Trade What You See E-Book

Larry Pesavento

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch
• Veröffentlichungsjahr: 2011

Seitenzahl: 280

Beschreibung

Trading the financial markets is extremely difficult, but with the right approach, traders can achieve success. Nobody knows this better than authors Larry Pesavento and Leslie Jouflas, both traders and educators of traders, who have consistently used pattern recognition to capture profits from the markets. In Trade What You See, Pesavento and Jouflas show traders how to identify patterns as they are developing and exactly where to place entry and exit orders. While some patterns derive from the techniques of Wall Street's earliest traders and other patterns reflect Pesavento's emphasis on the geometry of market movements and Fibonacci numbers.. Filled with hard-won knowledge gained through years of market experience, Trade What You Seeoutlines both a practical and sophisticated approach to trading that will be of interest to both novice and seasoned traders alike. Larry Pesavento is a forty-year veteran trader. He operates a Web site,

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Preface

VALIDATION FROM THE SCIENTIFIC COMMUNITY

OVERVIEW OF THE BOOK

Acknowledgments

SPECIAL THANKS AND ACKNOWLEDGMENT

About the Authors

PART I - Introduction to Trading with Pattern Recognition

CHAPTER 1 - Opening Thoughts

HOW TO USE THIS BOOK

SUCCEEDING OR FAILING IN TRADING

STEPS TO TAKE FOR SUCCESSFUL TRADING

CHAPTER 2 - Geometry of the Patterns and Fibonacci Ratios

HISTORY OF GEOMETRY IN THE MARKETS

FIBONACCI RATIOS

APPLYING THE FIBONACCI RATIOS

SUMMARY

CHAPTER 3 - Harmonic Numbers and How to Use Them

WHERE THE TERM HARMONIC NUMBERS ORIGINATED

DEFINING A HARMONIC NUMBER

VIBRATIONS IN PRICE SWINGS

REPETITION IN PRICE SWINGS

FINDING HARMONIC NUMBERS

HARMONIC NUMBERS FOUND IN OTHER MARKETS

PART II - The Price Patterns and How to Trade Them

CHAPTER 4 - The AB=CD Pattern

HISTORY OF THE AB=CD PATTERN

AB=CD PATTERN DESCRIPTION

AB=CD PATTERN STRUCTURE

IMPORTANT CHARACTERISTICS OF THE AB=CD PATTERN

CD LEG VARIATIONS

SLOPE AND TIME FRAMES

PSYCHOLOGY OF THE AB=CD PATTERN

TRADING THE AB=CD PATTERN

CHAPTER 5 - The Gartley “222” Pattern

HISTORY OF THE GARTLEY “222” PATTERN

GARTLEY “222” PATTERN DESCRIPTION

GARTLEY “222” PATTERN STRUCTURE

IMPORTANT CHARACTERISTICS OF THE GARTLEY “222” PATTERN

PSYCHOLOGY OF THE GARTLEY “222” PATTERN

TRADING THE GARTLEY “222” PATTERN

CHAPTER 6 - The Butterfly Pattern

HISTORY OF THE BUTTERFLY PATTERN

BUTTERFLY PATTERN DESCRIPTION

BUTTERFLY PATTERN STRUCTURE

IMPORTANT CHARACTERISTICS OF THE BUTTERFLY PATTERN

PSYCHOLOGY OF THE BUTTERFLY PATTERN

TRADING THE BUTTERFLY PATTERN

CHAPTER 7 - The Three Drives Pattern

HISTORY OF THE THREE DRIVES PATTERN

THREE DRIVES PATTERN DESCRIPTION

THREE DRIVES PATTERN STRUCTURE

IMPORTANT CHARACTERISTICS OF THE THREE DRIVES PATTERN

PSYCHOLOGY OF THE THREE DRIVES PATTERN

TRADING THE THREE DRIVES PATTERN

CHAPTER 8 - Retracement Entries and Multiple Time Frames

FIBONACCI RETRACEMENT ENTRIES

FIBONACCI RETRACEMENT PATTERN STRUCTURE

TRADING THE FIBONACCI RETRACEMENT PATTERN

OPENING PRICE RETRACEMENT SETUPS

MARKET SETUP FOR THE OPENING PRICE RETRACEMENT TRADE

TRADING THE OPENING PRICE RETRACEMENT SETUP

MULTIPLE TIME FRAMES

CHAPTER 9 - Classical Technical Analysis Patterns

A BRIEF HISTORY OF TECHNICAL ANALYSIS

BASICS OF TECHNICAL ANALYSIS

DOUBLE BOTTOM AND TOP PATTERNS

HEAD AND SHOULDERS PATTERN

BROADENING TOP AND BOTTOM PATTERNS

CHAPTER 10 - Learning to Recognize Trend Days

IDENTIFYING A TREND DAY

PATTERNS FOUND ON TREND DAYS

FIBONACCI RATIOS ON TREND DAYS

CONTROLLING RISK ON A TREND DAY

TRADING A TREND DAY

PART III - Essential Elements of Trading

CHAPTER 11 - Trade Management

THINKING IN PROBABILITIES

WARNING SIGNS AND CONFIRMATION SIGNS

MONEY MANAGEMENT

CHAPTER 12 - Using Options with the Fibonacci Ratios and Patterns

CALL AND PUT OPTIONS DEFINED

FACTORS THAT INFLUENCE THE PRICE OF AN OPTION

CONTROLLING RISK WITH OPTIONS

EXAMPLES OF USING OPTIONS WITH EXTENSION PATTERNS

CHAPTER 13 - Building a Trading Plan

DAILY TRADING PLAN

TRADING AS A BUSINESS

DISASTER PLANS

SUMMARY

CHAPTER 14 - Daily Routines

TRADE PREPARATION

MENTAL PREPARATION

PHYSICAL PREPARATION

APPENDIX - Useful Resources

Index

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The Wiley Trading series features books by traders who have survived the market’s ever-changing temperament and have prosperedsome 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.

