Reprinted from Technical Analysis of STOCKS & COMMODITIES magazine. © 2006 Technical Analysis Inc., (800) 832-4642, http://www.traders.

com

FOREX FOCUS

Access to foreign exchange trading has opened up exciting trading options for the
retail trader. You can now trade alongside corporations and institutions in a highly
liquid market that is global, traded around the clock, and highly leveraged. Before
jumping into this market, however, we must understand the factors that affect the
forex market. With that in mind, STOCKS & COMMODITIES has introduced Forex
Focus to better prepare the retail trader to participate in the currency market.

Profiting From The Gartley

By identifying advanced patterns in markets about
to reverse, you can get a better idea when and Bullish Gartley Bearish Gartley
where the next five-wave trend could emerge. A
.382 – .786 Ret X
C .618 – .786 Ret
D
distinctive and recognizable pattern .382 – .618 Ret

A
1.272 –
occurs in the early stages of an emerg- 2.618 Ext
ing trend. Being aware of such a pat- B
AB = CD
tern can help you position yourself for AB = CD
the pending move. This article will detail the B 1.272 –
2.618 Ext
characteristics of that pattern, the symmetrical .382 – .618 Ret
D C
price legs contained within it, what the price .618 – .786 Ret .382 – .786 Ret
implications may be, and how a trader can iden-
tify and profit from this powerful pattern, re- X A

eSIGNAL
ferred to as the Gartley pattern. We will also
delve into Elliott wave theory to further substan-
FIGURE 1: BULLISH AND BEARISH GARTLEY. Following the four legs and being aware of the
tiate the symmetrical price swings that accom- corresponding Fibonacci ratios gives you an idea of where the trends correct.
pany Gartley patterns and their relative location
to the market trend.

THE GARTLEY PATTERN FOLLOWING THE GARTLEY

H.M. Gartley first introduced the pattern in 1937, but it
wasn’t until the late 1980s, when trader Larry Pesavento
assigned expected ratios to the four legs of the pattern, that its
use became more widespread.
Essentially, the Gartley pattern uncovers the market’s
tendencies to take advantage of the trend-following crowd.
Unknown to the trend-followers, Gartleys frequently appear
at critical reversal levels. They begin to take shape in the
consolidation zones following an extended trend and will
often bait latecoming trend-followers into the market, to their
dismay.
The key to this pattern, which will also help us pinpoint our
relative location within the current trend, is the symmetry of
neighboring price swings. The symmetry of price swings has
been observed and traded in the markets since the earliest
days of technical analysis.
by Todd Gordon
First, let’s explore the four legs and corresponding Fibonacci
ratios of the Gartley pattern. Examine the bullish Gartley in
Figure 1 on the left-hand side to understand how they unfold.
As you go along, note the required Fibonacci ratios for each
leg that make this pattern complete. After an extended
downtrend, price explodes higher in leg X–A, labeled as
short-covering in the longer-term downtrend by the trend-
following crowd. To align themselves with the trend, they
begin reshorting the market as leg A–B unfolds. Low-point B
sends the market slightly higher in minor retracement leg B–
C, which (in the minds of the bears) is a golden opportunity
to pick up some cash before the market breaks to new lows.
As soon as the market has pulled all of the latecoming
shorts into their positions, the real buyers who originally
reversed the market at point X jump back into the pit to buy
at point D. The saturation point of sellers at leg C–D is often
the same distance as leg A–B, which creates the symmetrical
support level for the bullish Gartley.
The buying sends the late shorts running for cover, as well
 Reprinted from Technical Analysis of STOCKS & COMMODITIES magazine. © 2006 Technical Analysis Inc., (800) 832-4642, http://www.traders.com

