040 radius of the 1.000 1.4142 2.000 2.828above circle and half the side of the above | The inverse ratio relationships are:square, i.e., the radius of the Earth 3960, 0.354 0.500 0.707 1.000
would give the following result.16
Larry Pesavento
 
F. HE er,A 6. J
1.618 is commonly known as the GoldenMean, is represented by the Greek symbol Oand is called PHI.
if we call the height of the triangle thecombined radii of the Earth and Moon, i.e.,3960 + 1080 or 5040, then the hypotenuse 6409as a ratio of the height is 6409:5040 or1,272:1,000.
Those of you who would like to explorethe many complexities of the geometry of mar-
kets should get Bruce Gilmore's book Geometryof Markets and Robert Miner's Dynamic Trader.17
Stock Trading Using Pattern Recognition and Geometric Ratios
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2
 
The Primary Patterns
 
This section discusses the primary patterns |use in trading. Many of my students ask mewhy I share this information. It is quite simpleand has a two part answer. First, all of thesepatterns were found by someone else over thepast 70 years. Second, every trader has hisown time frame that he likes to trade, so thechance of a self-fulling trade expectation isvety remote.
One very important difference willemerge from this section on pattern recogni-tion. That difference is that all of the patternsdiscussed will be illustrated using the math-ematical ratios of ancient geometry, of whichthe Fibonacci Summation series is a part. WhatI tried to do is show how you can use only fournumbers of the Fibonacci Summation series tomathematically identify these patterns. I al-ways thought that the mathematical relation-ship of these price swings is what the origina-tors of these patterns failed to bring up. This isespecially true for the Elliott Wave theoreti-cians. I studied the Elliott Wave principle ex-tensively from 1974 to 1978. I thought his te-nets on wave patterns were more like guide-lines than immutable laws. To this day, if youget 12 Elliott Wave theorists in a room you willend up with 24 or more interpretations of theprice action, There is nothing wrong withthat. It is just another way of showing that noone knows what is going to happen next in themarkets. More importantly it also reitieratesthat it is not necessary to know what is goingto happen next. What is necessary is to knowthe risk on the trade. Since we are dealingwith mathematical relationships, the control ofrisk can be quantified easily.
I spent the better part of 30 years lookingat these patterns, My sources originated from
Don Mack at the Investment Center in SantaMonica, California and John Hill at the Com-modity Research Institute in Hendersonville,North Carolina. | do not think | overlookedanyone who ever described a price pattern.There are two books that I highly recommend:
1. Profits in the Stock Market by H.M.Gartley (1935), This was Gartley’s Stock Mar-ket course in the 1930s. It cost $1500 whichwas equivalent to 3 Ford automobiles at thetime. On pages 200 to 250 most of the patternsever discussed are found. More trading sys-tems were rediscovered and sold from thisbook than any other book. This includes: TheTubbs Stock Market Course, The Trident Strat-egy, The Reversal Point Wave, and many oth-ers. The book is more than 700 pages andcomes with huge wall charts illustrating theaction of the stock market in the 1920's and1930s. It can be purchased for under $100 fromTraders Press in Greenville, SC, 800-927-8222.
2. Torque Analysis of Stock Market Cyclesby William Garrett (1971), This book is a truegem. It was the first book ever written that ex-plores the mathematical and geometrical rela-tionships of price patterns and how they re-late to the numbers of ancient geo-metry.Garrett's book came out at about thesame time as another book on cycles. JamesHurst's The Profit Magic of Stock TransactionTiming. Hurst's book was less expensive andmuch ¢asier to read. But the content ofGarrett’s book held the key to many answersabout cycles and Fibonacci numbers. Only 200copies of Garrett's book were ever sold.Prentice Hall destroyed the remainder of copies due to the need for warehouse space.
If you spend some time looking throughmy bibliography, you will see that a greatLarry Pesavento
LLL
number of authors are covered. I always feltthat each of them contributed to the science oftechnical studies,
The Ten Basic PatternsPattern One
   
Patterns One and Two were first de-scribed on page 249 of H. M, Gartley's Profitsin the Stock Market (see the original illustrationbelow). It is the basic pattern in the theory ofparallel] channels, From this one page inGartley's book, two of the most famous tradingsystems were sold. The first was the TubbsStock Market course ($1500 in the 1950s) andThe Trident Strategy ($3000 in 1970s).
 
Practical Use of Trend Lines
SELLING POINT AS -PARALLEL 1S APPROACHES 2NAL?
 