Copyright © 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, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

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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

To all traders, past and present, who have dedicated themselves to becoming successful at making a living in the profession of trading.

Preface

“Trading is a journey—not a destination.”

Several hundred years ago, technical analysis began its journey to help investors and traders determine, with reasonable probability, what direction prices might take. Technical analysis allows investors and traders to identify moments of opportunity to profit in the markets. It does so by identifying and quantifying specific patterns that form and repeat with enough regularity that trading methods and strategies can be developed and implemented with success.

Trade What You See: How to Profit from Pattern Recognition focuses on trading patterns with an underlying root structure based on simple geometric forms and Fibonacci ratios. The patterns are easily identifiable once the trader has spent some time observing and learning the basic structures. Each of these patterns can be quantified and a sound money management strategy applied.

Writing a book about pattern recognition based on geometric patterns and Fibonacci ratios requires acknowledging the early scholars of geometry, including Pythagoras, Archimedes, and of course the great mathematician Leonardo di Pisa (better known as Fibonacci). These great scholars had all traveled to Egypt during their lifetimes and had studied the Great Pyramids. Pythagoras, the father of modern geometry, was obsessed by the mathematics of the pyramids. The actual mass of the structure was not as important to him as the fact that all of the angles on all sides were within .01 percent. Part of the mystery of the Great Pyramids is how the mathematics relates to the golden ratio, which is also referred to as the divine proportion, or .618.

It was not so many years ago that a book of this nature, based on technical analysis, would not have been taken seriously by many. We begin with a look at a point in time when technical analysis had begun to take root in the academic community.

VALIDATION FROM THE SCIENTIFIC COMMUNITY

For years technical analysis was shunned by many Wall Street professionals, looked upon as one step above tea leaf reading. A turning point occurred on April 17, 2000, when a paper by Dr. Andrew W. Lo of the Massachusetts Institute of Technology (MIT) was published in Business Week. The title of 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. This, of course, did not surprise any market technician who had successfully been using pattern recognition.

The article did, however, bring technical analysis from the age of alchemy into the realm of academia. Princeton University Press published a book by Dr. Lo and A. Craig MacKinlay, A Non-Random Walk Down Wall Street, which analyzed why patterns work and how they repeat. This could be one of the reasons that the financial public is now exposed to so many chart patterns in the financial press and on television.

Long before Lo and MacKinlay’s book was published, there were many great technical analysts to whom today we owe a debt of gratitude. Some of these technical analysts who have contributed groundbreaking work are H.M. Gartley, William Garrett, Edwards and McGhee, Frank Tubbs, R.W. Schabacker, William Dunnigan, Ralph Elliott, John Murphy, Linda Raschke, John Hill, Bryce Gilmore, Charles Lindsay, and Richard Wyckoff. We regret if we unintentionally omitted any 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 learn to believe in what the market is telling them based on price. This is best accomplished by studying price behavior through pattern recognition.

OVERVIEW OF THE BOOK

This book was written to give the reader a comprehensive view of the specific patterns presented. We use a variety of stocks and markets in the chart examples throughout the book to illustrate that these particular patterns do form in all markets, and in all time frames. We present patterns derived from some of the classic technical analysis patterns as well as the geometry and Fibonacci-based patterns. Here is an overview of each chapter:

Chapter 1: Opening Thoughts—We give the reader some of our observations on what is needed to successfully use the information in this book. We also offer our insights after dealing with hundreds of traders on what can make a successful trader and also what leads to failure.