FOREX FOCUS
as the fresh longs into the market.
These longs have been waiting pa- (GBP AO-FX British Pound Sterling Composite, 240) Dynamic, 0:00-24:00
tiently on the sidelines for a solid 3
GBP/USD - 240 Min 3 5 1.9200
entry level. The combination of short- v 5
b
3 1.9100
covering and fresh long interest cre- B
4 1 1.9000
ates long powerful trends that can b
iii a
often reverse a daily or weekly trend 5 1.8900
c a Figure 4 1.8874
over the course of just a few days. 3 iv c
A 2 1.8800
C 1.8700
GARTLEY AND ELLIOTT 1
4 4
Now, it just so happens that at the i 1.8600
B b
same time H.M. Gartley was intro- 1
b 2 1.8500
bx
ducing his pattern to the charting
b a 1.8400
world, Ralph Nelson Elliott began a 1 c
a a ii
labeling stock market trends in waves c
c Figure 3 1.8300
of threes and fives. Modern-day char- A
2 1.8200
tist Robert Prechter, interpreting c
C 1.8100
Elliott’s work, stated that there are 2 1.80824
6/18 6/25 7/02 7/09 7/19 7/23 7/30 8/06 8/13 8/20
generally two situations where price
legs can have a symmetrical relation- FIGURE 2: GARTLEY SETTING WAVE 3 INTO ACTION. On this 240-minute chart of the GBP/USD, you can see
ship: trend phases and corrective two occurrences of the Gartley setting wave 3 into action.
phases. The basis for Elliott’s work is
that impulse, or trending, markets move in waves of 5, while 0.786. Once you identify this zone of support, a partial
corrective market phases often show waves of 3. Symmetry position can be initiated with stops below the lows of point X.
often occurs in the first- and fifth-wave positions of trend, and The remainder of your position can be initiated once the
the A and C waves position of an A-B-C correction. You resistant lows at point B are cleared, and your stop for your
should see the similarity of the Gartley pattern’s three-wave entire position can then be moved to just below point D. The
push lower preceded by a strong push up, and Elliott’s three- initial profit is the 0.618 retracement of leg A–D and the
wave A-B-C corrective move lower. ultimate target is the distance of the previous wave 1 pro-
Further, in A.J. Frost and Prechter’s classic Elliott Wave jected up from the low point D, which becomes the minimum
Principle, the guideline of alternation suggests: “If wave two target of wave 3.
of an impulse is a sharp correction, expect wave four to be a Let’s look at the two highlighted examples of a Gartley
sideways correction, and vice versa.” It goes on to say, setting wave 3 into action on the same 240-minute British
“[Sharp corrections] are almost always zigzags (single, double, pound/US dollar (GBP/USD) chart (Figure 2).
or triple) … and sideways corrections include flats, triangles, Even more powerful than a regular wave 3 is a third wave
and double and triple corrections.” contained within wave 3. For our first example, let’s take a
Further, “A triangle always occurs in a position prior to the look at a third of 3 that was started by a bullish Gartley. Note
final actionary wave in the pattern of one larger degree, that this chart corresponds to Figure 3.
is, as wave four in an impulse, or wave B in A-B-C …” This The 16-point buy zone was created from the 0.618 retracement
notes that triangles, which can in no way be confused with of X–A at 1.8368, the 1.0 projection of A-B-C-D at 1.8381, and
Gartley patterns, or comparing to Elliott’s zigzags, occur most the 1.618 extension of B–C at 1.8384 on this 240-minute chart.
often in the fourth wave of a five-wave impulse move, as well Price tiptoed across the top of the buy zone before the wave 3
as the B wave of an A-B-C correction. The B wave on Elliott’s of 3 all kicked into gear. Price climbed nearly 800 points in one
A-B-C corresponds to the B-C leg of the Gartley example in week after 35 points of initial risk.
Figure 1. It would be very difficult for a five-pointed triangle The second example (Figure 4) is a trade that was recently
to occur in the B leg of a correction, so we can now default to closed out. Wave 3 within the larger fifth wave appears to have
a zigzag, and potential Gartley, in corrective wave 2. Follow- just gotten under way. A tight 15-point buy zone triggered us
ing wave 2 is wave 3, and according to wave theory, wave 3 is long sterling at 1.8865 before price found resistance 134 points
the strongest and powerful market environment. higher at wave 1 highs of 1.8999.
The jury is out on this wave 3 because we failed at the highs,
FINDING GARTLEY but it doesn’t matter if our wave count is correct. We identified
Let’s explore the specifics of how to spot a Gartley, and what symmetry between legs A–B and C–D after an extended
to expect in the way of trade parameters. A Gartley pattern downtrend, which offered a powerful long entry with a small 35-
should become evident when leg C–D of the bullish Gartley point stop-loss. Our potential reward was almost four times
approaches the projected absolute distance of leg A–B in the greater than our original risk at wave 1 high resistance, so the
vicinity of leg X–A’s required retracement levels of 0.618 or trade was certainly worth the risk.
 Reprinted from Technical Analysis of STOCKS & COMMODITIES magazine. © 2006 Technical Analysis Inc., (800) 832-4642, http://www.traders.com

