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March S&P 500 Formation of the Gartley5 minnte “222” Pattern
This is a potential “222” pattern in the making. There are three reasons why ashort sale should be avoided today: 1) Prices are far above the opening price (12points): 2) No time symmetry in AB - CD; 3) There are only two hours left in thetrading day.
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 150
Larry Pesavento
 
Appendix Il
Some Practical Tips on Cycles
 
Cycles are a funny lot—
Totally random they are not—
Just when you think you have a great find—
Along comes another to challenge your mind.-S.W.S.
"Pia above poem sums up the study ofcycles. I believe that speculation markets arenon-random and chaotic, Within this chaos areTespectable patterns of price and time, MyTomahawk neural network program has shownthis to be true on a very consistent basis
There are two cycle principles that Ithink cach trader should explore. These werefirst brought to my attention when I studiedJim Hurst's Cyclitic material in 1971. The firstprinciple is that of high translation. Thismeans that bearish and bullish cycles have dis-tinct characteristics.
Bullish Cycle
High Translation to Right
Cycle crest
far to rightor late inthe cycle
Bullish marketsspend more timegoing up.
Bearish CycleHigh Translation to Lett
Beesrish marketsspend more timegoing down.
18 period cycle
 
The second cycle principle is that ofnominality. Cycles usually repeat in equal in-crements. For instance, if there is a 9 periodcycle it will usually repeat for at least 2 cycles= 18 periods. On occasion it will repeat formore than 5 cycles (5 waves) but then it willshift. The trader can learn two valuable les-sons from this phenomenon, First, once thecycle has changed begin to look for the newnominal cycle. Second, once a nominal cyclehas been identified keep using it until it stopsworking, That certainly sounds simple enough,
The study of cycles can be improved byusing the principles of rational proportion. Ifyou think of a price chart on any stock andcommodity as nothing more than a road map,then all you have to do is to connect the dotsto get to the destination. The following dia-gram is an oversimplification of what I’m try-ing to convey
 
——— 36 period cycle — — — —36
If the trader (analyst) will use the prin-ciple of ratio and proportion it can leave valu-able clues as to the validity of a cycle. Re-minder—we are dealing with probabilitiesonly. Nothing is written as absolute law.
Take care of your losses and your profitswill lake care of themselves.—Amos Hostetter, Commodity Corp.Stock Trading Using Pattern Recognition and Geometric Ratios
151
eT
Fibonnaci Trading Card
My method of trading while on the floorof the CME was actually quite simple, Eachnight I would prepare the next day’s tradingfrom my apartment at McClurg Court. I keptdaily charts on about 20 commodities andintraday charts on all major CME futures con-tracts. While on the floor, I would still tradeSilver and Soybeans regularly, but the bulk oftrading was in T-Bills and Gold. Later, it wouldbe in the S&P $00 pit, but that wasn’t tradeduntil April of 1982. Because I did not like toenter the pits to trade for myself, I wouldphysically hand the pit broker my order. I kepta swing chart on a trading card in my jacket.This is what it would look like;
