first Sup-port FibZone that includes the symmetry level of swing B:C. In this case, thatResistance FibZone was from 833.25-835.00. My rule is to take profits on halfwhen price trades below the previous day’s low after touching this priceZone. In this case, it was 832.50. At this point, I also move my stop tobreakeven.
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 trade below the previ-ous low after touching the 1.272 extension of swing A:D. That was at 837.75.Not bad for a five-minute chart.
—_—-sso ee
   
   
DE122 Chapter 7
STRATEGY Q&A
Question: You mention an easy trigger to use for longs is a trade above the previous day'shigh after completing the pattern and for shorts when price trades below the previous day’slow after pattern completion. Do you use different triggers?
Answer: Yes. We will discuss in later chapters the various triggers that I will con-sider and on what time frame I look for them.
Question: Do you need a FibZone around the pattern completion level before you will con-sider taking the trade?
Answer: Yes. | want a total of at least three Fibonacci price levels acting as supportor resistance before I will consider the trade.
Question: Should someone trading this pattern use your stop loss rules?
Answer: I believe you have to “own” whatever you do. If this stop loss strategy thatI have outlined fits your style . . . go for it! However, if it doesn’t fit, find a stop lossprogram that does fit.
Question: What time frames work best for these patterns?
Answer: I've traded these patterns all the way down to five-minute charts, and theywork just as accurately as do the daily or weekly charts. The highest time frame Ihave traded these patterns on were monthly charts. I tend to trade the daily andweekly patterns more than any other. The time frame chosen will be largely depend-ent upon how much risk your money management plan allows you to take pertrade (to be discussed later). Remember, the Gartley is “officially complete” when itreaches the .618 retracement of swing X:A. However, it can go down to the .786retracement of X:A and still be valid. The higher the time frame you go, and the big-ger the pattern, the bigger the gap between the .618 and .786, which translates to alarger point risk if a trade is initiated at the 618 level. Sometimes by waiting on atrigger to enter, it keeps a trader patient until price goes deeper into the FibZone be-tween the .618 and .786 before being called to take the trade leaving less point risk.SS SSS
Two-Step Patterns (TSP) 123
Find Powerful Reversals With The Butterfly TSP
The “Butterfly Pattern” is a TSP-type pattern that was discovered by Bryce Gilmoreand Larry Pesavento. This pattern allows you to find significant bottom and topturning points in the markets. The Butterfly is a “hybrid” of the Gartley. The keydifference in this pattern vs. the Gartley is the fact that point D completes betweenthe 1.272 and 1.618 extension of X:A vs. the .618 to .786 for a Gartley. It can betraded as a large reversal pattern, or if spotted on a smaller/micro time framewithin the context of a larger trend, it could be used for momentum /continuationtrading. Why the name? When you look at this pattern with the specific ratios at-tached to each swing and connect the dots, the pattern looks just like a butterfly inflight.
     
 
124 Chapter 7
                                
 
| Bullish Butterfly TSP |a
-382 to .786 of AB(not to exceed A)
 
