advice and strategies needed to prosper today and well into the future.
For a list of available titles, please visit our Web site at www.
C 2007 by Larry Pesavento and Leslie Jouflas. All rights reserved.
1. Speculation. 2. Stocks. 3. Investment analysis. 4. Fibonacci numbers.
I. Jouflas, Leslie, 1957– II. Title.
becoming successful at making a living in the profession of trading.
the trader has spent some time observing and learning the basic structures.
root in the academic community.
the article was "This Alchemy Will Yield Pure Gold." The article substantiated and verified that indeed there is an edge in technical analysis after all.
chart patterns in the financial press and on television.
H.M. Gartley, William Garrett, Edwards and McGhee, Frank Tubbs, R.W.
if we unintentionally omitted any famous names.
of technical analysis as well as seasoned traders.
by studying price behavior through pattern recognition.
Chapter 1: Opening Thoughts—We give the reader some of our observations on what is needed to successfully use the information in this book.
can make a successful trader and also what leads to failure.
begins to outline the basic structure of each pattern.
the 1930s, this pattern is a classic retracement pattern.
see on a price chart when it forms.
and Bottoms are discussed using Fibonacci ratios.
resistance in trends. We emphasize the importance of staying out of countertrend trades when a strong trend is in progress.
entry or for passing on a trade altogether.
describe the formulation of a trading plan.
successful trader does the same things every day to prepare for trading.
This chapter gives suggestions for daily routines.
you progress. We wish you a long and prosperous trading journey.
your time—it is greatly appreciated.
especially grateful to Gary, my husband, for his never-ending support.
Analysis of Stocks & Commodities. She co-authored Essentials of Trading: It's Not WHAT You Think, It's HOW You Think (Traders Press, 2006).
at ljouflas@msn.com or at www.tradingliveonline.com.
some traders succeed and why some fail at trading.
steps forward and three steps back. Once you do find a consistent successful approach, though, there is nothing like the business of trading.
In this first chapter we cover what is the best way to use this book.
suggestions for actions traders can take for successful trading.
one way: practice, practice, and more practice.
activities should be treated and set up as a second business.
symbol for the S&P 500; others are labeled as S&P 500.
like Profits in the Stock Market, by H.M. Gartley (1935), there are observations about what accounts for successful versus unsuccessful trading. Interestingly, we have not seen many changes over the decades in this area.
however, many actions the individual trader can implement to succeed.
will be a key to a successful trading career.
become a part of what you do each day without conscious thought.
do not take steps to protect their capital.
mental side first, then develop your trading methodology and plan.
Solid knowledge and understanding of the markets they are trading.
Technical expertise on how to trade their markets.
A sound trading methodology with a proven edge.
A trading plan based on the methodology.
Thinking in terms of probabilities, rather than emphasis on the outcome of any one trade.
Ĺ Good money management; adherence to money management rules.
Ĺ Having mentors or seeking out experts and peers to gain trading knowledge.
Assessing risk first, profits second.
Employment of a set of trading rules.
A foundation of daily routines, including mental preparation.
Maintenance of a high level of confidence and a positive attitude.
Commitment to the process of trading.
solid understanding of what the business of speculation involves.
smaller accounts who do succeed eventually hang on until they understand how leverage can be friend or foe.
Ĺ No trading methodology; they use a seat-of-the-pants approach.
Ĺ Failure to apply a solid money management system.
Ĺ Lack of understanding of the inherent risks present in trading.
Ĺ No trading rules applied.
Ĺ Failure to develop the discipline necessary to trade successfully.
Ĺ Not learning from previous mistakes.
Ĺ Lack of commitment to the process of trading.
small loss into a large loss.
Ĺ Blaming outcomes on external sources and not taking 100 percent responsibility for each and every aspect of their trading.
form the very best habits that will ensure success.
be developed through testing and implementing a specific trading strategy.
list of positive habits to replace those.
can then fill in the necessary steps to close that gap.
doing right in your trading can be developed further into strengths.
the path to your goals, but in the long run each action is your responsibility.
Replace negative habits with positive habits.
Take 100 percent responsibility for each outcome.
Create a support system to help keep you on the path to your goals.
Take a proactive approach to making changes in your trading.
Start with a list of actions that you need to take to reach your goals.
Believe in yourself; know that you are a successful trader.
As you study the trading patterns in this book, we hope that the aforementioned items will help you to develop as a successful trader.
the markets and especially in the patterns presented in this book.