 
 
Pattern ThreeGartley “222”
 
Gartley “222”
 
The Gartley "222" Pattern (illustrated inPatterns Three and Four) is one of the best Ihave ever found. I named it the Gartley "222"pattern because it is on page 222 in Gartley’sbook, He spent more time describing thispattern than all the others, This pattern showswhy it is not necessary to pick a top orbottom—just wait for the first “222° patternfollowing the top or bottom, The real beauty ofit is that it contains an AB=CD pattern withinit. This allows the trader to calculate ratio andproportions of various price waves in order todetermine the risk on the trade. If the daytrader learns only this pattern he will do verywell. It is worth noting that when the *222"pattern fails (market moves beyond point X) amajor continuation move is in progress.
 Stock Trading Using Pattern Recognition and Geometric Ratios
Pattern Five
Patterns Five and Six are reaction pat-terns. The move from point 1 can be 38%,50%, 61%, 70.7%, 78%, 100% (double top orbottom). The only time I use the 38%retracement level to find a trade entry is whenthe move from X to 1 is one of tremendousthrust (three to five times normal tradingrange bars), The market will give you strongclues as to what it will do next if you watch theretracements in new moves. If it reacts only38% on the first reaction swing, then a highprobability exists that the next swing or twowill also be 38% reactions,
 
Patterns Seven and Eight are extensionpatterns, It was this pattern that changed myapproach to trading. As I was trading fromSwitzerland, where I had spoken to a group ofSwiss bankers, almost every trade I put onover the last several days had been stoppedout on a penetration of point X. In my hotelroom, I was calculating why my stop was rightat the high/low of the day. I had placed mystop right at the 1.27 move of X to 1. It wasupon hitting the square root button on my cal-culator that I first began to see the importanceof the 1.27 ratio (V1.618 = 1.27).
A good rule of thumb is to wait for acandlestick pattern such as a doji or hammer(page 97) when point A is reached. Rememberthat this pattern is an extension pattern andthere are no guarantees that the swing cannotgo much higher.Larry Pesavento
a a
Pattern Nine
 
Patterns Nine and Ten are the most diffi-cult to find on daily charts. They are foundmore frequently on intraday charts (5 minute,30 minute, etc.). William Dunnigan describedthis pattern in Dunnigan’s One-Way Method andthe Dunnigan Thrust Method. The three drivepattern should be very esthetic to the eyes ofthe trader. It should jump out at you. If youfind that you are forcing the pattern to fitthree drives, it is probably not correct. Themost important thing to keep in mind is sym-metry: The waves should be symmetrical inprice and time. (Note: In her book StreetSmarts, Linda Bradford Raschke refers to thispattern as the Three Little Indians.)
 
The diagram above is an example only. Itshows the number of periods could be 3 to 13.The price swing could also be 1.618.
Characteristics of PatternsPattern One
ra
4
 
1, Price swing from A to B will be equal to CD60 percent of the time. The other 40 per-cent of the time CD will be 1.27 or 1.618of AB.
2. The BC swing will be .618 or .786 of the ABmove. In very strongly trending marketsthe BC swing will only be at the .382retracement.
3. Ifthe AB swing is very strong. it will give agood clue what to expect on the BCmove,
4. The time bars from point A to B should beequal to the CD time bars about 60 per-cent of the time, The other 40 percent ofthe time these time periods will expandto 1.27 or 1.618 of AB,
5. Should the CD price swing have a price gapora very wide range bar, the tradershould interpret this as a sign of extremestrength and expect to see price expan-sions of 1.27 or 1.618.Stock Trading Using Pattern Recognition and Geometric Ratios
 
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 Stock Trading Using Pattern Recognition and Geometric Ratios 27
 
1. Price swing from A to B will be equal to CD60 percent of the time. The other 40 per-cent of the time CD will be 1.27 or 1,618of AB.
2. The BC swing will be .618 or .786 of the ABmove. In very strongly trending marketsthe BC swing will only be at the .382retracement.
3. Ii the AB swing is very strong, it will give agood clue what to expect on the BCmove,
4, The time bars from point A to B should beequal to the CD time bars about 60 per-cent of the time. The other 40 percent ofthe time these time periods will expandto 1.27 or 1.618 of AB.
5. Should the CD price swing have a price gapor a very wide range bar, the tradershould interpret this as a sign of extremestrength and expect to see price expan-sions of 1.27 or 1,618, 
Larry Pesavento
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Pattern ThreeBullish Gartley “222”
 