ae
D1.272 to 1.618 of XA
  
Rules For Buys (Shorts Are Reversed):
1. Point X—The beginning point of the pattern and the second lowest point inthe entire pattern. It will be the “anchor” point to calculate the pattern com-pletion level at point D.
2. Point A—The highest high of the pattern.
3. Point B—This will ideally fall between the .382 and .786 retracement of SwingX:A. The only hard rule here is that point B cannot fall below point X.
4, Point C—The only hard requirement for this point is that it be lower thanpoint A. Ideally, it hits one of our retracement levels at .382, .50, .618, or .786of swing A:B. 
LL
5.
Two-Step Patterns (TSP) 125
Point D—This is the critical point. Once point C is established and price fallsand trades below point B, we calculate the 1.272 and 1.618 extension of swingX:A. This will provide the pattern completion zone. Point D must be lowerthan point X.
At this point, if you “connect the dots” in the following order . . .
XtoAX to BAtoBBtoCBtoDCtoD
... you should be able to see the outline of what looks like a butterfly. Sometimesthe butterfly is a little distorted depending on the time between swing points, but itshould look like a Butterfly with its right wing dipping down lower than the left.Let’s look at a couple of examples.
6.
7.8.
9.
For illustration purposes, we will enter a long trade above the previous day’shigh. (See Chapter 11 for other trigger ideas.)
Initial stop on the trade is below the Support FibZone.
The first objective will be between the .618 and .786 retracement of swingCD.
The final objective is the 1.272 extension of swing A:D.
The key differences between the Bullish Butterfly TSP and the Bullish Gartley TSP
are:
1.2.
Point B can go lower in the Butterfly TSP vs. the Gartley TSP.
Point D goes below X and, by definition, falls between the 1.272 to 1.618 ex-tension of swing X:A. The Gartley TSP has D completing within the X:Aswing between the .618 and .786 retracement of X:A.
The step from A to B does not necessarily have to “equal” C to D. C to D istypically longer than A:B. There are situations where A:B does equal C:D,which means we could have a Symmetrical TSP AND a Butterfly TSP allrolled into one.
  
eee126 Chapter 7
2MH D-D
 
 
 
28.137 Ret 1,27227.918 Ret 1.618
 
 
 
 
 
 
27 398 Ret 9,298
 
26.607 App 1.818
 
 
‘apr iz 13.26 “May'l0 ‘i724 31 ‘un 34. 21 Ge ‘Del “ip da ne
Chart created by Dynamic Trader (c) 1996-2001
Bullish Butterfly TSP Setup:1. A low point, X, is made in April at 30.00.
2. Price rallies to point A and forms a swing high at 36.85. This is the highesthigh in the pattern.
3. Low point B is made at 31.02 around the .786 retracement of X:A. Remember,the only hard requirement here is that we don’t go below X.
4. A 6 point rally unfolds and high point C is made at 35.66 around the .786retracement of A:B. Here, the only requirement is that we don’t exceed point A.
5. Over the course of the next four weeks, ZMH sells off 8 points and hits aSupport FibZone from 26.60-28.13. On July 24, ZMH hits the 1.272 extensionof X:A to officially complete our pattern. Now we look for opportunities togo long. (See Chapter 11 on Triggers for potential ideas on how to look forentry opportunities once a pattern completes.)
  
 
Two-Step Patterns (TSP) 127
      
2MH D-D
   
41.009 Ret 1.616
   
39.257 Ret 1.272
   
BULLISH BUTTERFLY TSP
 
34.319 Ret 0.786
          
32,969 Ret 0.618
 
  
28:438 Ret £09827,298 Ret 0.286nnn nn 26,607 App 1,618+ (7)
OTD
0.009%
28.000, 0.000TT T—T— T LTT 1. “Tt Rabulo2 T rT14926 May 10 17 24 31 Jun 14 (21 38 Jul ‘ie 19 26 Aug 9 16Chart created by Dynamic Trader (c} 1996-2001
                
Bullish Butterfly TSP Result:
This pattern resulted in a 42% rally from point D, or roughly 12 points of possibleprofits, in 12 trading sessions.
» The same day ZMH hits our Support FibZone, we go long.
6.
7. The initial stop is just below the FibZone around 26.60.
8. First profits are taken at the .618 to .786 retracement of swing C:D,9
. The final objective on these trades is around the 1.272 to 1.618 extension ofswing A:D.
  