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As prices would approach my buying or sellingpoints I would watch the “runners* bringingorders into the pit from their respective com-mission houses. During a sharp rally or sell-off, this activity is really easy to see, As theactivity slackened I would then move to thepit and take the opposite side (sell rallies —buy dips). I used a trading card with all of theFibonacci numbers and the .618 and 1.618 rela-tionships. As I mentioned earlier, I did notknow the importance of the square roots ofthese numbers until 1989. The following 2pages aré a replica of the trading card I car-ried. I've included a card with the .786 and1.27 relationships for your convenience. ! stilluse these cards to this day, but now they are
much larger and are placed on wooden frameshanging over my desk.
Notice the price of the S&P in the chart.That is the price it was trading at in 1982-83,The nearby futures would routinely trade atadiscount to the cash S&P.FIBONACCI TRADING CARD
0604070s08050906100610712071308140915.091610171118119:220:12
Exampie: 3521
2113221423142415251526162/1728172918301931193220332034.35213622
37233823392440 25Ales42026432744.745 284628472948304920903151 32
Multiply 25 x 619 « 21
9232933354:23903456355/35583609366037612s62386339644065.066.416/41
Add 21 + 35 » 56 (1.618 of 35)
Larry Pesavento
.618/1.618
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 Stock Trading Using Pattern Recognition and Geometric Ratios
FIBONACCI TRADING CARD
4056506607s608 107091810139 11 1491215101317111446121519131620131722141823151924
162025Example: 283648
172.127 293747 425367 5<69ee172228 303048 425469 55/0s9182.329 313950 435570 56/100192430 314051 445671 57/2o1202532 324152 455772 577393202633 334253 4659874 587404210/34 344355 465975 5075s222.836 9544.56 476076 60/697232937 354557 486177 617/98243038 364658 4386279 617 899243139 374760 506320 62/9100253241 384861 506481 6380102263342 304962 516549 6481103273443 305064 526664 6482104283044 405165 536785 6583105203646 410266 536826 6604107
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 Larry Pesavento
154
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Some More Practical Tips
Money Management
I. Money management in risk speculationshould be kept simple. Here are some un-breakable rules and some guidelines.
A. Unbreakable Rules
1, Never add to a losing position.
2. Never risk more than 10 percentof your trading capital on any onetrade.
3. Always have a protective stop inplace.
4. If you don't have a profit in threedays, exit the trade.
B, Guidelines
1. Never close a trade without a rea-son,
2. Take 100 percent responsibility foryour trades
3. Markets that have higher lows arein uptrends. Markets that havelower highs are in downtrends.
4, Always do your analysis prior tothe market open.
Il. Ask these questions before closing a posi-
tion:
A. Does the position show a loss?
B, Has it reached the price objective?
C. Are you convinced your opinion iswtong?If the answer to all three questions isNO, then you must held your posi-tion, If the answer to any one of thethree isa YES, then you may closethe trade if you wish.
 
