Trade What You See: How To Profit from Pattern Recognition

Preface xi

Acknowledgments xv

About the Authors xvii

Part I 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 13

Applying the Fibonacci Ratios 15

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 22

Repetition in Price Swings 24

Finding Harmonic Numbers 28

Harmonic Numbers Found in Other Markets 34

Part II The Price Patterns and How to Trade Them

Chapter 4 The AB=CD Pattern 37

History of the AB=CD Pattern 37

AB=CD Pattern Description 39

AB=CD Pattern Structure 39

Important Characteristics of the AB=CD Pattern 42

CD Leg Variations 43

Slope and Time Frames 46

Psychology of the AB=CD Pattern 48

Trading the AB=CD Pattern 49

Chapter 5 The Gartley “222” Pattern 53

History of the Gartley “222” Pattern 53

Gartley “222” Pattern Description 55

Gartley “222” Pattern Structure 56

Important Characteristics of the Gartley “222” Pattern 57

Psychology of the Gartley “222” Pattern 59

Trading the Gartley “222” Pattern 60

Chapter 6 The Butterfly Pattern 67

History of the Butterfly Pattern 67

Butterfly Pattern Description 69

Butterfly Pattern Structure 70

Important Characteristics of the Butterfly Pattern 71

Psychology of the Butterfly Pattern 72

Trading the Butterfly Pattern 73

Chapter 7 The Three Drives Pattern 81

History of the Three Drives Pattern 81

Three Drives Pattern Description 82

Three Drives Pattern Structure 83

Important Characteristics of the Three Drives Pattern 84

Psychology of the Three Drives Pattern 84

Trading the Three Drives Pattern 85

Chapter 8 Retracement Entries and Multiple Time Frames 91

Fibonacci Retracement Entries 92

Fibonacci Retracement Pattern Structure 92

Trading the Fibonacci Retracement Pattern 95

Opening Price Retracement Setups 98

Market Setup for the Opening Price Retracement Trade 99

Trading the Opening Price Retracement Setup 100

Multiple Time Frames 103

Chapter 9 Classical Technical Analysis Patterns 113

A Brief History of Technical Analysis 114

Basics of Technical Analysis 115

Double Bottom and Top Patterns 115

Head and Shoulders Pattern 120

Broadening Top and Bottom Patterns 126

Chapter 10 Learning to Recognize Trend Days 131

Identifying a Trend Day 132

Patterns Found on Trend Days 135

Fibonacci Ratios on Trend Days 138

Controlling Risk on a Trend Day 140

Trading a Trend Day 141

Part III Essential Elements of Trading

Chapter 11 Trade Management 149

Thinking in Probabilities 150

Warning Signs and Confirmation Signs 151

Money Management 155

Chapter 12 Using Options with the Fibonacci Ratios and Patterns 161

Call and Put Options Defined 161

Factors That Influence the Price of an Option 162

Controlling Risk with Options 163

Examples of Using Options with Extension Patterns 164

Chapter 13 Building a Trading Plan 167

Daily Trading Plan 168

Trading as a Business 174

Disaster Plans 177

Summary 181

Chapter 14 Daily Routines 183

Trade Preparation 183

Mental Preparation 187

Physical Preparation 188

Appendix 191

Index 195