128 Chapter 7
 
27.000
BULLISH BUTTERFLY TSP26.000
Ls 000
24,000
 
Ls 000
|? -000
 
99.988 REP EDP43:84% Ret 1:618
19.285 Exp 0.618
 
 
23 30. ‘Sep ‘13 "20 27 "OctChart created by Dynamic Trader (c) 1996-2001
 
Bullish Butterfly TSP Setup:1. A low point, X, is made in August at 21.30.
2. Price rallies to point A and forms a swing high point at 26.21. This is thehighest high in the pattern.
3. Low point B is made at 21.93 around the .786 retracement of X:A. Remember,the only hard requirement here is that we don’t go below X.
4. A small rally unfolds and high point C is made at 24.35 around the .50retracement of A:B. Here, the only requirement is that we don’t exceed point A.
5. Over the course of the next four weeks, QQQ sells off 4 points and hits aSupport FibZone from 19.28-20.05. QQQ hits the 1.272 extension of X:A to of-ficially complete our pattern at 19.96.
 
 Two-Step Patterns (TSP) 129
 
2Decd228.730, 9.0305.70%
3eTp_oOoO Oo 30.196 Ret 1.818
(9)
27,964 Ret 1.272
BULLISH BUTTERFLY TSP |
|i! ‘
[ 22.597 Ret 0.618
«<—— 6)30.088 Rep tameaaa 39.842 Ret £:618
19.285 Exp 0.618
 
 
na
13.760, 0.000G2,
 
‘R192 ‘aug’ te 23 50 Sep WO on eS ‘Nov'8 15 22 29 Dec 4Chart created by Dynamic Trader (c) 1996-2001
Bullish Butterfly TSP Result:Ina little over one month, QQQ rose over 45%, or 9 points.
6. A long trade is entered around 20.50 above the previous day’s high after pat-tern completion.
. The initial stop loss is just below 19.25.
. As soon as a swing point D is established, I immediately calculate Fibonacciprice resistance levels that will tell me where price will face major decisions.The first level that I look to take profits is between the .618 and .786retracement of C:D. At this level, I typically take half the position off andmove my stop up to reduce or eliminate risk.
. The final objective on these trades is around the 1.272 to 1.618 extension ofswing A:D. In this situation, we took profits between 27.00 and 28.00.
            
a130 Chapter 7
Bearish Butterfly TSP jf
1.272 to 1.618 of XA D
(5)
 
.382 to .786 of AB(not to exceed A)
 Scenes
Two-Step Patterns (TSP) 131
Rules For Short Sales (Buys Are Reversed):
1.
Point X—The beginning point of the pattern is the second highest point inthe entire pattern. It will be the “anchor” point to calculate the pattern com-pletion level at point D.
Point A—The lowest low of the pattern.Point B—This is typically between a .382 and .786 retracement of Swing X:A.
Point C—The only hard requirement for this point is that it be higher thanpoint A. Ideally, it hits one of our retracement levels at .50, .618, or .786 ofSwing A:B.
Point D—This is the critical point. Once point C is established and price ral-lies and trades above point B, we calculate the 1.272 and 1.618 extension ofswing X:A. This will provide the pattern-completion level. Point D must behigher than point X.
At this point, if you “connect the dots” in the following order . . .
XtoAX toBAtoBBtoCBtoDCtoD
-.- you should be able to see the outline of what looks like a butterfly. Sometimesthe butterfly is a little distorted depending on the time between swing points, but itshould look like a Butterfly with its right wing pushing higher than the left. Let’slook at a couple of examples.
6.
For illustration purposes, we will enter a short trade below the previousday’s low. (See Chapter 11 for other trigger ideas.)
Initial stop on the trade is above the Resistance FibZone.
The first objective will be between the 618 and .786 retracement of swingCD.
The final objective is between the 1.272 and 1.618 extension of swing A:D.
                                         
