This is the inaugural edition of "Trade Tips".  A free monthly newsletter intended to teach the principles of harmonic trading and provide some insight into trade management, trade psychology and other trading related issues. In addition to the monthly newsletter, you will receive a weekly update showing brief examples of harmonic trading. These will include closed trades as well as setups that are completing.

I was interviewed this week by Kira Brecht of Active Trader magazine for their September issue. Kira commented that after having been in the business for twelve years and educated in technical analysis, she was unfamiliar with the concepts of harmonic trading or harmonic numbers. It seems clear that those who practice this methodology are a relatively small community of traders. Our mission will be to spread the word about harmonic trading. We welcome both your feedback and contributions to this exciting and dynamic approach to trading the markets.


Named after the pattern that appears on page 222 of H.M Gartley's work "Profits in the Stock Market" published in 1935, the pattern remained largely unknown for sixty years until Larry Pesavento published "Fibonacci Patterns with Pattern Recognition" in 1997.

On page 222 of Gartley's work he describes a pattern that is a “re-test” of an important top or bottom. The pattern is an AB = CD parallel move attempting to make a new high or low. The real beauty of this pattern is that when properly identified, it enables you to enter with the trend in a high probability reversal zone with minimal risk.

Over the last seven years I have observed, especially in the case of "Bearish Gartley" patterns, that those with a climax top demonstrated by extreme volume spikes at "X" make for exceptional trading opportunities. The presence of such conditions prevent you from taking a "gamble" at a high or low.

Why Does it Work?

By the time this pattern has set up, there will frequently be some comment from fundamental analysts that will support the new trend. Additionally, technical analysts will be talking about support (if a bullish setup) or resistance (if a bearish setup) and probable price reversal near the 50 day or 10 week moving average which will frequently coincide with the harmonic reversal zone.

Trader's who are counting waves will also have this trade setup on their radar screen since the pattern fits exceptionally well into Elliott Wave theory completing at what would be labeled as a wave two (or B) and putting traders in a position to catch the potentially explosive wave three move or at least a wave "C" correction.

Add to these reasons the growing number of traders specifically looking to trade the Gartley pattern and you have something of a consensus among many different traders regarding market direction. The result is frequently an explosive and highly profitable trade setup. However, nothing works all of the time which is why the trader must control risk in the trade. This pattern works about 70% of the time but the necessary trade management will reduce the win/loss percentage to closer to 60% over a long series of trades.

Credit Where Credit is Due

Someone once asked me what Larry Pesavento's major contribution to the business of trading was and what he will be remembered for. My response was that he had combined pattern recognition with Fibonacci ratios. The best and earliest example of this, to my knowledge, in his work from 1997. It would be my guess that Larry's work on this subject will be read and quoted for many decades to come. Larry is unquestionably responsible for bringing the Gartley pattern with Fibonacci ratios to the attention of the trading community.

Larry has told me that he was introduced to Fibonacci numbers by his mentor John Hill. I met John in 2003 at the online trading expo in Chicago and was fortunate enough to have dinner with him and his wife as well as Larry and some other trading friends. John is an older gentleman probably best known for his work at Futures Truth. It was remarkable to listen to him talk about his quest for trading knowledge as a young man and his intense passion for trading spanning five or six decades. That passion similarly resides in my mentor Larry Pesavento. His contributions to the trading profession are profound and have changed the lives of many individuals, myself included.

As in every other discipline, traders build upon the work of those who came before them. The swing trade model I developed while working with Larry has documented over 900 trades since 2000. A complete record with charts and a spreadsheet that compiles the results of trading Harmonic setups on the daily and weekly charts. Most of these trades involve Gartley 222 patterns. Is there more to be discovered about trading this pattern? I believe the answer to that question is yes. Various filters can be applied that statistically weed out setups that are less likely to produce a good result.

Let's look at an example of a Bearish Gartely "222" pattern. This is a recent trade from our swing trade model in Moody's (MCO). The first thing I want to point out on this chart is the professional selling that occurred on February 16, 2005. Note the green alert at the top of the volume window which I have highlighted with a yellow circle. This is a proprietary alert I've developed that is triggered by high volume. Following the decline that lasted until April 18th, there is an ab=cd correction to this new downtrend. This is both symmetrical in time and price and terminates in a Fibonacci resistance zone that you see drawn in on the chart.


If you pull up a current chart of Moody's, you will see that it put a bottom in on May 13, and has rallied since that time. Yes, there was the probability that it could have gone much lower! However, this turned out to just be a correction - there was no explosive wave three to capture and that is often how it works out. So you have to take profits when they are offered and control the one thing that you can - risk!

Bear in mind that what looks like a Gartley to some traders looks like a cup and handle pattern to others! So if you are in one of these trades and the stock has good fundamentals you have to be careful if you see a small pullback at completion followed by a strong surge.

The next example is another recent trade from the swing trade model in Emerson (EMR). The chart shows 3 drives or "pushes" as the pattern completed. These would be very clear on a 60 minute chart. Emerson is a stock that trades a little over a million shares a day, but on April 28 it more than doubled trading almost 3 million shares. On April 29th,  the market could not even test the low from the 28th and prices proceeded to rally sharply reaching the .618 profit objective in only four days. Note how we took profits all the way up as the market offered them.


