In 1935 H.M. Gartley published a book entitled “Profits in the Stock Market”. Since then the pattern has been refined with additional parameters added, specifically Fibonacci retracement ratios. Gartley patterns are visible and measurable patterns that occur on technical analysis charts of various markets. These patterns apply to the Stock Market, the Commodities Market, and the Currency Market.
The Fibonacci based patterns can create bullish and bearish trading signals. The patterns must meet specific conditions to be considered a verified pattern. Key Fibonacci ratios are used to observe patterns that resemble and are similar to deformed “W” or “M” patterns within the chart. These patterns can be viewed on a few websites that can be found with a simple search. Other patterns have been developed that are similar to the Gartley pattern. They have been given names such as The Crab, The Bat, and The Butterfly.
The patterns consist of four distinct price points or pivot points on a price chart. They are considered classic retracement patterns and occur in all time frames. This makes these patterns usable for day traders, swing traders, and longer term investors. Gartley originally used ratios of one third and two thirds. It was not until further development of the pattern that the Fibonacci ratios were applied.
Gartley wrote that the pattern was successful approximately 70% of the time. Recent studies have reinforced this estimate. The pattern has been tested over the past 70 years making it a very reliable trading signal.
Larry Pesavento, a veteran trader of over 40 years, has done extensive research on this pattern. He published a book in 997 called “Fibonacci Patterns with Pattern Recognition”.
When the pattern is properly identified, the trader can enter a high probability trade. The main advantage of this trade is the ability to set tight stop loss orders in case of pattern failure. As with any trading system, this pattern is best used in conjunction with other reinforcing indicators. Support, resistance, and pivot points would be an example of this.
This style of trading is sometimes referred to as Harmonic Trading. No trading systems work all of the time. A 70% win rate with a controlled risk makes this pattern based system an excellent trading system for many types of traders.