6. Once high point D is established and price starts to reverse down out of theTCZ, it is time to calculate the 1.272 extension of the C low to the D high.That comes in at 39.81.
7. Once QQQ trades down through the 1.272 level, trail the stop on half of theposition to the previous bar’s high, and move the other half of the position’sstop to breakeven at 45.19.
8. Unfortunately on the first half of the trade, price reverses back up against theshort position, and we are stopped out at 42.40 for over 2.5 points of profit.As soon as this stop is activated, we need to focus on the other half of the po-sition with a stop at breakeven and move it down.
9. Now let's shift to trailing the last half of the stop down. It looks like the
swing point at 44.43 is a good swing to use. The stop is trailed down three
additional times from 41.70 to 39.99 to 37.50 and finally to 30.43 where I’m
stopped out of the last half for over 15 points of profit. The trailing stop did
: its job in this case and allowed us to capture a much larger profit. That’s thej goal—to put ourselves in the position to Participate in a move like this one.
ee
 nl94 Chapter 6
This is definitely a favorite strategy of mine. Why?
* Risk is defined and relatively tight. This translates to small losses on losingtrades.
When these trades work out, they REALLY work out! With our stop strat-egy, it allows these profits to run and compound.
e
It is simple to calculate. You only have to look at three swing points anduse three Fibonacci ratios.
The Triple Crown identifies many different patterns and market conditionsthat set up for reversal. The TCZ identifies consolidating areas that are setto explode. It identifies Head and Shoulders pullbacks to the neckline,which many times yield great reversal opportunities. I have noticed that italso identifies other solid patterns like Cup & Handles, Triangles, and thelist goes on. Bottom line: This specific Fibonacci price zone is very impor-tant!
Spend some time with this Zone and watch it work. You'll be pleasantly surprised.
 SSS
Trading Pullbacks Using The Triple Crown Strategy 95
STRATEGY Q&A
Question: How far below the TCZ do you allow price to 80 to still consider the zone valid?
Answer: The situation where this arises most is an intraday move that slightly vio-lates the Zone. I am a simple guy. If it looks like it has not violated the zone by toomuch, I would likely agree. Another requirement is that price cannot go higher thanthe high or lower than the low made past the TCZ. I give it one chance and onechance only. A second dip through the zone is all she wrote.
Question: How did you come up with the trailing strategy?
Answer: I was taking profits way too early on trades that would just make tremen-dous moves out of these zones. So I started holding the entire position for longer pe-riods of time. Then I found that in choppy markets, I was losing more. So, aftersome hit and miss, I came up with this money management strategy that would putsome money in my pocket relatively quickly and take my stop to breakeven. Then Icould turn off the screens and let the charts do what they may, but at least I’m in thetrade for a potential home run, and worst case (assuming no crazy gap moves), I getstopped out at breakeven.
Question: If this Zone is so critical, what happens when it is broken?
Answer: Great question. When a TCZ is broken, it quite often creates a momentummove in the direction in which the zone was broken.
 CHAPTER 7
TWO-STEP PATTERNS (TSP)
 STRATEGY #4: TWO-STEP PATTERNS (TSP)
The best way to understand a TSP is to look at a picture of it. The name “two step”comes from the fact that there are two swings that move, or “step,” in the same di-rection. The first part of the pattern is Swing A:B. The second move in this pattern isa small pullback in the opposite direction of swing A:B to point C. Then the thirdand final move is swing C:D, which finds price trading beyond swing point B tomake a new high or low. There are three variations of this pattern that we will dis-cuss in detail. All of these patterns create powerful trading opportunities because itis a pattern that takes advantage of “weak hands” and a “don’t miss the boat” men-tality exhibited by the masses.
In this chapter I first want to give a general description of the two-step pattern andhow it ties into what is called the Theory of Parallel Channels. Secondly, I will de-scribe in detail three specific types of two-step patterns (TSPs) that I use to tradewith against FibZones.
“Te ie eessan O15S00 28%,ae pet
 
