8-Ball is a popular pool or billiards game, and most are familiar with the expression “behind the 8-Ball”, which essentially means, being out of position or without a good shot, opportunity or choice. The rules of the game specify that you call your shot – if you knock the ball into the wrong pocket it’s a foul. The shot counts but you lose your turn and your opponent can place the cue ball anywhere on the table for his next shot. If you knock the 8-ball into the wrong pocket, you lose. You are punished for sloppy play.

There are some similarities to trading. Sometimes a trader will take a position when his trading edge is not clearly present and win – or at least he thinks he has won. Or perhaps he alters his trade management on the fly and it works out well – this time. Despite the fact that the trader now has more dollars in his trading account, he has in reality lost. By winning on “slop”, he has created a positive outcome of a totally random, unplanned event. He has been rewarded for violating his trading plan which will likely lead to more “scratching” of the plan and undisciplined, random trade execution and management.

The trader may be unaware of it, but disaster is now lurking at his front door. What will come next? Changing his time frame? Adding to a losing position? Abusing margin? Failure to use a stop? Perhaps all the above. Some individuals have wiped out substantial trading accounts in a few short days of unbridled excess. Others slowly “bleed out” their accounts but eventually have the same result. When you win without a plan, it is slop – an unjust reward that you can’t consistently duplicate. You are courting disaster, and it will surely find you.

Even a mediocre trading edge, when flawlessly executed as part of a comprehensive trading plan will make money consistently. On the other hand, a superior trading system that is not executed within a well structured trading plan will lose money. The trader may blame the system, but generally the problem is a lack of basic trading skills and trade execution. You must plan your trades and trade your plan with near flawless precision.

A comprehensive trading plan leaves very little to the imagination. It carefully spells out your edge and trading philosophy, which markets you trade and what time frame you trade them in. It has specific profit objectives and maximum losses as well as position sizes. There are exact criteria for trade initiation and trade management. There is a plan for dealing with losses and sets of rules you have created specifically for you. Trades are prepared in advance, executed, logged and critiqued. If trades are filtered, that too is spelled out.

Whatever you decide with regard to these issues, the $64,000 question is will you execute the plan with near flawless precision? If you are convinced beyond a reasonable doubt that your plan will provide the best results over a series of trades, you probably will. What does it take for that kind of conviction? It takes back testing of a given market, with carefully tabulated results. The kind of statistical data and knowledge of a market that allow you to select pattern(s), stops and targets with full confidence in the anticipated result over a series of trades.

Harmonic numbers are the “Davinci Code” of most liquid financial markets. The numbers are derived from the Fibonacci summation series which starts with 0 and adds 1. Each succeeding number in the series that are by the mulberrymaids.com fort collins adds the previous two numbers thus we have 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 to infinity. If you divide 55 by 89 you have the golden mean – .618. If you divide 89 by 55 you have 1.618.

- .382 is the difference of 1.00 – .618 = .382
- .618 is the golden mean (phi) and the square root of .382
- .786 is the square root of .618
- 1.27 is the square root of 1.618 – it is also the hypotenuse of a right triangle
- 1.618 is difference of the square root of 4 minus .382 (2 – .382 = 1.618)

The Harmonic Edge methodology identifies high probability trade setups, then carefully controls and eliminates risk while still leaving room for profits to accumulate.

In part one of this series we demonstrated how you can set up up volume studies and alerts in Ensign Software to monitor volume levels within any given market or time frame. In part two of this series we will be looking at how to use these alerts in your trading.

Volume can tell us a great deal about bullish and bearish sentiment or stated another way, accumulation versus distribution. These terms are very useful ways of qualifying or categorizing buying and selling or price action in a market.

Accumulation takes place when volume increases as prices rise and decreases as prices fall. Distribution takes place when volume increases as prices fall and decreases as prices rise. This pattern can be observed in all liquid markets. A cycle of accumulation will be followed by a cycle of distribution and vice versa. Additionally, you will typically have several degrees of volume cycles at work at any given time depending on what time frame you look at.