 
15,952 Exp 1.61215,817 Ret 1.618
c (5)o$B.B82 Rae 1972
   
15.265 Ret 0.61815,200
 
15.166 Ret 0.786
OK,Jw (4) b=
14,880 Ret 1.272
14,675 Ret 1.618
 
 
Bearish Butterfly TSP Setup:1. A high point, X, is made 15.52 on this 60-minute chart.
2. Price declines to point A and forms a swing low point at 15.04. This is thelowest low in the pattern.
3. High point B is made at 15.35 around the .50 retracement of X:A. Remember,the only hard requirement here is that price cannot go above point X.
4. A small decline unfolds and low point C is made at 15.17 around the .50retracement of A:B. Here, the only requirement is that we don’t trade below
point A.5. CSCO rallies from point C and hits a Resistance FibZone from 15.60-15.85 thatincludes the 1.272 extension of X:A to officially complete our pattern. Now we
look for opportunities to go short. (Gee Chapter 11 on Triggers for potentialideas on how to look for entry opportunities once a pattern completes.)
NN                                   
Two-Step Patterns (TSP) 133
 
15.952 Exp 1.61815.817 Ret 1.618
 
 
 
 
15.689 Raw 1.999
15.265 Ret 0618
 
15.166 Ret 0.786
 
14.880 Ret 1.272
 
14.675 Ret 1.618
 
 
 
"Bw “te veChart created by Dynamic Trader (c) 1996-2001
 
Bearish Butterfly TSP Result:
From this pattern on a 60-minute chart, CSCO falls over 1.6 points in three days.6. A short is entered around 15.50.
7. The initial stop loss is just above 15.85.
8. As soon as swing point D is established, I immediately calculate Fibonacciprice support levels that will tell me where price will face major decisions.The first level that I look to take profits is between the .618 and .786retracement of C:D. At this level, I typically take half the position off andmove my stop up to reduce or eliminate risk. In the situation above, you may
decide to simply tighten stops due to the minimal amount of movement ittook to get to these levels.
9. The final objective on these trades is around the 1.272 to 1.618 extension ofswing A:D. Once this zone is hit, I occasionally use the previous bar’s high as
a trailing stop as price makes lower lows to see if we can maximize and rideout a larger winner.
    
 
Let’s drill down to adaily chart to look atprice action . .. —»
+18 Wk
20.220273ul02
 
Chart created by Dynamic Trader (c) 1996-2001
You're probably thinking, "Wait a minute here. This chart doesn’t have a BearishButterfly TSP setup.” You're right, but over this two-year time frame, how wouldyou have known that the high made during the week of March 23, 2002, was goingto lead to a 20 point selloff in Wal-Mart (WMT)? On the next page, check out whatwas forming at this weekly chart peak when we drilled down to the daily chart.
 ———
Two-Step Patterns (TSP) 135
460 54.600 53.250 54.420 0.970
1gMaroz10TDv
 
 
64,921 Ret 1.618re Bd 298 Ret 1.618
a Bo NF Exp 0.618
D£3808 Ber Lap
lim tat 13w 14t 15F “18m'i9 ‘ZowChart created by Dynamic Trader (c) 1996-2001
 
This pattern is often found at significant
it led to a 20 point selloff (as seen from the previ-ous page).
    