Ill. Observations
A.
Calculate your trading capital andmultiply by three percent. This willgive you the amount of loss you cantake on any trade, Example: $10,000 x3% = $300. You should only risk $300on the trade.
As your account grows you must stilluse the three percent guideline, butyou can trade more contracts.
If you are able to trade multiple con-tracts you should consider using a“trailing” stop on one of the positions.This brings the risk closer to break-even,
The trader must always protect him-self from his own fallibility. Stops areplaced for protection against yourself,
Markets are seldom wrong:
men often are.Roy Longstreet
Recommended reading
A.
noo
Reminiscences of a Stock Operation,Edwin Lefevre :The Disciplined Trader, MarkDouglass
The Warrior Athlete, Dan MillmanThe Att of War, Sun Tsu
The Psychology of Winning, DennisWaitley
Life is a do-it-yourself project.156 Larry Pesavento
Controlled RiskMoney Management
30,000 x 10% = 3,000 | $Risk | %Risk || #1 Money Contract | 4,000_ [3 1/3% || #2 Trading Contract | 4,000 | 3 1/3% |
#3 Long Term Contract. | 1,000 | 3 1/3% |
Take profits on both #3contracts as long term priceObjectives are met
Take profits on #2 contractas TC price objective is met o.
(oo,TC bottom falis *%, to retrace enough” to add 3 contractsExit #1 Contractg With $1,000 profit'@ Buy 3 contractsTC Bottom@ TC bottomExit #1 contract with$1,000 profita
~~
7Buy 3 contractsTC bottom
This chart is courtesy of Walter Bressert. Mr. Bressert is a pioneer in cycleresearch and a director of the Foundation for the Study ot Cycles. The chart is pre-sented to alert our readers of the importance of Fisk control in trading all markets.
 Stock Trading Using Pattern Recognition and Geometric Ratios
157
SS
Danger Signals
Markets are seldom wrong! There is onefact that is always present in the markets: Ifprices go up there are more buyers; if pricesgo down there are more sellers. Here are a fewtechnical indicators that suggest a market maybe changing character:
Gaps:A big price gap on a chart is indicative ofa change in sentiment and deserves yourattention, Use the Shapiro Iteration (waitone time-bar) before acting.
Wide Range:When price ranges become abnormallywide, then price objectives are more likelyto be exceeded (1.618). You should knowthe average daily range of the commodityyou are trading.
Tail Close:Markets that close at the extreme top orbottom are indicating strength or weak-ness. Look for several days of tail closes inthe same direction,
Take care of your losses and the profitswill take care of themselves.
—Amos Hostetter
Commodity Corporation (c. 1967)
Rules of Jesse Livermoreexcerpted from Reminiscences of a StockOperator by Edwin LeFevre
1, Ofall the speculative blunders, there arefew greater than trying to average a losinggame.
2. Always sell what shows you a loss andkeep what shows you a profit.
3. You cannot try to force the market intogiving you something it does not have togive.
4. The courage in a specualtor is merely theconfidence to act on the decision of hismind,
5. A loss never bothers me after I take it. Iforget it overnight. But being wrong—nottaking the loss—that is what does thedamage to the pocketbook and to the soul,
6. The man who is right always has twoforces working in his favor—basic condi-tions andthe men who are wrong
7. The trend is evident to a man who has anOpen mind and reasonably clear sight. Itis never wise for a speculator to fit hisfacts to his theories.
8, In a narrow market when price moveswithin a narrow range, the thing to do iswatch the market, read the tape to deter-mine the limits of prices, and make upyour mind that you will not take an inter-est until the price breaks through the limitin either direction.
9. You watch the market with one objective:to determine the direction or price ten-158
S000
dency. Prices like everything else, movealong the line of least resistance,
In the long run commodtiy prices are gov-erned but by one law—the economic lawof supply and demand.
It costs me millions to learn that a danger-ous cnemy to a trader is his susceptibilityto the urging of a magnetic personalitycombined with a brilliant mind
Have a profit—forget it! Have a loss, for-get it even quicker!
It never was my thinking that made thebig money for me. It was always my sit-ting, my sitting tight.
There is only one side to the stock marketand it is not the bull side or the bear side,but the right side.
HE WHO KNOWS NOT WHAT HERISKS.,..RISKS ALL!
There are three rules you need to de-
velop in order to trade successfully:
1, Build a foundation of trust in yourselfso that you will act in your own bestinterests—without hesitation
2. Follow a set of steps that will buildconfidence and a belief in your ownconsistency. This includes learning tonot give your money away.
3, Execute your trades flawlessly when asignal is given. Ask yourself thesethree questions:
Larry Pesavento
a, Is it an identifiable pattern?b. Are the sacred ratios present?c. Can | afford to take the risk?
If the answer to these three questionsis ‘yes!' then you should take the trade.
Keep in mind these important factors:
1, Money management always takes pre-cedent over any trading methodology.You must never expose yourself to un-limited risk. Stops are placed for pro-tection against yourself,
2. Never get into a trade where the riskis unknown,
3. The mistake is not being wrong; themistake is in staying wrong!
4. Fear causes us to narrow our focus ofattention and distorts our perceptionof the environment,
5. Self-discipline is the ability of main-taining your focus of attention whenal] the things in the environment arein conflict.
6. Never let the market save you—youmust Save yourself. Use stops!
7. We deal in probabilities! The market isalways greater than anything we canever anticipate. No methodology oftrading can tell you what is going tohappen next. Profits come from stringof trades and not from one particulartrade.Stock Trading Using Pattern Recognition and Geometric Ratios 159
NN ——_—_—_—_—_—_—_—_—_———_
8. Take care of hour losses and the prof-its will take care of themselves! Re-lease yourself from being wrong or thefear of losing money. Trading is not agame of right or wrong, it is the pro-cess of making money.
9. Be rigid in your rules and flexible withyour observations.
 Larry Pesavento
 