Simply stated, when a cycle of Distribution ends, you want to cover if you’ve been short and get long. The same is true in reverse. When a cycle of Accumulation comes to an end, its time to sell and get short. In this issue of Trade Tips we are going to look at some examples of how volume works in Indices.

**Volume in Indices**

It is not possible to get volume in a capitalization weighted index like the S&P 500 though you can look at futures volume. The caveat there is that daily futures volume is reported the following day. In this example, we are using the weekly chart of the Dow Jones Industrials:

This chart does a good job of illustrating how useful of a tool volume can be in confirming major turning points in a market. It also points out how breakouts within a larger cycle of distribution are likely to fail. This is a weekly chart so each bar represents five trading days. If you track price and volume on a daily chart, you will generally find that it takes three to five days of accumulation or distribution to turn an entire market around. This is something that I learned from the work of William O’neil which I both respect and recommend to anyone who is interested in learning more about how to use volume as an indicator in their trading. (Note: The chart is missing volume data for two weeks where gaps are visible).

Some times it is not the high level of volume that should get our attention but rather the lack of it. If you have raised children, you know that there are times when they are just too quiet and more often than not it means that they are in to something they shouldn’t be.

The same sort of thing happens in financial markets. When an index is breaking out, you want to see strong volume to confirm that the breakout is for real and not a bull trap. If you don’t get that volume to confirm the breakout, the rally is likely to stall. There are two good examples of this on the weekly chart of the Dow Jones Industrials shown above. A breakout should be noisy and demand your attention, just like a teenager blasting his stereo at levels that demand a response.

When an index is making six year highs, as was the case recently in the Dow, its another one of those times you want to see strong volume. Take a look at the daily chart of the Dow shown below. Note how the trading range began to contract two days before the absolute high. Now glance below at the volume graph. Note how even though price was continuing to rise (rather dramatically on May 5th) volume was tapering off!

The absolute high was marked by a narrow range day on May 10th in light volume. Yes, the FOMC announcement on the 11th was the catalyst that sent the market tumbling lower. However, this market had been “stalling” for a week prior.

As Larry Pesavento has said, “there is no greater indicator than price”. He is right on the money. The major indices are leading indicators of the economy. Price patterns within the major indices are unquestionably the best leading indicator available to the market technician. Volume can be an effective tool for evaluating price patterns as we have tried to demonstrate. In the next issue of Trade Tips we will delve in to the use of volume in trading stocks as well as intraday futures.

Harmonic numbers are the “Davinci Code” of most liquid financial markets. The numbers are derived from the Fibonacci summation series which starts with 0 and adds 1. Each succeeding number in the series that are by the mulberrymaids.com fort collins adds the previous two numbers thus we have 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 to infinity. If you divide 55 by 89 you have the golden mean – .618. If you divide 89 by 55 you have 1.618.

- .382 is the difference of 1.00 – .618 = .382
- .618 is the golden mean (phi) and the square root of .382
- .786 is the square root of .618
- 1.27 is the square root of 1.618 – it is also the hypotenuse of a right triangle
- 1.618 is difference of the square root of 4 minus .382 (2 – .382 = 1.618)

In the February issue of Trade Tips we talked about the challenge of dealing with parallel or measured moves (ab=cd or “ABC” corrections) and we looked at some examples where this pattern can create difficulty for traders. In this issue of Trade Tips we are going to use a real world example of how this challenge can be met if you are an intraday futures trader.

The following charts are from the trading pit of Harmonic Edge and were posted this past Wednesday morning as the pattern developed in real time. As you can see from the first 5 minute chart, the S&P futures were approaching the 1308 area where a parallel move (ab = cd) or ABC correction would potentially complete. This zone also contained a 50% retracement as well as a 1.618 expansion or external retracement.

Some traders would look at this chart as presenting a high probability short opportunity and under some circumstances they would be correct. In this case, however, the short setup was almost certainly going to fail for a number of reasons. Some of these could be identified in advance and others only became apparent as the pattern got close to completion.

