Ensign Software - Studies: Pesavento Patterns

The Pesavento Patterns study automatically determines the swing lines, and connects peaks with a line and labels the line with the retracement percentage. The study can also do the Fibonacci levels as a forecast for key retracement levels for the current trend.

The following property settings were used to create the Pesavento Patterns shown in the example chart.

Adjust the Min Size and Min Bars parameters until your chart shows just the main swings you want marked. A smaller value for the Minimum Size of the swing will allow minor swings to be marked and may clutter the chart with too many swings being shown. For the ES symbol the parameters of 5.00 for Min Size and 3 for Min Bars yield good results. Or, check the Auto Min. Size option to have the program determine an appropriate value to use based on the chart's scale range.

Check the Forecast 1 and Forecast 2 check boxes if you want to have the Fibonacci levels for recent swings automatically shown on the chart. When Forecast 1 is checked, the Fibonacci levels are calculated for the prior swing and give price objectives for the current swing in progress. The example shows the current swing is nearing the 1.618 percent level where this measurement is 162% of the size of the prior swing.

When Forecast 2 is checked, two additional Fibonacci levels may be shown using the ranges of prior swings. The 100% level is a good indicator of the top or bottom of the prior swing that is being used for the calculation.

The Pesavento Patterns tool is totally automatic. The swings, triangles and their percentage labels, and the Fibonacci levels are drawn automatically and update in real time as bars are added to the chart and create new swings.

If you want to exclude from the images a particular Fibonacci level and swing percentage, simply change the Draw Line style for a level to be the first entry in the Style drop down list. The first entry is a blank.

Markers can be drawn above swing highs and below swing lows. Select the markers to show in these positions on the row for the Up Trend and the Down Trend. The location of the marker can be moved farther away from the swing points by checking the 2nd Location option. The markers can be moved slightly leftward by checking the Left Location. These options permit other studies to share the swing points for showing their markers simulateously.

The LBL marker for the Up Trend and the Down Trend will label the swings with a dot and these letters:

One of the techniques used by Larry Pesavento is labeling a chart with its Fibonacci relationships. This daily chart of Intel illustrates the swing relationships that Larry would identify on the chart. The 5 sacred ratios he is looking for are 0.618, 0.786, 1.00, 1.272, and 1.618.

"Intel is one of the most widely held and liquid stocks in the world and trades over 20 million share per day. Notice the 17 price swings on the daily chart covering a four month period. Every swing is related to every other swing by the Fibonacci summation series of numbers." -Larry Pesavento

Leonardo de Pisa de Fibonacci (born around 1170 in Pisa, Italy) was a mathematician who studied the Great Pyramid at Giza and discovered a number series which we now call Fibonacci numbers. The number in the series is the sum of the two previous numbers, and includes the set 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and 144. Dividing one number by the next after the 8th sequence yields 0.618, which happens to be the relationship of the height of the Great Pyramid to its base. Another relationship is that the next number in the sequence is approximately 1.618 times the preceding number. These relationships are also a Fibonacci number series: 0.382, 0.618, 1.000, 1.618, and 2.618, etc.

Fibonacci numbers are valuable because these numbers and relationships are found everywhere in nature and in the markets. Frequently the magnitude of a wave will have a Fibonacci relationship to the magnitude of another wave structure. A wave's magnitude is determined by measuring the price range from a significant top to a significant bottom. The magnitude of a Trend wave might be 1.618 times the magnitude of the previous Retracement wave. A corrective Retracement wave might be 0.618 times the magnitude of the previous Trend.

Larry Pesavento shows in his book 'Profitable Patterns for Stock Trading' that two additional ratios are frequently found in the markets. These ratios are the square roots of the two primary Fibonacci ratios. The square root of 0.618 = 0.786, and the square root of 1.618 = 1.272. Larry uses these two additional relationships, 0.786 and 1.272, because not all waves are a ratio of 0.618 and 1.618, or the other common ratios of 0.382, 0.500, and 2.618.

Table of Relationships
Key Ratio	Square	Square Root	Reciprocal
0.382		0.618	2.618
0.618	0.382	0.786	1.618
0.786	0.618		1.272
1.000	1.000	1.000	1.000
1.272	1.618	1.128	0.786
1.618	2.618	1.272	0.618
2.618		1.618	0.382

0.500	0.250	0.707	2.000
0.707	0.500	0.841	1.414
0.841	0.707
1.414	2.000		0.707
2.000	4.000	1.414	0.500

A powerful feature in Ensign Windows automatically finds major swings and labels the swing relationships with their retracement percentages. The patterns are called Pesavento Patterns in honor of Larry Pesavento who has studied these relationships for 4 decades and published a book on the subject: 'Fibonacci Ratios with Pattern Recognition'.

In this chart showing 2 minute bars for the ES e-mini contract, note the large number of relationships whose ratios appear in the Table of Relationships. The blue labels are Key Ratios followed by Larry Pesavento. The swing ratio was within 4% of the blue label's value. The 3 black labels are actual swing ratios that were not within 4% of the key ratios. 80% of the swing relationships marked on this chart were key ratios. The trading tip being taught is that markets turn at these key ratios. Note that many of the turns had multiple relationships at the key ratios. For example, the sharp drop to 903.00 was 1.414 times the size of the prior swing, and also a 1.128 extension measured from a prior swing low as shown. The Pesavento Patterns tool in Ensign Windows finds and labels all of these relationships.

Check the % Label box to show the retracement percentages on the diagonal lines. Check the Actual % option to show actual values instead of the nice Key Ratios when the percentages are near Key Ratios. The color used for the Key Ratios is the Down Trend color. The color used for the other percentages is the chart's font color.

Larry Pesavento's web site is www.tradingtutor.com where he gives trade recommendations and commentary on the markets. The following charts and commentary from Nov 13th, 2002, are typical of how Larry uses the Pesavento Patterns to analyze the markets.

Here is another example of Larry's use of Key Ratios to establish his game plan prior to market open. This example is using 5-minute bars on the ES e-mini contract and shows a portion of one of Larry's charts. The 3 heavy black lines were manually drawn and labeled by Larry.