 
 
 
 
      
Two-Step Patterns (TSP) 99
A basic two-step pattern looks like charts (1) and (2) below
            
Bearish TSP(1)
 
AtoB = Step #1
CtoD= Step #2100 Chapter 7
Capture Strong Trends With The Symmetrical TSP
Now that we have defined what a two-step pattern is, we can dig into a few varia-tions of this basic pattern. The first is called a Symmetrical TSP. We take the generaltwo-step pattern and give definition to each step. The size of the move from A to Bis equal to the size of the move from C to D. The equation is A:B = C:D.
Bullish TSP
 Two-Step Patterns (TSP) 101
Rules For Buys (Shorts Are Reversed)1. A swing down is made that will be labeled A:B.
2. A pullback in the opposite direction of swing A:B is then made. This swingwill be labeled B:C. Ideally, point C must not exceed the .786 retracement ofswing A:B.
3. Once point C is established, price again reverses to the downside. Price mustnow trade below point B.
4. After low point B is violated, we will look for price to stop going downbased on two items. First, a Support FibZone is calculated and defined. Sec-ond, the swing down from A to B is measured and projected from point C todetermine what we will call the “Symmetry Level.”
5. Once the requirements of the setup are met and price trades down to the“symmetry level” within the Support FibZone, it is “all clear” to look for op-portunities to take a long trade. (See Chapter 11 for discussion on possibleentry techniques.) For the example, the trigger will be a trade above the pre-vious bar’s high.
6. Initial stops on these trades will be below the Support FibZone.
7. The objective on these setups falls within the 1.272 and 1.618 extensions ofswing AD.
 ~0.650
Symmetrical SwingsAB = CD
Ato B=5 pts
CtoD=5pts
 
26.228 Ret 1.618
Chart created by Dynamic Trader (cj 1996-2001
Symmetrical TSP Setup:
12.3.4
. Amove down from A to B.
. Price rallies from B to C. High point C does not exceed A.
After establishing point C, price reverses down and goes below B.
. The move from A to B was 5 points. From point C, we project a 5 point de-
cline. That price level is 27.41. I call this the symmetry level.
i With three other Fibonacci price levels around our symmetry level, it’s time to lookfor an opportunity to go long and for price to reverse to the upside.
  
 
Two-Step Patterns (TSP) 103
 
220ct0238,300, 11.5516TD
38.464 Ret 1.613
35,959 Ret L272
 
2 G16 Be YioAto B=5 pts
Cto D=6 pts bo 26.228 Ret 1.618
of ON
26.750, 0.000 (6)30Sep02
16 #23 30 Sep 13 20 27 Oct 11 #18 OS FfChart created by Dynamic Trader (c) 1996-2001
 
Symmetrical TSP Result:
The result of this symmetrical two-step was quite powerful. In 16 days, Verizon (VZ)traded up almost 50%, or 11 points.
5. The long trade was taken around $28.6. Initial stop was placed just below the Support FibZone around 26.20.
7. Trade objective was between the 1.272 and 1.618 extension of swing A:D.Those prices were 35.95 to 38.46.
 a
104
   
Chapter 7
-Jan-2001 15.430 15.560 1
A
14.429 Ret 1.272414:385 Repeat
——— 9 14156 Ret 0.614.021 Ret 1.618
13.804 Ret 0.618
 
 
Symmetrical TSP Setup:
123.4
With five other Fibonacci price levels (Support FibZone) around our symmetry level,it’s time to look for an opportunity to go long and for price to reverse to the upside.
. Amove down from A to B.
. Price rallies from B to C. High point C does not exceed A.
. The move from A to B was about 1.6 points. From point C, we project a 1.6
 
After establishing point C, price reverses down and goes below B.
point decline. That price level is 14.25. I call this the symmetry level, whereC:D is symmetrical with A:B.
 