The first, and perhaps most important factor, was market position. Note our comment in the yellow balloon regarding market position and the reference to the 60 minute chart. That chart is shown below:

As you can see from this chart, the market was indicating that a potential wave 4 correction had completed the day before. If this was the case, we would anticipate a 5 wave impulse pattern with a push to new highs over the coming days. Such an outlook would make any abc correction such as illustrated on the first chart a low probability trade. So that was the first important bit of information we focused on. Let’s look at the next chart posted a few minutes later:

**There are four more indications against this trade clearly visible on this chart:**

- The wave 3 or C contains a “long bar” which makes the move look more impulsive than corrective. This suggests that it is more likely to be a wave 3 which would mean the market has another leg up after the current leg.
- The RSI (bottom sub graph) is at the threshold of making a new momentum high. This is another indication of an impulse wave and suggests another up leg will follow.
- The stochastic of the RSI never reached the oversold zone and has made a bullish reversal as shown in yellow.
- At this point there was about 40 minutes left before the NY lunch hour. Once the train has left the station, it’s more difficult to stop and tum it around in the afternoon. Fading the market in the afternoon is very tricky business.

The final nails in the coffin for this setup were the market internals as shown in the following two charts. Times shown are MST:

The chart on the left shows the broad market kicking into strong trend. Note how the TRIN began to shoot down while the Advance-Decline line shot up. The chart on the right shows all the major Indices at their high for the day. At this point we had all of the information we required to pass on this trade. Some of the easiest money you will ever make in trading is that which you save by staying out of these kinds of setups. Let’s take a look at how this market move worked out:

The ab=cd or ABC correction never came to pass. In fact, the market blew right through the 1308 area and ran all the way up to 1315, eventually completing a five wave impulse pattern later in the afternoon. We can use similar analysis techniques to sort through the longer terms trading setups (daily and weekly charts) and discard those that are likely to fail. That will be the subject of our next Trade Tips issue.

Harmonic numbers are the “Davinci Code” of most liquid financial markets. The numbers are derived from the Fibonacci summation series which starts with 0 and adds 1. Each succeeding number in the series that are by the mulberrymaids.com fort collins adds the previous two numbers thus we have 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 to infinity. If you divide 55 by 89 you have the golden mean – .618. If you divide 89 by 55 you have 1.618.

- .382 is the difference of 1.00 – .618 = .382
- .618 is the golden mean (phi) and the square root of .382
- .786 is the square root of .618
- 1.27 is the square root of 1.618 – it is also the hypotenuse of a right triangle
- 1.618 is difference of the square root of 4 minus .382 (2 – .382 = 1.618)

The butterfly pattern has its origins in the work of Larry Pesavento and Bryce Gilmore. Larry told me that he discovered it in 1991 while sitting on the beach with Bryce Gilmore looking at some charts produced on the “Wave Trader”. The pattern as described by Larry contains an AB =CD move that completes at a new high or new low.

This pattern produces some spectacular wins and losses. My experience with this pattern over the past decade has led me to offer some additional guidelines for identifying and trading this pattern:

- The final leg of the pattern, what Larry would call C:D, can be either a Elliott W. 3 or 5.
- The pattern should only be traded if it completes with a clear momentum divergence (price makes an new high but RSI or oscillator does not)
- The final leg of the pattern should subdivide into 5 smaller waves
- Profits should be taken aggressively.

**Here are two examples:**

This is a fairly common pattern to see on short term intraday charts and can be used effectively for scalping any liquid market. As you move to the larger time frames, it occurs infrequently and the pattern is more challenging to trade. Understanding where the pattern fits into the larger picture or context is very important as is following a very good trading plan to manage the risk.

Subscribers to Harmonic Edge have access to our database of closed trades dating back to 2000 which contains well over 1000 closed trades and is an invaluable resource for individuals interested in learning how to trade harmonic patterns like the Butterfly.