Appendix IV
Additional ReadingArt of War. Sun Tsu.
Astro Cycles in Speculative Markets. Jensen,L, (Lambert-Gann Publishing).
Astro-Cycles: The Trader's Viewpoint.Pesavento, Larry. (AstroCycles, 1988).
Astro-Economic Interpretation. Jensen, L.(Lambert-Gann Publishing).
Business Cycles Versus Planetary Move-ments. Langham, J.M. (Maghnal).
Capital Ideas: The Improbable Origins ofModern Wall Street. Bernstein, Peter.
(New York Free Press, 1992)
Chaos and Order in the Capital Markets.Peters, Edgar. (John Wiley & Sons, 1991),
Commodity Futures Trading with Point andFigure. Maxwell, Joseph.
Cycles—The Science of Prediction, Daiken,Dewey. (Foundation Study of Cycles).
Cyclical Market Forecasting: Stocks andGrains. Langham, J.M. (Maghnal).
Divine Proportion. Huntley. (Dover Press).
Economic Cycles: Their Law and Course.Moore, H. (Macmillan).
Elliott Wave Principle. Prechter Robert. (NewClassics Library).
 
Extraordinary Popular Delusions and theMadness of Crowds, Mackay, Chuck.
Pibonacci Applications and Strategies forTraders. Fischer, Robert.
Forecasting Financial Markets: The TruthBehind Technical Analysis. P)ummer,Tony. (Kogan Page Ltd., London, 1990),
Forecasting Prices. Butaney, T.G. (PearlPrinting).
Geometry of Markets. Gilmore, Bryce T.(Bryce Gilmore & Assoc., Pty Ltd.,Melbourne, Australia, 1989).
Geometry of Markets II, Gilmore, Bryce T.(Bryce Gilmore & Assoc., Pty Ltd.,Melbourne, Australia, 1993).
Investing for Profit with Torque Analysis ofStock Market Cycles. Garrett, W. (RuffPub, 508-448-6739)
Investor's Guide to the Net. Farrell, Paul (JohnWiley & Son).
Market Wizards: Interviews with TopTraders. Schwager, Jack D. (Simon &Schuster, 1989)
Mastering Elliott Wave. Neely, Glenn.
Mathematics of Money Management. Vince,Ralph.Stock Trading Using Pattern Recognition and Geometric Ratios
161
 
Planetary Effects on Stock Market Prices.Langham, J.M. (Maghnal),
Planetary Harmonics of Speculative Markets.Pesavento, Larry. (Astro-Cycles, 1990)
Profit Magic of Stock Transactions Timing.Hurst, J. (Prentice Hall).
Profits in the Stock Market, Gartley, H.M(Lambert-Gann Publishing)
Rocky Mountain Financial Workbook. Foster,W. (Box 1093, Reseda, CA 91355).
Secret Teaching of All Ages. Hall, M.P. ( Philo-sophical Society of Los Angeles).
Stock and Commodity Trader’s Handbook ofTrend Determinators. Bayer, George.(Out of Print.)
Stock Market Prediction. Bradley. (LlewellynPublishing)
Technical Analysis of the Futures Markets.Murphy, John
Technical Analysis of Stock Trends. Edwardsand Magee
The Dimensions of Paradise: The Propor-tions and Symbolic Numbers of AncientCosmology. Mitchell, John, (Harper &Row, 1988)
The Disciplined Trader: Developing WinningAttitudes. Douglass, Mark (New York In-stitute of Finance, 1990)
The Kabala of Numbers.(Newcastle).
Sepherial
The Magic Word, Gann, W.D. (Lambert-GannPublishing).
The Major Works of R.N. Eltiott. (New Clas-sics Library).
The Outer Game of Trading. Koppel, Robertand Abell, Howard. (Proteus Publishing,1974).
The Secret of the Ages. Collier, Robert.
Time Factors in the Stock Market. Bayer,George. (Out of print.) +
Tunnel Through the Air. Gann, W.D.(Lambert-Gann Publishing),<|end|>