     
aTwo-Step Patterns (TSP) 105
1FebO118.000, 3.75037D
+
17.777 Ret 1.618
17.023 Ret 1.272
 
ised RPE
13.304 Ret 0.618
-13,.27%14,250, -2.18019jJanO1
19
Chart created by Dynamic Trader (c) 1996-2001
 
Symmetrical TSP Result:
The result of this symmetrical two step was also quite powerful. Notice the day afterpoint D is formed, Boston Scientific jumps higher at the open, and in 9 days, BSXtraded up over 26% or 3.75 points.
5. A long trade was taken around $15.50.6. Initial stop was placed just below the Support FibZone around 13.70.
7. Trade objective was between the 1.272 and 1.618 extension of swing A:D.Those prices were 17.02 to 17.77.
     
a106 Chapter 7
Let’s reverse the scenario and look for short trade setups.
 
 
 
 
 
 
 Two-Step Patterns (TSP) 107
Rules For a Bearish TSP (Shorts):
1.2.
A swing up is made that will be labeled A:B.
A pullback in the opposite direction of swing A:B is then made. This swingwill be labeled B:C. Point C ideally will not exceed the .786 retracement ofswing A:B. The only requirement is that C does not trade below point A.
. Once point C is established, price again reverses to the upside. Price must
now trade above point B.
After high point B is violated to the upside, we will look for price to tally,but find resistance higher based on two items. First, a Resistance FibZone iscalculated and defined. Second, the swing up from A to B is measured andProjected from point C to determine what we will call the “Symmetry Level.”
Once the requirements of the setup are met and price trades up to the “sym-metry level” within the Resistance FibZone, it is clear to look for opportuni-ties to take a short trade.
Initial stops on these trades will be above the Resistance FibZone.
The objective on these setups falls within the 1.272 and 1.618 extensions ofswing A:D.
           
16.081 Ret 0.78617.715 Exp 0.618
17.390 App 1.000
47-244 Ret 8.98817
                      
Ato B = 2.3 points
C to D = 2.5 points
 
 
Bearish Symmetrical TSP Setup:1. A move up from A to B.2. Price falls from B to C. Low point C does not exceed A.3. After establishing point C, price reverses up and goes above B.4
. The move from A to B was 2.3 points. From point C, we project a 2.3 pointrally. That price level is 17.39. I call this the symmetry level.
With four other Fibonacci price levels around our symmetry level, it’s time to lookfor an opportunity to go short and for price to reverse to the downside.
 
 
 
 
                        
Two-Step Patterns (TSP) 109
 
18.081 Ret 0.786
 
17.715 Exp 0.618
 
17.300 App 1.00C
17-348 REE BE
 
 
13.025 Ret 1.272
 
 
 
Bearish Symmetrical TSP Result:
After Webex tested our FibZone for a few days, it sold off over 4.5 points and imme-diately went down to the 1.272 extension of swing A:D.
5. A short trade was taken around $16.50.6. Initial stop was placed just above the Resistance FibZone around 18.10.
7. Trade objective was between the 1.272 and 1.618 extension of swing A:D.Webex formed a double bottom against the 1.272 extension at 13.02, whichwould be a warning sign to consider taking profits.
   iiii1
 
 
110 Chapter 7
STRATEGY Q&A
Question: Do you ever take profits before the 1.272 or 1.618 retracement?
Answer: Yes. Many times I have found a resistance or Support FibZone that standsbetween my entry and the ultimate 1.272 to 1.618 objective. If this FibZone is of sig-nificant size (number of price levels), then I will consider taking a portion of mytrade off at that intermediate level and trailing my stop. This is especially beneficialin markets that are not trending and very choppy. When a stock is in a strong trend,I typically do not have to do this.
Question: Sometimes the number of bars from A to B are significantly more or less than theC to D swing, but the swings are still symmetrical in price. Does this matter?
Answer: Generally speaking, the number of bars to complete each step are not criti-cal. Sometimes the two-step pattern does not look all that pretty, but the concept weare trying to capitalize on is the fact that each of these swings are equal in price. Ofcourse, the pattern does have to pass the basic visual test. So, if you look at a chartand the move from A to B is 5 bars and the move from C to D is 40 bars, I wouldnot classify it as a two-step pattern. Use common sense here.
Question: Is this considered a reversal or is it momentum trading with this pattern?
Answer: The answer to this question—for this pattern and ALL patterns in thisbook—is based on the size of the pattern. For example, we may be looking at a sym-metrical two-step pattern where A to B is 20 points and C to D is 20 points, leavingcurrent price at, say, 15. This would be considered a reversal setup. However, if weare in a major up trend and the price of the stock is $50 and the A to B and C to Dsteps down are each only 1 point, then this would be considered a micro-patternpullback setting up for a continuation/momentum trade. It is all based on the sizeof the pattern to determine whether it’s a reversal or momentum trade. These setupsoccur on all time frames and in many sizes.
  
