Larry Pesavento – Trade Preparation

by Larry Pesavento

Ask a seasoned trader like Larry Pesavento and you will hear that trading is a lot like golf. It takes certain skills which require a lot of practice. A mind set is necessary to play out the scenarios on the course. And most important, it is necessary to know when you reach the 18th green or decide to take a double bogey to reduce the damage. Everyone would like to play golf with Tiger Woods – but who among us is willing to hit the 20,000 golf balls to play at Tiger Wood’s level?

Larry Pesavento and other traders will tell you that pattern recognition trading is a probability-based system. Each pattern has its own payoff and risk parameter. Pattern recognition falls into one of the categories of technical analysis. Technical analysis has been the wicked step sister of market information – almost like a witch’s brew. But things are changing radically thanks to a boost from our friends in academia, this time it was the prestigious group from the Massachusetts Institute of Technology (MIT). Colleagues of Dr. Andrew Lo ran sophisticated statistical studies to prove once and for all that chart patterns have no use in the investment community. What they discovered was astounding to everyone, except traders like Larry Pesavento, who has been profitably trading chart patterns for years.

Dr. Lo’s group found amazing correlations in price patterns and these patterns did repeat with regularity and could be mathematically quantified. The complete article was published in Business Week. [1]

Each day a successful trader like Larry Pesavento is likely to track the 40 most active and volatile stocks! (20 NYSE and 20 NASDAQ) My favorites are JPM, AXP, INTC, MSFT, CSCO, GE, etc.

The SP 500 futures, 10 year note and t-bond/dollar/yen charts are also followed by Larry Pesavento and many other traders. Within these 40 or so charts, several patterns will be tradable set-ups for the next few days or possibly a day trading opportunity. Larry Pesavento recommends to inexperienced investors that the SP 500 is the only vehicle they should trade everyday – it provides a speculators dream – volatility, liquidity, low commission and most importantly, good execution.

At the end of each day´s trading, Larry Pesavento reviews the 40 plus charts. First he will check for the daily patterns, then scale down to the 30-min. patterns. Finally, as a trade is setting up, Larry Pesavento suggests going to the 4-minute charts for entry. The patterns on all of the charts are recognizable. Four-minute charts allow me to estimate sales volume and the bid and ask spreads. Experts like Larry Pesavento use four-minute charts because the earth rotates one degree every four minutes mak¬ing it a natural cycle.

Next step is to wait for the pattern to complete and enter the market, i.e. jump in the river, knowing with 100% certainty that you can never know how much you can make, (if anything). So always have your life raft with you (stop protection), if you want to get out of the river. For truly successful investors like Larry Pesavento, drowning is not an acceptable outcome!

1 THIS ALCHEMY MAY YIELD REAL GOLD. BUSINESS WEEK. APRIL 17, 2000, P.170.

Back To Articles of Interest