JWPR033-FM JWPR033-Pesavento (Wiley Trading Series) August 31, 2007 12:52 Char Count= 0 Trade What You See How to Profit from Pattern Recognition LARRY PESAVENTO LESLIE JOUFLAS iii JWPR033-FM JWPR033-Pesavento (Wiley Trading Series) August 31, 2007 12:52 Char Count= 0 i JWPR033-FM JWPR033-Pesavento (Wiley Trading Series) August 31, 2007 12:52 Char Count= 0 Trade What You See i JWPR033-FM JWPR033-Pesavento (Wiley Trading Series) August 31, 2007 12:52 Char Count= 0 Founded in 1807, John Wiley & Sons is the oldest independent publish- ing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market’s ever-changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in between, these books will provide the 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. WileyFinance.com. ii JWPR033-FM JWPR033-Pesavento (Wiley Trading Series) August 31, 2007 12:52 Char Count= 0 Trade What You See How to Profit from Pattern Recognition LARRY PESAVENTO LESLIE JOUFLAS iii JWPR033-FM JWPR033-Pesavento (Wiley Trading Series) August 31, 2007 12:52 Char Count= 0 Copyright C  2007 by Larry Pesavento and Leslie Jouflas. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada. Wiley Bicentennial Logo: Richard J. 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HG6041.P382 2008 332.63  228–dc22 2007034476 Printed in the United States of America 10987654321 i JWPR033-FM JWPR033-Pesavento (Wiley Trading Series) August 31, 2007 12:52 Char Count= 0 To all traders, past and present, who have dedicated themselves to becoming successful at making a living in the profession of trading. JWPR033-FM JWPR033-Pesavento (Wiley Trading Series) August 31, 2007 12:52 Char Count= 0 i JWPR033-FM JWPR033-Pesavento (Wiley Trading Series) August 31, 2007 12:52 Char Count= 0 Contents Preface xi Acknowledgments xv About the Authors xvii PART ONE Introduction to Trading with Pattern Recognition CHAPTER 1 Opening Thoughts 3 How to Use This Book 3 Succeeding or Failing in Trading 4 Steps to Take for Successful Trading 7 CHAPTER 2 Geometry of the Patterns and Fibonacci Ratios 9 History of Geometry in the Markets 11 Fibonacci Ratios 12 Applying the Fibonacci Ratios 16 Summary 18 CHAPTER 3 Harmonic Numbers and How to Use Them 19 Where the Term Harmonic Numbers Originated 19 Defining a Harmonic Number 20 Vibrations in Price Swings 21 Repetition in Price Swings 24 vii JWPR033-FM JWPR033-Pesavento (Wiley Trading Series) August 31, 2007 12:52 Char Count= 0 viii CONTENTS Finding Harmonic Numbers 28 Harmonic Numbers Found in Other Markets 34 PART TWO The Price Patterns and How to Trade Them CHAPTER 4 The AB=CD Pattern 39 History of the AB=CD Pattern 39 AB=CD Pattern Description 41 AB=CD Pattern Structure 41 Important Characteristics of the AB=CD Pattern 44 CD Leg Variations 45 Slope and Time Frames 48 Psychology of the AB=CD Pattern 50 Trading the AB=CD Pattern 51 CHAPTER 5 The Gartley “222” Pattern 55 History of the Gartley “222” Pattern 55 Gartley “222” Pattern Description 57 Gartley “222” Pattern Structure 58 Important Characteristics of the Gartley “222” Pattern 59 Psychology of the Gartley “222” Pattern 61 Trading the Gartley “222” Pattern 62 CHAPTER 6 The Butterfly Pattern 69 History of the Butterfly Pattern 69 Butterfly Pattern Description 70 Butterfly Pattern Structure 72 Important Characteristics of the Butterfly Pattern 73 Psychology of the Butterfly Pattern 74 Trading the Butterfly Pattern 75 CHAPTER 7 The Three Drives Pattern 85 History of the Three Drives Pattern 85 Three Drives Pattern Description 86 [...]... 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 c02 JWPR033-Pesavento... famous names What this book teaches is a simple, pragmatic approach to pattern recognition It’s designed to be hands-on and to appeal to new students of technical analysis as well as seasoned traders The motto that we trade by is Trade what you see, not what you believe.” A true technician is interested only in price bars and the summation of these price bars—the only truth in trading Traders must... will see if there is a gap between where they are and where they want to be This is a point where the trader can then fill in the necessary steps to close that gap Conversely, pay attention to your positive habits The actions you are doing right in your trading can be developed further into strengths c01 JWPR033-Pesavento (Wiley Trading Series) 8 August 14, 2007 7:21 Char Count= TRADE WHAT YOU SEE Develop... support systems to help you instill new positive habits A support system may be using a buddy system with another trader It never hurts to have accountability with someone else that can help keep you on the path to your goals, but in the long run each action is your responsibility Here is a list you can use to help develop your personal plan of action to reach the success level you want in trading: Ĺ... would suggest you start by keeping it simple and study a couple of patterns each day We also suggest that you work through the patterns in the order they’re presented Start with the basics—geometry (Chapter 2) and harmonics (Chapter 3)—before moving on to the pattern formations This 3 c01 JWPR033-Pesavento (Wiley Trading Series) August 14, 2007 7:21 4 Char Count= TRADE WHAT YOU SEE will help you build... help you build a solid foundation and understanding of what we are teaching We include many examples of trades in each pattern chapter Once you have a basic foundation in place of the pattern structures, you will be ready to study how these patterns are traded, and begin to think in terms of implementing these into your trading We always recommend traders do some form of paper trading or simulated trading... for each and everything that happens in their trading Ĺ Being in the habit of forgetting their last trade, win or lose, and moving on to the next trade Ĺ Ĺ Ĺ Ĺ Ĺ Ĺ Ĺ Ĺ Why Traders Fail Conversely, we also see particular reasons traders fail We would like to share these observations with you in the hope you can learn from these errors and avoid some of these pitfalls An ancient proverb states, “The smart... direction you are taking If you are an experienced trader and you have already formed habits that are not producing the desired results, then take time to evaluate your trading and begin to form new habits that will get you the results you desire in trading Chapter 13 has a worksheet titled “Twenty Sample Trades Worksheet” (Figure 13.2), designed to help traders instill new trading habits It focuses on... trader consistently exits a trade before the profit objective is reached The new positive habit will have the trader hold for the profit objective Another example may be that the trader enters early before a pattern is completed The new positive habit will have the trader enter at the correct entry point Once traders understand and know what their edge is, they will begin to see the importance of consistently... Astro-cycles: The Traders Viewpoint (Traders Press, 1987); Planetary Harmonics for Speculative Markets (Traders Press, 1990); Harmonic Vibrations: A Metamorphosis from Traditional Cycle Theory to AstroHarmonics (Traders Press, 1990); Fibonacci Ratios with Pattern Recognition (Traders Press, 1997); Profitable Patterns for Stock Trading (Traders Press, 1999); The Opening Price Principle, with Peggy MacKay (Traders . that we trade by is Trade what you see, not what you be- lieve.” A true technician is interested only in price bars and the summation of these price bars—the only truth in trading. Traders must. with Peggy MacKay (Traders Press, 2000); Private Thoughts from a Trader’s Diary, with Peggy MacKay (Traders Press, 2002); Essentials of Trading: It’s Not WHAT You Think, It’s HOW You Think, with. publications as Trader’s Journal, Active Trader,and Technical Analysis of Stocks & Commodities. She co-authored Essentials of Trad- ing: It’s Not WHAT You Think, It’s HOW You Think (Traders Press,