   
a136 Chapter 7
STRATEGY O&A
Question: Do you enter the trade as soon as the pattern completes at point D?
Answer: Personally, I do not enter right when the pattern hits the 1.272 extension. Ialmost always look for a trigger to enter. When trading this pattern on a daily timeframe or higher, this pattern is usually occurring in the midst of a strong trend,which means I would be going against the grain. That’s fine, but I don’t want to bestepping in front of oncoming traffic either. So, I look for a trigger.
For example, let’s say a Bullish Butterfly TSP is official as price hits the 1.272 exten-sion of swing X:A. A simple trigger would be to only take a long trade if price goesabove the previous day’s high. That previous day’s high acts as the “trigger” for meto take action and go long. That is a simple trigger. More complex triggers are dis-cussed later in this book. That being said, I know many people that successfullytrade these patterns that enter the trade as soon as price hits the 1.272 Fibonacci ex-tension level with the thought process that there is less risk. I agree that there is po-tentially less “point risk,” but there is no structural price confirmation that price isreversing, so there is a higher likelihood of getting stopped out in my opinion. Re-gardless of how you chose to enter into these trades, stops must be used.
Question: I see that you take profits in two stages. Why is this?
Answer: This is risk control for me. I’m not trying to hit home runs. I want to posi-tion myself to benefit from a home run trade, but I realize most trades are going tobe base hits. So, I take half profits at the “base hit level” and trail my stop to a closerlevel (ideally at breakeven, if the chart allows). If price keeps moving in my favor, thengreat . . . I'll benefit. If not, that’s fine, because I’ve locked in profits and I'll getstopped out with little or no damage on the last half of the trade. There are manyways to take profits and trail stops. I have found this strategy to work best for me.The key concept to remember is to lock in profits on a portion of the trade as soonas possible and let the rest of the trade move as it may with a focus on reducing andeliminating risk by trailing the stop order as a trade moves in your favor.CHAPTER 8
HEISENBERG 200
  LL SS :
STRATEGY #5: HEISENBERG 200
The 200-day Simple Moving Average (SMA) is a highly watched level by institu-tional investors, and Wall Street research outfits. In the case of the 200-day SMA,there is a mass belief and following that one should be a buyer when price crossesabove the 200-day SMA and a seller when it crosses below. I don’t know how manytimes I’ve turned on the TV to watch my financial soap operas and hear that a“Street firm” has upgraded XYZ Corp. for reasons supposedly related to an improv-ing fundamental outlook. So when I pull up a chart of that company, where is pricesitting? Lo and behold, it’s sitting on the 200-day SMA. Countless timing systemshave been constructed around the 200-day SMA following the same concept to be abuyer above the 200-day SMA and a seller below it. The bottom line here, is that the200-day SMA is followed closely by many market participants to determine the stateof the overall direction of a particular financial instrument or index.
With such an interest in the 200-day SMA, I was motivated to design a strategy us-ing Fibonacci around these levels. What I came up with was a strategy that identi-fies moves that are contrary to how the crowd acts on price action around the200-day SMA. I named this strategy Heisenberg 200 after the Heisenberg Uncer-tainty Principle. The Heisenberg Uncertainty Principle basically says that in measur-ing something, we alter it, and that makes the measurement invalid. Could I applythis principle to the markets? In my mind, it was clear that with so many peoplemaking decisions to buy or sell based on the general rule I gave above, it would nat-urally distort the observation and make those buy or sell decisions “obsolete” or in-accurate. Is it a stretch? Conceptually it may sound that way, but the actual tradeopportunities speak to the contrary.
What I have done is taken two concepts you have already learned, which are Sup-port and Resistance FibZones and Two-Step Patterns (TSPs), and put them in a melt-ing pot with the 200-day SMA. I was able to create a personal strategy that identifiesquite powerful reversal moves.
                      
140 Chapter 8
BEARISH HEISENBERG 200
 
Price goes above the 200 Day SMA butcompletes a Bearish Two Step Pattern(TSP) and hits our resistance FibZone.This initiates a potential short Heisenberg200 trade.
ee
        
 
   
200 SMA violated initiating ~~. _crowd reaction by hitting sell n/pstops and short selling \
}
Price Movement (A)
 
Once price reverses down after hittingthe resistance FibZone the crowd has tosell longs. In some cases they shift toshort selling because price is backbelow the 200 SMA. This addes fuel forthe ride down.
 Heisenberg 200 141
HEISENBERG 200: RULES
Rules For Short Sales (Buys Are Reversed):
1. A bearish Two-Step Pattern has completed. This includes Symmetrical,Gartley, and Butterfly TSPs.
- The pattern has hit a Resistance FibZone of at least three Fibonacci Price lev-els.
. The final point (D) of the TSP must complete above the 200-day SMA.
» Enter a short trade when Price goes below the Previous day’s low. Or, con-sider a trigger entry from Chapter 11.
. Once triggered into a short trade my initial stop is just above the ResistanceFibZone.
                                
