Weekly Technical Analysis Review
The Gartley Pattern – Part 5
One of the most important aspects of adhering to any particular trading strategy is to believe
that the strategy is a high probability strategy. It is very hard to believe in a trade strategy if you
don’t know how it works (I.E. Black Boxes.) With this in mind, let’s carefully consider each of the
individual legs that unfold in the Gartley Pattern to understand the Psychology behind this high
probability set up.
Referring to the first example “A” in figure 27 from H.M. Gartley’s book, Profits in the Stock Market,
Gartley first identifies a bearish A-B leg . This leg appears to be a significant trend move or impulsive
phase with minor rallies punctuating the down trend. At the completion of this A-B leg, we notice a
significant rally that is labeled as the B-C leg. This B-C rally exceeds the previous rallies in the A-B
downtrend in both price and time. This B-C price action indicates that the previous downward trend
might be complete and that the B-C leg might be indicating the beginning as a new impulsive trend
move in the opposite direction of the previous A-B move down. This B-C leg is very typical of what
happens when traders all begin to cover their short positions after a sustained bearish trend. The B-C leg
completes when the short covering is complete. With this in mind, the assumption is that the market
will not take out the low at point B as a new trend up will probably continue higher and never look back.
Based on this information, Gartley puts his protective sell stop just below point B. Though Gartley
mentions the A-B leg in his book, most educators of the Gartley Pattern omit this important aspect of
the pattern.
At the completion of the B-C move, Gartley mentions that there will be a minor decline that cancels a
third to a half of the preceding minor advance (B-C). In other words, Gartley is looking for a 33% to 50%
retracement of the B-C move up. Why does this minor decline take place? This minor decline could be
caused by traders that were anxious to get short in the previous A-B decline. These bears were waiting
for a significant pullback during this bearish trend down, however the market kept missing their sell limit
orders on the rallies. Now that the market has had a significant rally against the downtrend they start
selling at point C and push the market down. Depending on where they get filled, they will put their
stops just above point C. This selling from the “late bears” pushes the market down into what Gartley
describes as a minor decline.
for more information visit
www.gartleytrader.com
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