Pesavento Larry, Jouflas Leslie - Trade What You See. How To Profit From Pattern Recognition.pdf

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Trade What
You See
How to Profit from
Pattern Recognition
LARRY PESAVENTO
LESLIE JOUFLAS
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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. Pacifico
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise,
except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without
either the prior written permission of the Publisher, or authorization through payment of the
appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers,
MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to
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& Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online
at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their
best efforts in preparing this book, they make no representations or warranties with respect
to the accuracy or completeness of the contents of this book and specifically disclaim any
implied warranties of merchantability or fitness for a particular purpose. No warranty may be
created or extended by sales representatives or written sales materials. The advice and strategies
contained herein may not be suitable for your situation. You should consult with a professional
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Library of Congress Cataloging-in-Publication Data:
Pesavento, Larry.
Trade what you see : how to profit from pattern recognition / Larry
Pesavento, Leslie Jouflas.
p. cm. – (Wiley trading series)
Includes index.
ISBN 978-0-470-10676-1 (cloth)
1.
Speculation.
2.
Stocks.
3.
Investment analysis.
4.
Fibonacci numbers.
I.
Jouflas, Leslie, 1957– II. Title.
HG6041.P382 2008
332.63 228–dc22
2007034476
Printed in the United States of America
10987654321
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Contents
Preface
xi
Acknowledgments
xv
About the Authors
xvii
PART ONE
Introduction to Trading with
Pattern Recognition
3
CHAPTER 1
Opening Thoughts
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
19
CHAPTER 3
Harmonic Numbers and How to Use Them
Where the Term Harmonic Numbers Originated
19
Defining a Harmonic Number
20
Vibrations in Price Swings
21
Repetition in Price Swings
24
vii
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viii
CONTENTS
Finding Harmonic Numbers
28
Harmonic Numbers Found in Other Markets
34
PART TWO
The Price Patterns and How to Trade Them
39
CHAPTER 4
The AB=CD Pattern
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
55
CHAPTER 5
The Gartley “222” Pattern
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
69
CHAPTER 6
The Butterfly Pattern
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
85
CHAPTER 7
The Three Drives Pattern
History of the Three Drives Pattern
85
Three Drives Pattern Description
86
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ix
Contents
Three Drives Pattern Structure
87
Important Characteristics of the Three Drives Pattern
88
Psychology of the Three Drives Pattern
89
Trading the Three Drives Pattern
89
CHAPTER 8
Retracement Entries and Multiple
Time Frames
95
Fibonacci Retracement Entries
96
Fibonacci Retracement Pattern Structure
96
Trading the Fibonacci Retracement Pattern
98
Opening Price Retracement Setups
103
Market Setup for the Opening Price Retracement Trade
103
Trading the Opening Price Retracement Setup
105
Multiple Time Frames
108
117
CHAPTER 9
Classical Technical Analysis Patterns
A Brief History of Technical Analysis
118
Basics of Technical Analysis
119
Double Bottom and Top Patterns
119
Head and Shoulders Pattern
125
Broadening Top and Bottom Patterns
130
135
CHAPTER 10
Learning to Recognize Trend Days
Identifying a Trend Day
136
Patterns Found on Trend Days
139
Fibonacci Ratios on Trend Days
142
Controlling Risk on a Trend Day
144
Trading a Trend Day
145
PART THREE Essential Elements of Trading
153
CHAPTER 11
Trade Management
Thinking in Probabilities
154
Warning Signs and Confirmation Signs
155
Money Management
159
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