Goals in writing Profitable Patterns for Stock Tradingis to expose you to the subject of ancient geometry. Fibonacci numbers are an integral part of the numbers that make up the subject of ancient geometry.
It will be of interest to some of you that many of these sacred ratios have their origin in the cosmos. I will not spend a significant amount of time relating my experiences in astro-harmonics research. The subject is too vast for me to consider here. More importantly, it is not necessary for profitable trading.
On the eastern seaboard of Italy, about an hour’s drive from Florence, lies the town of Pisa. It was here that Fibonacci was born. He was a thirteenth century mathematician who primarily worked for the royal families of Italy. The work for which he is most famous is the Libre Abad (Book of Calculations).
His award for this work was the present day equivalent of the Nobel Peace Prize. Fibonacci was largely responsible for the use of arithmetic numbers versus Roman numerals. Before Fibonacci, the number 30 was written XXX. After his Libre Abaci, it was written 30.
Legend describes his journey to Egypt as one of great discoveries. He went to Egypt to study the mathematical relationships contained in the pyramids. Those of you who really want to study the math contained in the pyramids should read Peter Thompkin’s book The Secret of the Great Pyramids.
It is not my intention to explore all of the geometry in the pyramids, only the Fibonacci Summation series. Fibonacci found this series when he studied the Great Pyramid at Giza. The series is the sum of the two previous numbers 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, SS, 89, 144 to infinity. Dividing one number by the next after the eighth sequence yields 21+ 34 = .618. This just happens to be the relationship of the height of the Great Pyramid to its base.
What Fibonacci did for me was to open my eyes! These are the relationships that are constantly ln the market. I first staned using Fibonacci numbers in 1974 at the urging of John Hill, Sr. of the Commodity Research Institute of Hendersonvtlle North Carolina. I read all of Elliott’s papers and his correspondence with Charles Collins. Years later, Frost and Prechter wrote the book Elli0te Wave Theory, which explained the wave structure and the use of Fibonacci numbers.
It concerned me that not all the waves were .382, .500, .618, 1.618. It was not until 1988 that I began using the square root numbers of the Fibonacci series √0.618 = 0.786 and √1.618 = 1.27.
Armed with these two square root relationships, the wave structure can be more easily explained. Bryce Gilmore’s first book, Geometry of Markets, brought the ratios to the public’s attention. The Elliote Wave Netvsletter has never used these ratios as far as I know. I used to fax information to them on the square root numbers, but they never responded.
Robert Miner of the Dynamic Traders Group In Tucson, Arizona, uses all of the harmonic ratios. It Is my opinion that his newsletter and technical work is the best tn our business. If you don’t have the time to do the work. Robert Miner. one of the best technicians on this planet, will do it for you at a small monthly cost. This reminds me of one of my favorite quotes from my friend and fellow trader, Jim Twentyman “Defy Human Nature- Do the work yourself”.
What Profitable Patterns for Stock Trading is going to do is illustrate how to use the Fibonacci ratios, their square roots, and their reciprocals to determine the structure of wave vibrations. Of all the books I have In my library, none of the Elliott Wave material covers this Important concept. I am going to keep it as simple as possible.
If you can glean only one or two concepts or patterns, then this material will not have been written in vain . I can promise yon this much. If yon study the ratios and patterns shown here, you will realize that markets have a definite pattern hidden within their chaos. Sorting through this chaos can enlighten you.
The goal here is not to try to predict the future or even to know what is going to happen next. No one knows that~ (Well, there is One who knows. but He doesn’t trade.) It is not necessary to know what is going to happen in 5 days.
What is necessary is to determine how much risk and profit potential is available in the next 5 days. Probability is the name of the game. Risk control is of tantamount importance. Winners think in terms of how much they can lose. Losers focus on how much they can win. “Take care of your losses and the profits will take cate of themselves.” – A.B.H.
By the time I have finished, I hope you will see the correlation of geometric patterns to the ratios and proportions illustratcd. It Is going to be as simple as I can make it for you. Should you want more elaborate reading material lt will be listed In the bibliography.
- Harmonic and Vibratory Numbers
- Geometrics of a Price Chart
- The Primary Patterns
- Classical Chart Patterns Using Ratio and Proportion
- Bonus Pattern: The Butterfly
- The Opening Price
- Entry Techniques
- It’s Different This Time
- The Non Random Nature of Chaos Theory
- Description of the Gartley “222” Pattern
- Some Practical Tips on Cycles