Trade management of open orders or taking a last small position of the week is of course tasks which we can still do. But usually speaking, if you do any trading at all at the end of the trading week, when you would want to keep the trading light… especially if you are up in profit. Never give back what you earned in the first four days. The focus of this article is on Gartley Patterns and trading the patterns.
INTRODUCTION TO GARTLEY PATTERN
The Gartley pattern was first introduced by H.M. Gartley in his book “Profits in the Stock Market”, which was published in 1935. The pattern was named “The Gartley,” but in fact, many variations of the Gartley pattern have become common ever since the release of that book. Gartley patterns are chart patterns used in technical analysis and are known for their relationship using Fibonacci numbers and ratios. The Gartley pattern is a reversal pattern with clear rules and provides an excellent reward to risk.
“Classical” chart patterns are considered to be: flag, pennant, wedge pattern, triangle, range, rectangle, flat, head and shoulders, inverted head and shoulders, double top and bottom, trip top and bottom, gap, cup and handle, broadening top. Some of these patterns are reversal signals, others are continuation patterns. Most of the classical charts patterns use Fibonacci levels as well. A flag will typically find support levels at the various Fibonacci points (such as 23.6% and 38.2%) of various swing highs and lows but they are not so prominently used as in Gartley. Read more here.
The Gartley is using 5 letters to distinguish the 5 separate moves/waves/impulses. Here is an introduction:
The letter X is the start of the trend;
The letter A is the end of the trend;
The letter B is the first pullback of the trend;
The letter C is the pullback of the pullback (not breaking point A);
The letter D is the target of the letter C.
The various Fibonacci relationships between XA and AB have a value when calculating targets for B, C and D. Depending on the type of Fibonacci level the pattern is commonly named differently. The pattern is valid for both a down and an uptrend. In general, though, there is an also a close link to the Elliott Wave Theory. The AB, BC, and CD legs are also known in EW as an ABC correction of XA and a continuation of the XA direction can be expected at point D.
We will now go into the specific Gartley patterns which are usually called Bat, Crab, Gartley, Butterfly, etc.
This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 61.8% Fibonacci retracement level. The target of point D is, in fact, using the same XA swing high swing low and is aiming for the 78.6% Fibonacci retracement level of XA. The CD leg is therefore often equal to the AB leg.
Other modern variations that have become popular are listed here below.
This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 38.2% or 50% Fibonacci retracement levels (but not more than 61.8%). The target of point D is, in fact, using the same XA swing high swing low and is aiming for the 88.6% Fibonacci retracement level of XA. The CD leg is, therefore, longer than the AB leg.
ALTERNATE BAT PATTERN
This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 38.2% Fibonacci retracement level. The target of point D is beyond the origin of XA and is 1.13 of XA.
This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 78.6% Fibonacci retracement level. The target of point D is beyond the origin of XA and is 1.27 – 1.618 of XA.
This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 38.2%-61.8% Fibonacci retracement levels. The target of point D is beyond the origin of XA and is 1.618 of XA.
This pattern is valid when price respects and bounces off of the XA swing high swing low to form point B at the 88.6% Fibonacci retracement level. The target of point D is beyond the origin of XA and is 1.618 of XA.
AB=CD, 5-0, DRIVERS
Here are the remainder of the popularized patterns. An example of 5-0:
An example of AB=CD:
An example of drivers:
SIMPLIFY: SPLIT OF LEVELS
When analyzing the patterns, it becomes obvious that different patterns play out depending on where letter B stops in relationship with XA. This is my attempt to make the patterns easier to interpret (drivers and 5-0 excluded).
PART I: Let us break it down into Fibonacci levels.
1) 38.2% – Bat / Alternate Bat / Crab
2) 50% – Bat / Crab
3) 61.8% – (Bat) / Crab / Gartley / ab=cd
4) 78.6% – Butterfly
5) 88.6% – Deep Crab
That means that if the currency bounces up at the 38.2% for instance, then there could 3 Gartley patterns in play.
PART II: Let us continue with this breakdown and analyze the likely Fibs where letter C can stop when Fibbing AB and the answer is simple: C can stop at any Fib of AB, which is 38.2%, 50%, 61.8%, 78.6%, 88.6%.
PART III: The last but not least, the target D.
1) Bat – 88.6% Fib of XA OR 2.618 of BC
2) Alternate Bat – 113% Fib of XA (below X) OR 2.0 of BC
3) Crab – 161.8% Fib (below X) OR 3.14 of BC
4) Gartley – 78.6% Fib of XA OR 1.27 of BC
5) Butterfly – 161.8% Fib (below X) OR 1.618 of BC
6) Deep Crab – 161.8% Fib (below X) OR 2.618 of BC
TRADING THE PATTERNS
Trading the patterns forex is as always a matter of entry methodology. We discussed entry techniques in a previous article: please read the entire article here. In general, it boils down to either entering upon a direct level, a confirmation or a momentum break.
For the Gartley patterns mentioned here, a direct level entry means a pending entry order at a specific Fibonacci level. A confirmation would be to wait for a candlestick reversal pattern at the Fib. And the break out would occur when price bounces off the Fib and breaks a trend line in the anticipated direction.
Please note that trading letter B is a with the trend setup but with a limited target (target is letter C). Trading letter C is a reversal trade but with good reward to risk (target is letter D). Trading letter D could be seen as with the trend trade (very close to support and resistance in any case) and good reward to risk as well (target can be the top in up trend example, bottom in down trend example OR any Fib from C to D).
What is your opinion on Gartley Pattern? Do like trading the patterns? Do you want to use them? Do you like it? Do you already use Fibs? Has this helped your trade management? We gave a practical example of Gartley this week in the GBPAUD reversal article. Here is part 1 and 2 (part 2 has the pattern).
Update 1: the bat screenshot has been changed on 13th of October.
Update 2: our reader Russell had good advice: read Scott M. Carney’s book Harmonic Trading books for an in depth understanding of Gartley pattern trading.
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