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“How to profit from pattern recognition”

Introduction

Several years ago, technical analysis began it’s journey to help investors and traders determine, with reasonable probability, what direction prices will take. Technical analysis allows investors and traders to identify moments of opportunity to profit in the markets. It does so by identifying and quantifying specific patterns that form and repeat with enough regularity that trading methods and strategies can be developed and implemented with success.

Trade what you see; how to profit from pattern recognition focuses on trading patterns with an underlying root structure based on simple geometric forms and Fibonacci ratios. The patterns are easily identifiable once the trader has spent some time observing and learning the basic structures. Each of these patterns can be quantified and a sound money management strategy applied.

It was not so many years ago that a book of this nature, based on technical analysis would not have been taken seriously by many. It begins with a look at a point in time when technical analysis had begun to take root in the academic community.

Validation from the scientific community

For years technical analysis was shunned by many Wall Street professionals, looked upon as one step above tea leaf reading. A turning point occurred on April 17, 2000, when a paper by Dr. Andrew W.LO of the Massachusetts Institute of Technology (MIT)  was published in business week. The title of the article was “This academy will yield pure gold”. The article substantiated and verified that indeed there is an edge in technical analysis after all. This, of course, did not surprise any market technician who had successfully been using pattern recognition.

The article did, however, bring technical analysis from the age of alchemy to the age of academia. Princeton University Press published a book by Dr.Lo and A.Craig Mackinlay, A non-random walk down Wall Street, which analyzed why patterns work and why they repeat. This could be one of the reasons that the financial public is now exposed to so many chart patterns in the financial press and on television.

Long before Lo and Mackinlay’s book was published, there were many great technical analysts to whom today we owe a debt of gratitude. What this book teaches is a simple, pragmatic approach to pattern recognition. It’s designed to be hands-on and to appeal to new students of technical analysis as well as seasoned traders.

The motto that technical analysts trade by is “Trade what you see, not what you believe”. A true technician is interested only in price bars and the summation of these price bars – the only truth in trading. Traders must learn to believe in what the market is telling them based on price. This is best accomplished by studying price behavior through pattern recognition.

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Overview of the Book

This book was written to give the reader a comprehensive view of the specific patterns presented. A variety of stocks are used and markets in the chart examples throughout the book to illustrate that these particular patterns do form in all markets and in all timeframes. Presented patterns are derived from some of the classic technical analysis patterns as well as the geometry and Fibonacci-based patterns. Here is an overview of each chapter;

Chapter 1 Opening thoughts

The reader is given some of the writer’s observations on what is needed to successfully use the information in this book. Insight is offered after dealing with hundreds of traders on what can make a successful trader and also what leads to failure.

Chapter 2 Geometry of the markets and Fibonnacci Ratios

This chapter covers the simple geometry of the markets and how the x-axis and y-axis provide just another way of illustrating triangles. It also covers the history of Fibonacci ratios and presents the ones applied in today’s technical trading.

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Chapter 3 Harmonic Numbers and how to use them

This chapter shows that all financial markets have what we refer to as harmonic and repetitive swings that are inherent in each particular market. This chapter begins to outline the basic structure of each pattern.

Chapter 4 The AB=CD pattern

The AB=CD pattern is one of the simplest to identify in any market, on any time frame, and is the basis of several other patterns presented.

Chapter 5 The Gartley “222” Patterns

Derived from Gartley’s work in the 1930’s, this pattern is a classic retracement pattern.

Chapter 6 The Butterfly Pattern

The butterfly pattern is seen at extreme turning points in tops and bottoms, it is ideal for options trades and allows low-risk entries.

Chapter 7 Three drives Pattern

This pattern can signal either a major turning point or a more complex correction in a trend. It is very easy to see on a price chart when it forms.

CHapter 8 Retracemets and Multiple Time Frames

This chapter covers simple retracement patterns with Fibonacci ratios that we use to enter in the direction of a trend. It also looks at how to combine multiple time frames.

Chapter 9 Classical Technical Analysis Patterns

Patterns such as Head and Sholders, double tops and bottoms, broadening tops and bottoms are discussed using Fibonacci Ratios.

Chapter 10 Learning To recognize Trend Days

This chapter could pay for the book many times over. It teaches traders how to identify trending conditions and offers techniques for entering in the direction of the trend. It also shows how to use Fibonacci ratios as support and resistance in trends. It emphasizes the importance of staying out of counter-trend trades when a strong trend is in progress.

Chapter 11 Trade management

The secret to trade management is in understanding that risk is the most important element in trading. This chapter looks at position sizes and methods for determining total risk. It also covers which warning signs to use and the confirmation signals for trade entry or for passing on a trade altogether.

Chapter 12 Using options with the Fibonacci Ratios and Patterns

Options are available on nearly every liquid trading vehicle. Pattern recognition, because it is a leading indicator, is applicable to options. This chapter presents some basic option strategies that minimize risk and allow for substantial profits.

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Chapter 13 Building a Trading Plan

Once readers have studied the patterns, they can move on to a trading plan. This chapter gives a solid foundation to build a plan that can be expanded upon as the trader gains experience. Over half a century of trading experience was used to describe the formulation of a trading plan.

Chapter 14 Daily Routines

Routines and rituals are a necessary part of the trading profession. The difference between successful traders and unsuccessful traders is in the thought process and the preparation. The successful trader does the same things every day to prepare for trading. This chapter gives suggestions for daily routines.

We really hope you will find some value in this book and we would appreciate if you leave us a comment.

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