 
 
                 
2Aug00 40ctOO 160ctOO = 230ct0092,500 91,938 nyo 79/500
}95.000,
13,806 Ret 0.786
ec0 Ret 1.272) (2)
 
| 7 565 Ret G18200 Day SMA
X = 91.93
A= 54,31 een
B = 75.75
Cc = 57.00 155.000
D = 79.50
 
 
+ + t75.125 54.313 57,000. 185ep00 -— 10Oct90 1 7 150.000Aug ll 18 23 Sep 8 is 22 2 Oct 13 20 27
Heisenberg 200 Setup:Above is a daily chart of Xilinx (XLNX). The necessary ingredients are in place:1. A Bearish Gartley TSP Pattern has formed.
2. A Resistance FibZone of at least three levels has been tested. In this case wehave four Fibonacci price resistance levels in our FibZone.
3. Point D of the pattern completes above the 200-day SMA. So, it’s time to lookfor shorts.Heisenberg 200 143
 
 
80,850 Ret 1.272
F888 RP ERE
 
 
 
66.905 Ret 0.500
 
63.934 Ret 0.618
 
 
 
 
Heisenberg 200 Result:
4. After the TSP is complete, a simple trigger would be to take a short trade be-low the previous bar’s low. In this case, I am triggered short at 73.81
5. My initial stop is just above the resistance zone at 84. This is a 15% differencebetween my stop and entry price. With such a large price and percentage
range, I will reduce my position size to account for this relatively large Resis-tance FibZone.
6. The next day, I take profits between 64 and 66, which is the range of the .50and .618 Fibonacci retracements of low point A to high point D. Price ralliesbut finds a swing high point and my stop is moved down. I find a couple ofswing high points to move my stop to as price falls.
et a
 
7. Price finally hits the 1.272 extension of swing A:D at 47.46. I now trail mystop to the previous bar high. Continue to do this as we make new lows. Ul-timately I’m stopped out at 48.43 for a 25-point gain.
ooaoaoauaiioo
                                
144 Chapter 8
 
Resistance FibZone
108,564 Ret 2.611pe-dbs hee
rr 106.098 Ret 1.27
| ( 104.192 Exp 0.61103.574 Ret 0.61
200 Day SMA
 
 
 
Heisenberg 200 Setup:Above is a daily chart of Goldmplace:
1. A Bearish Butterfly TSP Pattern has formed.
2. A Resistance FibZone of at least three levels has been tested. In this case wehave seven Fibonacci price resistance levels in our FibZone.
an Sachs (GS). The necessary ingredients are in
3. Point D of the pattern completes above the 200-day SMA.
With these ingredients in place, it’s time to start looking for short trades.
aHeisenberg 200 145
 
 
108,564 Ret 2.61197.720 Exp 1.0016.085 RPI E?
106.093 Ret 1.27
 
 
 
 
 
 
104.192 Exp 0.61
 
103.574 Ret 0.61
 
97.220 Ret 0.500
 
95.349 Ret 0.618 |.
 
94,976 Ret 1.272
 
 
Heisenberg 200 Result:4.
5.6.
After the TSP is complete, a simple trigger would be to take a short trade be-low the previous bar’s low. In this case, I am triggered short at 102.30.
My initial stop is just above the resistance zone at 108.60.
Three days later, I take profits between 95 and 97, which is the range of the50 and .618 Fibonacci retracements of low point A to high point D. Price ral-lies but finds a swing high point and my stop is moved down. I find a cou-ple of swing high points to move my stop to as price falls.
. Price finally hits the 1.272 extension of swing A:D at 84.97. I now trail my
stop to the previous bar high. Continue to do this as we make new lows. Ul-timately, I'm stopped out around 83.50 for almost 20 points of gain.
   
   
   
146 Chapter 8
BULLISH HEISENBERG 