1. The swing down from point A will termi-nate at point D. This will be at the .618 or.786 retracements 75 percent of the time.The other 25 percent of the time, theretracements will be .382, 500 or .707.
2. There must be an AB=CD pattern ob-served in the move from A to D.
3. The BC move will be ,618 or .786 of AB, Instrongly trending markets expect a .382or .500 retracement,
>
Analyze the time frames from point X to Aand A to D, These time frames will alsobe in ratio and proportion, For example,the number of time bars up from point Xto Ais equal to 17 bars. The time barsfrom A to D equal 11, Seventeen is ap-proximately 1.618 of 11.
5. There will be a few instances where theAB=CD move will give a price objectiveat point X. This will be a true double bot-tom formation.
6. If point X is exceeded the trend will con-tinue to move down to at least 1.27 or1.618 of the X to A move.Larry Pesavento
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 Stock Trading Using Pattern Recognition and Geometric Ratios 41
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Pattern FourBearish Gartiey “222”
_
     
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1. The swing down from point A will termi-nate at point D, This will be at the .618 or.786 retracements 75 percent of the time.The other 25% of the time, theTetracements will be .382, .500 or .707,
2. There must be an AB=CD pattern ob-served in the move from A to D.
3. The BC move will be .618 or .786 of AB, Instrongly trending markets expect a .382or .500 retracement.
4. Analyze the time frames from point X to Aand A to D. These time frames will alsobe in ratio and proportion, For example,the number of time bars up from point Xto A is equal to 17 bars. The time barsfrom A to D equal 11. Seventeen is ap-proximately 1.618 of 11,
5. There will be a few instances where theAB=CD move will give a price objectiveat point X. This will be a true double bot-tom formation.
6. If point X is exceeded the trend will con-tinus to muve down to at least 1.27 or1,618 of the X to A move.
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Pattern Five1
 
The time frame between point X andpoint A will be between $ and 13 timebars {i-e., 5 minute, 30 minute, or daily).On rare instances 21 time bars. These areFibonacci numbers.
There are no swing patterns present be-tween points ] and A.
When the move from X to i is very explo-sive, the pullback to point A may only re-trace to 38.2 percent or 50 percent 1X.
If the price difference between the 618and .786 retracement is greater than thetrader is willing to risk, the trader shouldwait for further confirmation {i.¢,, achange in momentum or candlestick pat-tern; doji, hammer). In the S&P 500, forexample, if the difference between the618 and .786 numbers is greater than1,70 points, I will wait for further confir-mation to enter the trade,
Time periods, the next swing will usuallybe dramatic to the downside. If the timeframe down from point 1 to A is longerthan 8 periods, the ensuing pullback willmost likely be less dramatic.
6,
7.
8.
The trader will never know which of theretracement numbers the market is goingto reach. It is the trader's decision to de-termine how much risk is in the trade.
This pattern forces you to trade with theshort term trend, You are not trying topick a top or bottom.
After entry, once prices move 61.8 percentin the direction of the trend, the protec-tive stop should be moved to point A,This gives a risk free trade.
The minimum price objective should bethe same distance from point A to 1.Larry Pesavento
 
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Pattern Six periods, the ensuing rally will most likelynot be as strong.
. The trader will never know which of theretracement numbers the market is goingto reach. It is the trader's decision to de-termine how much risk is in the trade.
7. This pattern forces you to trade with theshort term trend. You are not trying topick a top or bottom,
 
1
8. After entry, once prices move 61.8% in
1. The time frame between point X and A the direction of the trend, the protectivewill be between 5 and 13 time bars (i.e., stop should be moved to point A. This5 minute, 30 minute, or daily). On rare gives a risk free trade.
instances 21 time bars.9. The minimum price objective should be2. There are usually no swing patterns the same distance as point X to 1.present between points 1 and A.
3. When the move from X to 1 is very explo-sive, the pullback to point A may only re-trace to 38.2 percent or 50 percent of 1X.
4, If the price difference between the .618 and.786 retracement is greater than thetrader is willing to risk, the trader shouldwait for further confirmation (i.¢, changein momentum or candlestick pattern;doji or hammer). In the S&P 500, for ex-ample, if the difference between the .618and .786 is greatet than 170 points I willwait for further confirmation to enter thetrade,
5. The time bars between points X and A givea strong clue to the next swing, Whenthe distance from point A is very short, 3to 5 time periods, the next swing will beexplosive to the upside, If the timeframedown from point 1 to A is longer than 853
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Pattern Seven1
 
. Time frame between X and point A will be
5 and 13 time bars (i.e., 5 minute, 30minute, daily), On rare occasions