Chapter 2: Geometry of the Markets and Fibonacci Ratios—This chapter covers the simple geometry of the markets and how the x-axis and y-axis provide just another way of illustrating triangles. We also cover the history of Fibonacci ratios and present the ones we apply to our trading.

Chapter 3: Harmonic Numbers and How to Use Them—This chapter shows that all financial markets have what we refer to as harmonic and repetitive swings that are inherent in each particular market. This chapter begins to outline the basic structure of each pattern.

Chapter 4: The AB=CD Pattern—The AB=CD pattern is one of the simplest to identify in any market, on any time frame, and is the basis of several other patterns presented.

Chapter 5: The Gartley “222” Pattern—Derived from Gartley’s work in the 1930s, this pattern is a classic retracement pattern.

Chapter 6: The Butterfly Pattern—The Butterfly pattern is seen at extreme turning points in tops and bottoms; it is ideal for options trades and allows low-risk entries.

Chapter 7: Three Drives Pattern—This pattern can signal either a major turning point or a more complex correction in a trend. It is very easy to see on a price chart when it forms.

Chapter 8: Retracement Entries and Multiple Time Frames—We cover simple retracement patterns with Fibonacci ratios that we use to enter in the direction of a trend. We also look at how to combine multiple time frames.

Chapter 9: Classical Technical Analysis Patterns—Patterns such as Head and Shoulders, Double Tops and Bottoms, and Broadening Tops and Bottoms are discussed using Fibonacci ratios.

Chapter 10: Learning to Recognize Trend Days—This chapter could pay for the book many times over. It teaches traders how to identify trending conditions and offers techniques for entering in the direction of the trend. We also show how to use Fibonacci ratios as support and resistance in trends. We emphasize the importance of staying out of countertrend trades when a strong trend is in progress.

Chapter 11: Trade Management—The secret to trade management is in understanding that risk is the most important element in trading. We look at position sizes and methods for determining total risk. This chapter covers which warning signs we use and the confirmation signals for trade entry or for passing on a trade altogether.

Chapter 12: Using Options with the Fibonacci Ratios and Patterns—Options are available on nearly every liquid trading vehicle. Pattern recognition, because it is a leading indicator, is applicable to options. We present some basic option strategies that minimize risk and allow for substantial profits.

Chapter 13: Building a Trading Plan—Once readers have studied the patterns, they can then move on to a trading plan. This chapter gives a solid foundation to build a plan that can be expanded upon as the trader gains experience. Over half a century of trading experience was used to describe the formulation of a trading plan.

Chapter 14: Daily Routines—Routines and rituals are a necessary part of the trading profession. The difference between successful traders and unsuccessful traders is in the thought process and the preparation. The successful trader does the same things every day to prepare for trading. This chapter gives suggestions for daily routines.

The appendix includes our lists of recommended books, magazines, and web site resources.

As a trader using pattern recognition, it is your job to learn these repetitive patterns and discover the underlying price ratios that lead to a predictive nature. We hope that you find this book a valuable guide and reference as you progress. We wish you a long and prosperous trading journey.

Acknowledgments

We would like to thank Robin Farina and Rich Crane for their patience, time, and outstanding help with this book. We also would like to thank our friends John Arrington and Howard Arrington at Ensign Software; all the chart examples in this book were generated from their software, which is user friendly to our methodology. We’d like to thank Shelli Simon for her efforts and time. Thanks to John Hill from Futures Truth for his willingness to share some of the information obtained and some of the rare books mentioned. Thank you to Mark Douglas and Linda Raschke for their reviews and comments. Thanks to Jon and Liz Maresca for their support in everything.

Special thanks to Gary Porter, who patiently read each word and chapter as though he were a student of this methodology. His comments and insights are greatly appreciated.

A grateful thank-you to all those at John Wiley & Sons, Inc., who gave us the opportunity to write this book. Thank you, Emilie Herman, for all of your time—it is greatly appreciated.

It would be impossible to list all the great masters who have since passed on to that big trading room, but some of the more important ones to us do have their names mentioned in the book, as well as the ones still with us. The contributions of those mentioned in this book cannot be underestimated in the development of technical analysis of speculative markets.

SPECIAL THANKS AND ACKNOWLEDGMENT

I would like to give special thanks and gratitude to Larry Pesavento. You introduced me to seeing the fascinating, harmonic world of Fibonacci ratios in the markets. Thank you for inspiring me and helping me develop my enthusiasm into a solid trading methodology. Thank you for starting me on that journey.

I am especially thankful to my family—my Mom and Dad, my brothers Marty and Todd—for their support throughout my trading career. I am especially grateful to Gary, my husband, for his never-ending support.

Leslie Jouflas