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If you are a fan of harmonic chart patterns the names Butterfly, Bat,
Cypher, and Gartley may bring a smile to your face. But, if you are
new to technical analysis, these names may not mean much to you.
That is about to change.
Christopher Irvin The Butterfly, the Bat, the Cypher and the Gartley patterns are
Director of Stock and advanced harmonic chart patterns that go well beyond the basic
Options Education
concepts of candlesticks, trendlines, and support and resistance.
If you have ever wondered what the professionals know that you
may be missing, these patterns may solve the mystery.
In this guide, youll define what the Gartley Pattern is, understand
how to spot it, and learn how to use this critical pattern in your
trading plan.
BONUS: Read to the end to see the Gartley Pattern spotter exercises!
Yours Truly,
Chris Irvin
Copyright 2015 Market Traders Institute, Inc. | 1-800-866-7431 | MarketTraders.com i
The Gartley Pattern in
Laymans Terms
One common way to manage price swings on stock charts is to identify ABCD
patterns. The pattern actually looks very similar to a lightning bolt. The ABCD
pattern is made up of three phases.
The initial phase is known as the rally. The rally is identified with an A at
the initiation and a B at the completion. This initial move is often referred
to as the AB boundary. Following the rally, the second phase is known as
the retracement. The retracement phase
allows the primary trend to take a breather
before continuing on its original course. The
retracement phase begins at the end of the
rally, which is the B and ends at the C. The C
is a point where the original trend takes back
control from the retracement phase. The
final phase of the price swing is known as the
extension. This phase takes the price from the
end of the retracement (which is the C), to the
D extension above the previous B high (in the
case of a bullish move).
One of my favorite sayings is everything is easy IF you know what you are doing, and it definitely
applies in this case.
If you are unfamiliar with Leonardo Fibonacci, it will suffice to know that
he was considered to be one of the greatest mathematicians of the middle
ages. One of his most important contributions to the Western world was
the introduction of the arabic numeral system to the Roman Empire. Another
contribution made by this scholar was the introduction of a series of numbers
that is now known as the Fibonacci Sequence.
If you were to look deeper into the study of the Fibonacci sequence, you would
learn that the Fibonacci numerical sequence is prevalent in many aspects of the
world in which we live. From the numbers of petals on a bouquet of Shasta
Daisies, to the architectural balance and symmetry found in the Parthenon,
the Fibonacci sequence and the ratios derived from the sequence, provide
powerful structure to the order of our world.
See the Fibonacci ratio taught on the live market charts and the trade
setups its alerting traders of right now in a free webinar.
As you may have already guessed, the Fibonacci numerical sequence also plays a major role in the
financial markets.
As well as having a powerful influence in science and nature, the Fibonacci sequence also has a
major impact on human psychology and, in turn, the financial markets.
The Fibonacci numerical sequence is also the foundation of a series of ratios that traders use to
derive, known as Fibonacci retracement and extension levels. These ratios are created when,
starting with the eighth number in the Fibonacci sequence, we divide one number by the numbers
prior to, and the following after that number.
Example:
The Fibonacci ratios that are used to evaluate the financial markets, and more specifically the Gartley
Pattern, have already been calculated and are at the heart of some amazing technical analysis tools.
The easy part is learning how to use those tools. The most frequently used Fibonacci ratios are as
follows:
These ratios are foundational to the understanding of the ABCD price swing.
As discussed previously, the ABCD price swing moves in three phases. The rally, the retracement,
and the extension. The rally from A to B will always have a measurement of one, regardless of the
actual price movement.
The retracement phase from B to C will always be a percentage of the initial AB rally unless the
trend is reversing. We will use the Fibonacci ratios that are less than one (e.g. .382, .618, .786, .86)
to identify the potential retracement levels. Since the extension phase will take price above the
original AB move in a Gartley Pattern, it will be measured with a ratio that is greater than one (e.g.
1.18, 1,27, 1,618, 2.618). The next part of this discussion is the most critical aspect of understanding the
development of the ABCD price swing.
Based on the correlation of the ratios as they are derived, we are able to use the retracement levels
to project the extension levels.
Example:
As stated previously, the Gartley Pattern is one of several patterns that help traders navigate the
BC retracement phase of the price swing. The example below shows where the BC retracements
are found in the trend. Based on the fact that the Gartley Pattern is a counter trend move, the price
swing is notated with lowercase letters and is referred to as a sub-abcd move.
Example:
The Gartley Pattern takes the same Fibonacci based price swing that
we use in the primary ABCD move and inverts it to measure the
retracement phase.
The sub a begins at the primary B. From the sub b, the markets been
proven to retrace back to the .618 retracement level as shown below.
The third phase of the Gartley Pattern is the sub extension that moves the sub d extension down to
a level that is approximately 1.618.
This level will typically correspond to a level that is at or near the .786 retracement of the primary
AB boundary. Once the primary C has been identified, the trader can enter into the primary trend.
In this case re-establishing the bullish move.
PRO TIP:
For a full lesson on the Fibonacci Golden Ratio and how it could predict
entry and exit points for your trades, go to Lesson 6 of The Ultimate Stock
Course. Not an MTI student? Get a sneak peek of the Fibonacci Golden
Ratio on the live market charts when you register for an upcoming webinar.
Check the schedule and grab a ticket here.
Once you know where the sub d lies on the chart, you know where the larger trends
C is located. Based on the location of the C, you can project the corresponding D
extension level as your profit target. Thats the main value of a Gartley Pattern.
The opposite also holds true. You can find a Gartley Pattern on a bearish ABCD
movement, but youll need to remember that your sub-abcd will be a bullish trend.
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