong.
7. The trend is evident to a man who has an open mind and reasonably clear sight. It is
never wise for a speculator to fit his facts to his theories.
8. In a narrow market when price moves within a narrow range, the thing to do is watch the
market, read the tape to determine the limits of prices, and make up your mind that you wi
not take an interest until the price breaks through the limit in either direction.
9. You watch the market with one objective: to determine the direction or price tendency. Price
like everything else, move along the line of least resistance.
10. In the long run commodtiy prices are governed but by one law—the economic law of suppl
and demand.
11. It costs me millions to learn that a dangerous enemy to a trader is his susceptibility to the
urging of a magnetic personality combined with a brilliant mind.
13. It never was my thinking that made the big money for me. It was always my sitting, my sittin
tight.
14. There is only one side to the stock market and it is not the bull side or the bear side, but
the right side.
..
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171
HE WHO KNOWS NOT
WHAT HE RISKS...
RISKS ALL!
There are three rules you need to develop in order to trade successfully:
1. Build a foundation of trust in yourself so that you will act in your own best interests—without
hesitation.
2. Follow a set of steps that will build confidence and a belief in your own consistency. This includes
learning to not give your money away.
3. Execute your trades flawlessly when a signal is given. Ask yourself these three questions:
a) Is it an identifiable pattern?
b) Are the sacred ratios present?
c) Can I afford to take the risk?
If the answer to these three questions is 'yes!' then you should take the trade.
• Money management always takes precedent over any trading methodology. You must never expose
yourself to unlimited risk. Stops are placed for protection against yourself.
Fear causes us to narrow our focus of attention and distorts our perception of the environment.
• Self-discipline is the ability of maintaining your focus of attention when all the things in the environment
are in conflict.
Never let the market save you—you must save Yourself. Use stops!
• We deal in probabilities! The market is always greater than anything we can ever anticipate. No method-
ology of trading can tell you what is going to happen next. Profits come from string of trades and not
from one particular trade.
• Take care of hour losses and the profits will take care of themselves! Release yourself from being wrong
or the fear of losing money. Trading is not a game of right or wrong, it is the process of making
money.
APPENDIXVII
JANUARY 2, 1997
This day will end the writing of this book. It is included because of its wild swings The
Dow Jones dropped more than 100 points during the day and then recovered all of the
loss in the last 25 minutes. The S&P 500 dropped 16 points, rallied 9 points, dropped 9
points and then closed up on the day. Traders should keep in mind that the volatility of the
stock market has been very mild since 1990. It might behoove the trader to prepare for
increased volatility in the next few years.
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173
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177
ADDITIONAL
Fibonacci Applications and Strategies for Traders. Fischer,
Reading Robert.
ADDITIONAL
Rocky Mountain Financial Workbook, Foster, W. (Box 1093,
Reseda, CA 91355). Reading
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