Two-Step Patterns (TSP) 111
Enter Pullbacks Using The Gartley TSP
We have just looked at one variation of a Two-Step Pattern (TSP). Now let’s look atthe second of three, called a Gartley. Forty-year trading veteran Larry Pesaventopublished this pattern in his book Fibonacci Ratios with Pattern Recognition (1997).Larry originally saw the outline of this pattern in H. M. Gartley’s 1932 book ProfitsIn The Stock Market. No Fibonacci ratios were assigned to the pattern in this book. Itwas Larry who ultimately added Fibonacci to the Gartley price structure. In the con-text of his trading, Larry stated that the Gartley is “one of the best patterns I everfound.” I agree.
For purposes of this book, I have titled the pattern a “Gartley TSP” because withinthis pattern is an A:B = C:D two-step pattern (TSP). Specific Fibonacci ratios applyto this pattern, so let’s look at the setup for a Bullish Gartley TSP.
 
                        
a112 Chapter 7
Bullish Gartley TSP
we .382 to .786 of XA“s. (not to exceed A)Sg
tS,
(5)
a“
1-382 to .618 of XA) ~~.
a ee 1.272 to 1.618 of BCVa .618 to .786 of XASS
Two-Step Patterns (TSP) 113
Rules For Buys: (Shorts Are Reversed):
1. A low point, “X”, is determined on the chart. X will be the lowest low in thisentire pattern. If price falls below X, the Bullish Gartley TSP will be void.
2. From point X, a rally occurs up to a swing high point we will label A. Thisswing high is the highest high in the entire pattern. If price goes above A be-fore pattern completion, the Bullish Gartley TSP will be invalid.
3. Now that the upper and lower swing points of the pattern are established,we are looking for a move down from point A to the low point labeled B.This will be labeled Swing A:B. B should be between the 382 and 618retracement of swing X:A.
4. A pullback in the opposite direction of swing A:B is then made up to pointC. This swing will be labeled B:C. Point C ideally falls between the .382 and-786 retracement of swing A:B. The only hard requirement is that point Cdoes not exceed point A.
5. Once point C is established, price again reverses to the downside. Price mustnow trade below point B and down between the .618 to .786 retracement ofSwing X:A. Once price reaches this level, a Bullish Gartley TSP has been com-pleted, and we look for opportunities to buy.
In this case, we will enter above the previous day’s high.The initial stop will be below the Support FibZone.The first objective is at the first major Resistance FibZone
pe XN gH
. The final objective is the 1.272 extension of swing A:D.
The key differences between the Bullish Gartley TSP and the Bullish SymmetricalTSP are:
¢ An additional reference low point “X” is added into the mix. We gaugepoints B and D from this point with Fibonacci ratios. Low point B shouldbe between the .382 and .50 retracement of swing X:A. Low point D shouldbe between the .618 and .786 retracement of swing X:A. Point D is evenstronger when it is also the 1.272 or 1.618 extension of swing B:C.
* The step from A to B does not necessarily have to “equal” C to D. A to Bmay be longer or shorter in size than the C to D move. That is fine becausethis pattern is not defined by symmetry, but by specific Fibonacci ratios.
          