- .382 is the difference of 1.00 – .618 = .382
- .618 is the golden mean (phi) and the square root of .382
- .786 is the square root of .618
- 1.27 is the square root of 1.618 – it is also the hypotenuse of a right triangle
- 1.618 is difference of the square root of 4 minus .382 (2 – .382 = 1.618)

The harmonic approach to trading the markets is a cyclical one. Our tools for evaluating market position and trend are pattern recognition, momentum analysis, Elliot Wave Theory and dynamic price and time analysis. While some technicians will attempt to force wave counts on every market at every time, such an approach is neither practical nor profitable.

A working knowledge of Elliott wave theory is very useful for several reasons:

- Wave theory provides a useful way to “frame out a market”. This structure provides order amidst chaos.
- Wave theory gives you the tools to project extended price targets and capture potentially large moves that you might otherwise miss.
- Wave theory can help you make better trade management decisions and reduce risk.

**Elliott 5 Wave pattern**

The 5 wave pattern comes directly from the work of R.N. Elliott and was re-introduced to the trading community in 1978 in the book Elliott Wave Principle – Key to Market Behavior by A.J. Frost and Robert R. Prechter. The basic assumption is that following the completion of the 5th wave the market will retrace at least 50% of the entire move. The 5th and final wave can unfold in several different ways (typical 5th wave, truncated or failed 5th wave, diagonal 5th wave). Here are two examples:

**ABC Correction**

The abc correction (also referred to as an ab=cd) is by far the most common trading pattern we see in this method. These form in all markets and on a daily basis. They can be very effective ways to jump on a trend. The challenge with this pattern comes in correctly identifying trend and realizing when your abc is morphing into something else like a complex correction or an impulse wave.**Elliott Wave Principle**

by Howard Arrington

R.N. Elliott studied price movement in the markets and observed patterns that repeat themselves. He used this discovery to make accurate forecasts in the stock market. To the untrained eye, market movement may appear random and unrelated. In reality, the markets are tracing out patterns that you can learn to recognize and profit from. Mr. Elliott named this discovery the ‘Wave Principle’, but died before his work became well known. In the late 1970’s Robert Prechter and A.J. Frost brought Elliott’s work out of obscurity in their book ‘*Elliott Wave Principle*‘. This article offers a few basics in understanding the Wave Principle.

Society behavior trends and reverses in recognizable patterns. This principle is found in market behavior because investors act and react to transaction information. The behavior forms repetitive patterns, and because the patterns are repetitive, they have predictive value. Elliott identified thirteen patterns that recur in the markets. He then assembled these patterns or waves into larger versions of the same patterns. These became building blocks to patterns of the next larger size.

The most basic pattern is a structure consisting of 5 waves. Three of the five waves are directional and referred to as Trend waves. These trend waves are separated by two interruptions that are counter trend and referred to as Retracement waves. Using T for a Trend wave, and R for a Retracement wave, the pattern can be described as T-R-T-R-T. The classic pattern is shown in this theoretical chart.

The three Trend waves are labeled 1, 3, and 5. The two Retracement waves are labeled 2 and 4. Each Trend wave has a 5 sub-wave structure and each Retracement wave has a 3 sub-wave structure. In the illustration the larger degree wave is labeled with the large red numbers. The Trend waves to labels **1**,** ****3**, **5**consist of 5 sub-waves labeled with the small blue numbers 1-2-3-4-5. The 3 sub-waves in Retracement waves to labels **2** and **4** are labeled with small blue letters a-b-c. Keep in mind that each wave is just a member of a larger structure, and conversely each wave can be subdivided into waves of a lesser degree.