George Bayer, and Bryce Gilmore, author of The Geometry of Markets.
the book when we mention a geometric triangle or symmetrical pattern.
Figure 2.1 Example of symmetrical triangle shape formed by price.
Figure 2.2 Example of asymmetrical triangle.
of Gann angles, which are now found in many charting software packages.
discuss them in this book.
the 1950s was still a considerable amount.
numerical ties that linked Fibonacci numbers and astronomy.
travel to the Chicago Board of Trade to trade the grains.
an application in predicting stock prices.
these can also be found in the changes of price behavior in the markets.
Ĺ Pi, 3.14, which is the ratio of the circumference of a circle to its diameter.
Figure 2.3 Example of two symmetrical triangles forming an AB=CD pattern.
they were limited in proving their theories.
of the whole to its parts, which is considered to be the perfect proportion.
through the centuries. It is even alleged that the Freemasons were an offshoot of the secret school of Pythagoras.
Figure 2.4 Example of proportion using the golden mean ratio.
century A . D . It was here that Leonardo of Pisa (ca. 1170–1240) was born.
the Greek sciences and philosophies.
synonymous with the famous Fibonacci sequence.
as the standard mathematical system we now use.
2,584, 4,181, 6,765, 10,946 . . .
preceding numbers, such as: 1 + 1 = 2; 1 + 2 = 3; 2 + 3 = 5; 3 + 5 = 8.
the art of speculation and trading markets.
In the next section of this chapter we take a look at the specific Fibonacci ratios we use on a daily basis in our chart patterns.
you will find many chart examples using these ratios.
is generally the standard setting we use.
Figure 2.5 Example of Fibonacci ratios used.
Figure 2.6 Example of Fibonacci ratios applied to a price chart.
contracting are contracting by the numbers of .618 and .786.
trader should focus on those. Refer back to Figure 2.3. As with any trading method, all trades are only a probability and never a certainty.
.707. It will be helpful to note these observations when you see them.
Gartley "222" pattern (Chapter 5) or the Butterfly pattern (Chapter 6).
will train your eye to the symmetrical versus the asymmetrical patterns.
in turn creates swings of price that are measurable and repetitive.
of Gann's works, including the astrology books Gann had worked on.
whose frequency is an integral multiple of the fundamental frequency.
Markets are always in a process of either expanding or contracting.
trend. Refer to Figure 3.1 for an example of a sideways-trading market.
Figure 3.1 Example of a sideways market: Dow futures 60-minute chart.
created as it meets with a surface. Price movement is very similar to this.
cause prices to suddenly thrust up or down. Figure 3.4 shows an example of a price thrust or expansion after the release of an economic report.
Shocks such as natural disasters, currency devaluations, and wars are extreme events that will have larger vibration effects on the markets.
Figure 3.2 Example of a downtrend: crude oil futures.
Figure 3.3 Example of an uptrend: Dow futures.
was evident in the long (wide) range bars.
can equal a trend, while milder to weaker vibrations will form a range.
move in gold equals $100 per contract, these moves are significant.
in the form of a trend.
that are similar in length, are repetitive, and are found in all time frames.
Figure 3.7 Dow futures 60-minute chart showing seemingly random swings.
that is present in this market on this time frame.
and trading the patterns in this book.
smaller harmonic within a larger harmonic.
harmonics you will find those present as well.
more harmonic swings that make up the larger harmonic.
trade), you want to look for the repetition on that time frame.
for the price to move toward.
Figure 3.13 Vertical lines represent a 70-pip swing in euro currency futures 30minute chart.
Ĺ 5.4 points—a primary harmonic number in this market.
Ĺ 6.85 points—derived using 5.4 × 1.272.
Ĺ 8.7 points—derived using 1.618 × 5.4.
Ĺ 10.8 points—derived using 5.4 × 2 (two harmonics).
Ĺ 16.2 points—derived using 5.4 × 3 (three harmonics).
Ĺ 21.6 points—derived using 5.4 × 4 (four harmonics).
trend days is 3.5 points, which is .618 of the 5.4 harmonic number.
harmonic numbers that pertain to the type of trading day you have—rangetrading day (contraction) versus a trend-mode day (expansion).
easily see how each swing was within the harmonic ranges and the repetition that occurred.
of the swing at 1430.50.
support or resistance, in this case resistance.
and stop placement for this type of setup.
as a tool in conjunction with the patterns and the Fibonacci ratios.
Figure 3.15 Large ranges of harmonic numbers over a two-day period.