FOREX FOCUS

Identifying price legs can (GBP AO-FX British Pound Sterling Composite, 240) Dynamic, 0:00-24:00

help you uncover a pattern GBP/USD - 240 Min 1.8800

1.8759
1.8750
and keep you out of
1.8700
trend-following traps. 1.8650
A i
0.000 (1.8601) 1.8600
b C 0.0 (1.8537) 0.000 (1.8537) 1.8550
COUNTING WAVES
The identification of symmetrical price Symmetry Wave 3... and iii about to get started 1.8500
legs can not only help you uncover a 1.0000 (1.8443) 1.8450
a 1.618 (1.8384908)
classic reversal pattern that has been in B 1.8400
1.000 (1.8380)
0.618 (1.8368632)
existence for more than 70 years, but it 1 c ii 1.8350
D
can also keep you out of the trend- 1.8300
D = Buy point
following trap that so many traders fall
X 1.8250
into. For those counting waves out there, 1.000 (1.8225)
1.82201
look closely for symmetrical relation- 2 1.8200
ships and you’ll find that labeling the 2 1.8150
waves will be much easier. 1.8100
7/16 7/23 7/30 8/02 04:00

Todd Gordon is a currency strategist at FIGURE 3: THIRD WAVE WITHIN WAVE 3. Although prices paused at the buy zone, once the third wave kicked
FOREX.com, a division of GAIN Capital into gear, prices climbed about 800 points in one week.
Group. He produces “Strategy of the
Day,” a technical report that identifies
(GBP AO-FX British Pound Sterling Composite, 120) Dynamic, 0:00-24:00
price trends and trading opportunities
for the major currencies and crosses. GBP/USD - 120 Min
1.9040
1.9020
SUGGESTED READING 1A
0.000 (1.8998) 1.9000
Frost, A.J., and Robert Prechter [1985].
1.8980
Elliott Wave Principle, New Classics b
C 1.8960
Library. 0.000 (1.894) (1.8949)

Gartley, H.M. [1981]. Profits In The 1.8940

Stock Market, Traders Press (reprint 1.89188
1.89188
from 1935 original). 1.8900
1.000 (1.8890)
a 1.8886
1.8880
Gordon, Todd [2005]. “Are Fibonacci
B
Levels Leading Indicators For 1.618 0.618 1.8860
1.000 (1.8842) (1.8857)
Forex?” Technical Analysis of (1.8853536)
c 1.8840
.618 retracement
STOCKS & COMMODITIES, Volume 2 1.8820
D D = Buy point
23: October. 1.8800
Pesavento, Larry [2000]. Profitable 1.618 (1.8775874) 1.8780
1.000 (1.8770)
Patterns For Stock Trading, Traders C 1.8760
Press. X
S&C 2.000 (1.8735) 1.8740
8/20 8/24 08:00

FIGURE 4: THIRD WAVE WITHIN WAVE 5. A long position was entered at 1.8865. Prices hit a resistance level
at 1.8999, which is the high of wave 1.