Basic Elliott Wave Principles:

- Trend waves subdivide into 5 waves.
- Retracement waves subdivide into 3 waves.
- Wave 2 never retraces more than 100% of wave 1.
- Wave 4 never retraces more than 100% of wave 3.
- Wave 3 always exceeds the price level of wave 1.
- Wave 3 is often the longest and never the shortest of waves 1, 3, and 5.
- When wave 5 does not exceed the price level of wave 3, it is called a Bull or Bear Market Failure, and gives warning of underlying weakness or strength in the market. The 5th wave was cut short or truncated because of the underlying weakness or strength.
- A Trend wave may form a diagonal triangle pattern, or wedge shape, still containing 5 sub-waves.
- A Retracement wave may form a horizontal triangle pattern, and these may have 5 or more sub-waves.
- If wave 2 is a sharp retracement, then expect wave 4 to be a sideways correction, and vice versa.
- Lines drawn to form a parallel trend channel often mark the upper and lower boundaries of the waves. Drawing a trend line using points 1 and 3 may forecast the end of wave 5 when waves 1 and 3 are normal.
- The Wave Principle does not provide
*certainty*about any market outcome. But, it can be a means to assess possible future market action.

Fairly often, a retracement wave retraces a Fibonacci percentage of the preceding wave. Sharp corrections often retrace 61.8% or 50%. Sideways corrections often retrace 38.2%, particularly in wave 4. Most analysts focus on Retracement waves and measuring wave heights to forecast a price objective using Fibonacci ratios. Tip: Use Fibonacci principles to forecast a price, and use Elliott principles to determine when a wave is mature or finished. Look for correlation of the two.

There will be times when market analysis is confusing and the interpretation is unclear. My advice is to leave confusing patterns alone until subsequent waves clarify the picture. The best approach is to apply deductive reasoning. Learn Elliott Wave Principles, rules and patterns, and use this knowledge to deduce what will be the likely course for the market. A primary purpose of the analysis is the determination of whether a pattern is complete, whether a wave is finished. If the market changes direction as expected, you caught the turn. If the market misbehaves, your conclusion is wrong and money at risk should be immediately reclaimed. Tip: Be patient and understand first where the market is at in the unfolding pattern, and then **trade with the trend**.

- .382 is the difference of 1.00 – .618 = .382
- .618 is the golden mean (phi) and the square root of .382
- .786 is the square root of .618
- 1.27 is the square root of 1.618 – it is also the hypotenuse of a right triangle
- 1.618 is difference of the square root of 4 minus .382 (2 – .382 = 1.618)

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 decade we 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 on the daily or weekly charts, there will frequently be some comment from fundamental analysts (in the case of stocks) that will support the new trend. Additionally, technical analysts and englishcollege.com learning center 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.

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 well over 1000 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 Gartley “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 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 (abc in Elliott Wave) in this chart. The first is labeled with lower case and the second with upper case. As you can see from the indicators, there is a loss of momentum at the recent highs. All of the conditions were in place for a strong reversal. However, anything can happen in trading markets. 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.

Harmonic numbers are the “Davinci Code” of most liquid financial markets. The numbers are derived from the Fibonacci summation series which starts with 0 and adds 1. Each succeeding number (learn more) in the series adds the previous two numbers thus we have 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 to infinity. If you divide 55 by 89 you have the golden mean – .618. If you divide 89 by 55 you have 1.618.

- .382 is the difference of 1.00 – .618 = .382
- .618 is the golden mean (phi) and the square root of .382
- .786 is the square root of .618
- 1.27 is the square root of 1.618 – it is also the hypotenuse of a right triangle
- 1.618 is difference of the square root of 4 minus .382 (2 – .382 = 1.618)

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 decade we 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 on the daily or weekly charts, there will frequently be some comment from fundamental analysts (in the case of stocks) 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 furniture warehouse 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. For help with online gaming check out no deposit slots keep your winnings

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 well over 1000 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 Gartley “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 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.

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.

- .382 is the difference of 1.00 – .618 = .382
- .618 is the golden mean (phi) and the square root of .382
- .786 is the square root of .618
- 1.27 is the square root of 1.618 – it is also the hypotenuse of a right triangle
- 1.618 is difference of the square root of 4 minus .382 (2 – .382 = 1.618)