$2.98 could also be used for placing a stop-loss order.
trades in an IBM 60-minute chart.
profit target area for any short sales from the swing highs.
initiating a long trade, could then use the harmonic of $3.00 to place a stoploss order.
be used to take profits from a short-sale trade.
which is also at the $3.00 harmonic.
Ĺ They can help you understand the rhythm and price swings of a particular market.
Ĺ You're aware of the combinations and different elements for trade setups, such as harmonic numbers, Fibonacci ratios, and patterns for initiating trade setups, and taking profit objectives.
Finally, harmonic numbers are an integral part of forming many patterns presented in this book.
Dow Jones—35, 105, and 70.
Silver market—18, 36, and 12.
to learn this pattern and its variations, it will be time well spent.
the classic technical analysis patterns.
book, Profits in the Stock Market (1935).
Courtesy of Lambert Gann Publishing. P.O. Box 0, Pomeroy, WA 99347. www.
had explained in his 1935 book.
P3, and P4, which were nothing more than A, B, C, and D.
one-third and one-half for retracements.
the basic AB=CD buy and sell patterns.
shape of the buy and sell patterns.
Figure 4.3b AB=CD buy and sell patterns with S&P E-mini chart price.
Figure 4.4 Merck (MRK) daily chart showing completed AB=CD pattern. This pattern completion leads to retracements of the AD swing of almost all the main Fibonacci levels we use.
possibly pass on the trade or wait for further confirmation before entering the trade. Chapter 11, "Trade Management," covers this in more detail.
pattern completion at point D.
double top or bottom, but it is a valid pattern.
a valid AB=CD pattern. See Figure 4.5 as an example.
greater). See Figure 4.6 as an example.
Ĺ The CD leg has a slope or angle steeper or wider than AB.
determines the relationship to the AB leg.
extending to 1.27 of the AB leg.
leg—1.272, 1.618, or more. See Figure 4.7 as an example.
that the CD leg could become extended. See Figure 4.8 as an example.
Figure 4.9 as an example.
4. As illustrated in Figure 4.10, the time to form the two legs is symmetrical.
the AB leg. See Figure 4.11 for an example of this.
from point C and sharp sloping down move to point D suggests CD leg will extend.
be an extension to 1.272, 1.618, or greater of the AB leg.
Figure 4.9 Euro currency daily chart showing AB=CD pattern with very symmetrical six bars up in the AB leg and six bars up in the CD leg.
the symmetry of the patterns.
chart indicates that the CD leg will be an expansion of the AB leg.
starts fast, that is the faster Ferrari going further faster.
1.272, 1.618, or greater of the AB swing.
patterns without a solid understanding of them and a sound money management strategy is equivalent to trading suicide.
and adding it to the low (or subtracting it from the high) of C.
measures buying enthusiasm and selling climaxes.
who may have missed the first move up begin to step in to buy the dip.
top of the AB leg now take profits as the price is close to those levels again.
point to complete the pattern at D.
shares to illustrate scaling out in two parts.
the entry. In this case the stop-loss buy order would be placed at 1291.
slightly less profit. We don't want a winning trade to turn into a losing trade.
1. Reduces the risk in the trade.
Figure 4.13 This is a picture-perfect S&P E-mini day trade of the AB=CD sell pattern. The market turns down almost exactly at the completion of D (15-minute chart).
the second profit objective is filled, we then remove our stop-loss order.
The second contract profit nets 8.75 points for a total profit of 15.25 points.
to get into the trade.
stop is placed. The first objective is easily reached within two time bars.
have netted the trader +19 points.
given the trader a net profit of 16 points.
stock illustrates a very important point: Always use stop-loss orders.
risk allows us to move on to the next trade.
traded stock, commodity, or futures market.
Of the almost 500 pages in H.M. Gartley's book, none are more important than pages 221 and 222. This is where the author described this particular pattern in greater detail than any of the other patterns in his book.
Figure 27, which is reproduced here as Figure 5.1.
the description of this pattern, as it is not as clear as one might expect.
Figure 5.1 Reproduction of Figure 27 in Profits in the Stock Market by H.M.
Gartley. Source: H.M. Gartley, Profits in the Stock Market (Pomeroy, WA: LambertGann Publishing, 1935).
of what the pattern was all about; realizing the differences of the corrections led to a breakthrough after many attempts to understand the concept.
has proven that Gartley's original premise was indeed accurate.
Combining both of these elements creates a buy pattern and a sell pattern.