The last example I've selected is the current daily chart of the S&P 500 which contains a bearish Gartley 222 pattern. There are actually two nice ab=cd corrections in this chart. The first is labeled with lower case and the second with upper case. If this pattern works - and there is roughly a 70% chance that it will, this is the trade of the year. As you can see from the indicators, there is a loss of momentum at the recent highs. All of the conditions are in place for a strong reversal. Probability favors such a reversal. However, anything can happen! It is very easy to get overly excited and bet the farm on this kind of setup but that is very unwise.



It is one thing to be able to recognize time, price and pattern. It is another to actually trade it profitably. To do so requires more than just identifying the market conditions which make for a good trading opportunity. You must be able to carefully allocate your risk capital and establish a maximum stop loss that statistically gives the pattern room to play itself out without damaging your trading account should you be wrong on a specific trade or even a series of trades.

Additionally, you must have a plan for taking profits and reducing risk as you go along in a trade. You must have enough confidence in what you are doing to execute consistently over a series of trades, which means you had better have done your homework because once the bullets start flying in the heat of battle there is no one to save you but yourself. For those willing to do the work, trading can provide enormous freedom and pleasure. For those looking for easy money there will only be disappointment.

In coming months we will be looking at more specific examples of the Gartley pattern and sharing with you some of the finer points we have discovered about trading this harmonic setup. We will also be demonstrating some of the unique and time saving tools that have been developed by our friends at Ensign Software. Please feel free to contact us with your questions.

Like so many other things in life – trading involves progressing through various necessary stages of learning. This happens regardless of whether we are conscious of the process or not. Additionally, the amount of time we spend in these stages will vary depending on a number of factors which include our age, education, emotional makeup, finances, and perhaps most importantly, our willingness to learn.

The information presented here is not new but it bears repeating since fully grasping these concepts will not only help you identify where you are in the learning process but aid you in planning for future growth.

Stage One – Unconscious Incompetent

The first stage a trader experiences is that of the unconscious incompetent. This is the stage where the trader doesn't even know that he doesn’t know what he is doing. Since it requires no particular skill to put on a winning trade, (you have a 50/50 chance of being right). It is statistically quite normal for a new trader to put together a string of winning trades. This generally results in the trader feeling elation and euphoria. This is quite dangerous since the trader lacks the necessary skills to put together consistent successful results. Inevitably, the new trader is shoved along to the next stage in much the same way an infant suddenly becomes a toddler.

Stage Two – Conscious Incompetent

The second stage is the most frightening stage of trading. The trader is now painfully aware that he does not know what he is doing. It is akin to the toddler who has taken his first steps, only to fall and hit his head on the floor or coffee table. Fortunately, few if any of us consciously remember those experiences. Such is not the case when it comes to trading. We remember the painful losses that damaged or perhaps devastated our trading accounts. These are lessons that we will not forget anytime soon! We must learn how to put these painful experiences into perspective and learn from them or we quit trading – either to stop the pain or because our trading account is wiped out.

For most traders who survive into stage two, education is front and center in their life. Many will conclude that the key lies in better trade analysis. This is only partially correct. A frenzied study of various trading methodologies usually ensues. Those who possess a strong desire to learn will eventually find a trading style and “edge” that is suited to them. If they are fortunate enough to have not squandered all of their trading account during stage one and two and if they have learned something about trade management, probability theory, risk control and trading psychology they will move on to stage three.

Stage Three – Conscious Competent

The stage three trader possesses most of the necessary tools to be successful. He only lacks experience. This too is a stressful stage for while the trader is capable of producing consistent results, they must think about every step along the way. This eats up a great deal of energy and makes it difficult, perhaps impossible, to relax and simply enjoy what they are doing.

Building on our previous analogy, this would be similar to a child crossing a busy street or navigating a narrow trail. While they possess the necessary skills – they must be focused and constantly evaluating every step of the process. On the plus side, the trader is now producing consistent results that can easily be seen in their equity curve. With each passing day, the trader becomes more capable, experienced and relaxed.

Stage Four – Unconscious Competent

The stage four trader has arrived in every sense of the word. For him, trading has become an automatic reflex and requires no more mental effort than the average person expends on walking. There is little or no struggle with trading decisions but rather a conditioned response to trading opportunities. There is no hesitation about entering a position or booking a loss. It’s not personal – it’s just business. Additionally, most traders in this zone continue to educate themselves. They have learned that small refinements in technique pay large dividends to their trading accounts over the long haul.

This does not mean that the “unconscious competent” trader will not have challenges. Health problems, family issues, financial difficulties will arise eventually for everyone. The advanced trader has learned to constantly monitor his susceptibility to trading errors related to these types of outside forces.

It bears mentioning that no one has managed to become a successful trader without going through all of these stages. All of them are necessary and fundamentally important for continued growth. Knowing where you are in this process helps you know what to expect and what you need to do to progress to the next stage in your trading.