Profiting with Chart Patterns book

Rule of Eighths
This section covers the Eighths tool and how you use it. You will note right away, if 
you are a fan of the Fibonacci Retracement technique, that Fibonacci numbers (62%, 
50%, 38%) are eighths—5/8, 4/8, and 3/8. That is partly why this works. Eight is a 
number used by Gann and others to divide charts into tradeable segments. It just 
works.
To use the rule of eighths, you are going to follow the lines of the Eighths tool up. The 
rule is that if you are Long, you wait until you have a close above one of the lines, and 
then you move your stop up to the prior lower line. For Shorts, you do the opposite.
Figure 1-6.
Rule of Eights—Price Must Close Above An Eighths Line for Longs
You can see that each of the red circles represent a closing point above the given line, 
and I just move my stop up to the next lower line. The stop is always two lines below 
a close. You keep moving it up. Now, look at the zone between 5/8 and 4/8 in about 
the right third of this illustration. You will often get these retracements where the 
chart will pull back. If you do not have the Eighths tool, you will probably get stopped 
out because you are using a trailing stop or you just plain get scared that you are going 
to give back your profits. 

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Chapter 1 Tools of the Trade
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 Nirvana Systems Inc.
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Profiting with Chart Patterns
The Eighths tool keeps you in the trade a little bit longer with a mechanical method 
so that you can profit from the ultimate culmination of the move.
In the example on the right, you would have stayed in the trade because your stop 
would have been left at the 4/8 line. Of course, then the chart takes off and goes 
through 5/8, 6/8, 7/8 and eventually exits. Actually, you would not have exited at that 
last point because we did not close above the last Eighths line. 
Now, you may be wondering what happens if you keep going up past that top line. 
You will put an identical Eighths tool on top of where you were. In OmniTrader, you 
can actually just move the tool up to the next level. The Eighths tool gives you a 
rational method for the stop placement. As the chart moves up, you can just move it 
around and use it wherever you want on the chart.

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©
 Nirvana Systems Inc.
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Profiting with Chart Patterns
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