Gartley Pattern

This week I thought we would take a look at an indicator that you don’t hear about too often - the Gartley Pattern, that was developed by Harold M Gartley in 1935. Gartley was recognised as one of the pioneers of technical analysis and it was in his book ‘Profits in the Stock Market’, that Gartley first publicly described this classic chart pattern. The pattern, in its simplicity, is a four-swing analysis where the retracements have precise mathematical relationships with one another based upon Fibonacci ratios. A valid pattern will also provide trade entry and stop loss levels.

Before we begin, it is important to mention that I will be using the Gartley Pattern Hi-Lite™ tool in ProfitSource and whilst Fibonacci numbers are quite precise, we have to provide a little latitude to the Fibonacci numbers when used in this tool. What I mean here is that if you were to use the exact Fibonacci measurements it makes it hard to find a trade that meets the criteria. Conveniently, the Gartley Pattern Hi-Lite™’s Settings dialog allows users to set a percentage plus or minus of the Fibonacci level when measuring swing ranges. When using the Gartley Pattern I allow a 10% fluctuation for each swing.

Let’s go through step by step looking at NVIDIA Corporation (NVDA) listed on the NASDAQ. In Chart 1, I have applied the Gartley Pattern Hi-Lite™ and it identified a bullish pattern beginning on 8 December 2005. I then overlaid a Fibonacci projection to demonstrate how the Fibonacci ratios are used to calculate the swing ranges.

You will see the Gartley Pattern has 4 legs and 5 points starting with X. First up we measure the range X-A looking for B to retrace 61.8% of the X-A range. Here is where we have to be a little flexible with the parameters. You will see that B has actually retraced further in the example below, however it is well within my +/- 10% variation setting mentioned earlier.

Chart 1 – NVDA - Daily Bar
Gartley Pattern with Fibonacci Overlay using Range X-A

Next step we look for the B-C range to be within 61.8% and 78.6% of the A-B range. You can see in the diagram below our C has finished nicely midway between those two retracement levels.

Chart 2 – NVDA - Daily Bar
Gartley Pattern with Fibonacci Overlay using Range A-B

Now we will measure the C-D range in the chart below and ensure that it is between 127% and 161.8% of the B-C range.

Chart 3 – NVDA - Daily Bar
Gartley Pattern with Fibonacci Overlay using Range B-C

The final step in ensuring the Gartley Pattern is complete is to measure the range from A-D and ensure it is 78.6% of the X-A range. As you can see in the diagram below it has indeed finished up within my +/- 10% variance.

Chart 4 – NVDA - Daily Bar
Gartley Pattern & Fibonacci Extended Overlay using Range A-B

After measuring the ranges of each leg, it is time to look at how we can take a trade based on the Gartley Pattern. In our example, we are trading a bullish pattern.

In the majority of cases the market will tend to pull away fairly hard. One particular style is to place an entry order just above the high on the day the formation was confirmed, i.e. the day point D is confirmed. Just like any other trading system, money management rules are vitally important, and a common place to put a stop loss is just under the price where X has formed.

In Chart 5 below, you will see where the initial orders were in place and the plan is to protect your position and lock in profits along the way using a trailing stop loss. In this example, the position was exited once a previous swing bottom was broken on the chart. In this example the market moved up slightly after exiting the position, however a healthy profit was realised.

Chart 5 – NVDA - Daily Bar
Gartley Pattern with Entry, Stop & Exit Levels illustrated

So there you have it. The Gartley Pattern explained. It is important to note that this pattern works just as well in a bearish or downward moving market. It is simply the inverse of the bullish pattern! Note that ProfitSource’s Hi-Lite™ can be set to detect either Bullish or Bearish (or both) Gartley Patterns and their display can be colour coded.

So as I always say; do your homework and back test your market. You will not be inundated with too many opportunities but when they do present themselves, you will be ready to take the opportunity.

Until next time…good trading!

Neil Gladwin