  
29,913 Ret 1.272
29.442 Ret 0.786
29,040 Ret 1.618
(Nb/ iy[ om)
va
x
 
 
tom l7m ist “sw 20t 2if 24m'25t Zew 27t 2eF OctOkt Sw 4t Sf em St lowial eated by Dyna Track
 
Chart Dyna ader_(c) 1996-2001
Bullish Gartley TSP Setup:
1.2.
Low point X is determined.
A rally occurs and establishes high point A. X and A now serve as theboundaries of the pattern.
Price falls to B, which turns out to be between the .50 and .618 retracement ofswing X:A. This is a valid swing point, so the pattern is currently valid.
. VAR rallies up to the .786 retracement of swing A:B. It does not violate the
high at A, so at this point, we are 1 point away from a complete setup.
Price, in fact, reverses down to D and makes a low point at the .786 of SwingX:A and between the 1.272 and 1.618 extension of swing B:C.
Our pattern is valid at this point, so it’s time to look for a long trade. (See Chapter11 for possible entry techniques.)
 ceowererreni nti te
 
Two-Step Patterns (TSP) 115
 
36.786 Ret 1.618
 
 
35.229 Ret 1.272
 
 
 
 
 
« (8) if if\ ft ii
 
 
 
 
 
 
 
Bullish Gartley TSP Result:After VAR completed the pattern, the stock rallies over 8 points!
6. A simple trigger to use to enter these patterns is a trade above the previousday’s high. In this case, I entered at 30.71.
7. Initial stop was placed just below the Support FibZone around 29.00.
8. I take profits in two stages. The first stage is when price meets the first Resis-tance FibZone that includes the symmetry level of swing B:C. In this case, thatResistance FibZone was from 31.75-32.25. My rule is to take profits on halfwhen price trades below the previous day’s low after touching the price zone.In this case, it was 31.99. At this point, I also move my stop to breakeven.
9. My final objective on the trade is between the 1.272 and 1.618 extension ofswing A:D. I take profits on the rest of the position on a trade below the pre-vious bar’s low after touching the 1.272 extension of swing A:D. That was at35.25.
 
                     
SEE116 Chapter 7
Let’s reverse the scenario and look for setups for short trades.
1 Bearish Gartley TSP |
ne 618 to .786 of XAMN 1.272 to 1.618 of BC
~. J382 to 618 of XA|_-7
TS
ws, 7 
Two-Step Patterns (TSP) 117
Rules For Shorts (Buys Are Reversed):
1.
6.7.8.9.
A high point, “X”, is determined on the chart. X will be the highest high inthis entire pattern. If price rallies above X, the Bearish Gartley TSP will be
void.From point X, a selloff occurs down to a swing low point we will label point
A. This swing low is the lowest low in the entire pattern. If price goes belowA before pattern completion, the Bearish Gartley TSP will be void.
Now that the upper and lower swing points of the pattern are established,we are looking for a move up from point A to a swing high point labeled B.
A pullback in the opposite direction of swing A:B is then made. This swingwill be labeled B:C. Point C must not exceed the .786 retracement of swingA:B. It does not need to go all the way to .786, but should at least go to the.382 retracement of swing A:B.
Once point C is established, price again reverses to the upside. Price mustnow trade above point B and up to the .618 to .786 retracement of Swing X:A.Once price reaches this level, a Bearish Gartley TSP has been completed, andwe look for opportunities to sell short.
In this case, we will enter below the previous day’s low.The initial stop will be below the Support FibZone.
The first objective is at the first major Support FibZoneThe final objective is the 1.272 extension of swing A:D.
The key differences between the Bearish Gartley TSP and the Bearish Symmetrical
TSP are:1.
An additional reference high point, “X”, is added into the mix. We gaugepoints B and D from this point with Fibonacci ratios. High point B should bebetween the .382 and .50 retracement of swing X:A. High point D should bebetween the .618 and .786 retracement of swing X:A. Point D is even strongerwhen it is also the 1.272 or 1.618 extension of swing B:C.
. The step from A to B does not necessarily have to “equal” C to D. A to Bmay be longer or shorter in size than the C to D move. That is fine becausethis pattern is not defined by symmetry, but by specific Fibonacci ratios.
 
