Gartley Patterns Trading Strategy Explained

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A Forex Strategy Using the Gartley Patterns – 1

In 1935, a book titled: Profits in the Stock Market was released to the market by master trader H.M. Gartley. In his book, Gartley proposed a method of technical analysis that used repetitive price retracements as the basis of future currency price action.

As the analysis patterns were plotted on a chart, they formed what came to be known as the Gartley pattern. Two forms of this pattern exist: the bullish and bearish variety. In this strategy demonstration, we will show how to use a bearish Gartley pattern (shown below) as a trading strategy in the forex market.

 The bearish Gartley pattern is used as a downtrend seeking trade strategy. The bearish Gartley pattern uses retracing prices as the basis for determining when an upward retracement ends and the price action of the underlying asset proceeds in the original downtrend direction. If you look at this chart below, it is very clear to see.

  

On the left side of the chart, we see that the price is heading downwards, and at a point sometime on September 6, 2011, we see the price attempt an upward retracement. After a period of indecision which actually formed the characteristic “W” pattern of the bearish Gartley, the price continued in a strong downtrend. The bearish Gartley pattern is identified by drawing lines that connect the points marked XACD. This resembles a polygonal shape when the lines are connected, starting from the point marked X, and tracing a “W” pattern from points A, B, C and then D. Point D is critical; it marks the entry point for a sell order so as to catch the full bearish continuation after the brief retracement.

Trading with the Bearish Gartley Pattern

The key in using the bearish Gartley pattern as a forex trading strategy is to follow these steps:

1)    Identifying the characteristic “W” shape.

2)    Connecting the lines correctly.

3)    Identifying the point D

4)    Selling at point D.

A key step in identification of the Gartley pattern is to trace the price from A to D. This A-D swing should correspond to the 61.8% price retracement of the price swing from X to A, occurring within the ABCD Gartley pattern. To do this, draw the Fibonacci retracement tool starting from X to A. Once the 61.8% Fibonacci level has been visualized, trace the W pattern by plotting lines that run from A to B to C and D. Point D should be at the Fibonacci 61.8% point.

Please note these points very well, as failure to plot the patterns properly will disorganize the pattern and lead to false signals, which will definitely end in failure.

Obviously, you cannot wait until the entire pattern has formed before you start to do your line traces; you will be too late in catching the signal. Rather, the correct technique will be to watch for a period of downtrend, and then as soon as the price shows a bullish retracement, take the top of the highest retracement candle as point X. If the price briefly shifts down in the direction of the original trend, trace a line from X to the bottom of that move to form the X – A line. Watch again to see if the price retraces upwards (but not up to the level of point X). At this juncture, trace another line from A to the peak of the 2nd move (point B) to form line A – B.

By the time you follow this sequentially all the way to the critical point D, you will not only have succeeded in tracing the classical “W” Gartley pattern, but you would have correctly identified point D and you would be able to make your entry as early as possible. This is a very easy forex trading strategy to master and as you can clearly see, it does not employ all the confusing indicators that are seen plastered all over the screens of some traders’ computers. The screen is clean, clear and everything is seen as it should appear without ambiguity.

Of course, there is a bullish variety for this pattern, and we shall identify how to use it as a forex trading strategy in our subsequent blog posts.

 

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