 
  
 
 
 
 
Bearish Gartley TSP Setup:1. High point X is determined.
2. A selloff occurs and establishes low point A. X and A now serve as theboundaries of the pattern.
3. Price rallies to B, which turns out to be between the 50 retracement of swingX:A. This is a valid swing point, so the pattern is currently valid.
4. NVDA reverses down to the .786 retracement of swing A:B. It does not vio-late the low at A, so at this point, we are one point away from a completesetup.
5. Price, in fact, reverses up and rallies to D and makes a high point at the .786of Swing X:A and between the 1.272 and 1.618 extension of swing B:C.
p | Our pattern is valid at this point, so it’s time to look for a short trade against the Re-if sistance FibZone where the pattern has completed.
a
                     Two-Step Patterns (TSP) 119
 
 
 
 
 
 
 
 
 
 
 
 
BNVDA D-D _ _ _ a a _ a 2-Aty=2002 "41,900 43,970" 40.560_43.630 0730x 165.00000 64,059 Ret 6,608| 6 80,298 REPLEHE bon O908 q"S820 Rehm fo500053,544 Ret 0.618
o|| |(c) \~ (9) {50.000
46.193 Ret 1.272
a)
745,000
42.304 Ret 1.618
 
 
 
Bearish Gartley TSP Result:After NVDA completed the pattern, the stock declines over 20 points!
6. A simple trigger to use to enter these patterns is a trade below the previous
day’s low. In this case, I entered around 57.15.
7. The initial stop will be above the Resistance FibZone around 62.00.
8. I take profits in two stages. The first stage is when price meets the first Sup-port FibZone that includes the symmetry level of swing B:C. In this case, thatResistance FibZone was from 53.54-54,87, My rule is to take profits on halfwhen price trades above the previous day’s high after touching the pricezone. In this case, it was 52.83. At this point, I also move my stop to
breakeven.
9. My final objective on the trade is between the 1.272 and 1.618 extension ofswing A:D. I take profits on the rest of the Position on a trade above the pre-vious bar’s high after touching the 1.272 extension of swing A:D. That was at
49.55. Note that NVDA falls another 9 points after I’m out!
ooo eee
  
      
828.750 App 1.0C
826.118 Ret 1.27827,789 Ret 0.61
826,042 Ret 1.61825,353 Ret 0.78
 
 
              
2.
Our pattern is valid at this point, so it’s time to look for a long trade.
Intraday Gartley TSP Setup:1.
Low point X is determined on this five-minute chart.
A rally occurs and establishes high point A. X and A now serve as theboundaries of the pattern.
Price falls to point B, which turns out to be between the .50 retracement ofswing X:A. This is a valid swing point, so the pattern is currently valid.
ES03H rallies up to the .786 retracement of swing A:B. It does not violate thehigh at A, so at this point we are one point away from a complete setup.
Price, in fact, reverses down to D and makes a low point at the .786 of swingX:A and between the 1.272 and 1.618 extension of swing B:C. 
Two-Step Patterns (TSP) 121
eel
934.878 Ret 0.78
 
 
834.000 App 1.00soos 895,509 RODG.SL
228.750 App 1.00
928.116 Ret 1.27827.789 Ret 0:61
826.042 Ret 1.61
rr 825.353 Ret 0,78
 
 
 
Intraday Gartley TSP Result:After ESO3H completed the pattern, the contract rallied over 11 points!
6. A simple trigger to use to enter these patterns is a trade above the previousday’s high after price completes the pattern. In this case, I entered around829.50.
7. Initial stop was placed just below the Support FibZone around 825.00.
8. I take profits in two stages. The first stage is when price meets the