Once upon
a time, there was this insanely smart trader dude named Harold McKinley
Gartley.
He had a
stock market advisory service in the mid-1930s with a huge following. This
service was one of the first to apply scientific and statistical methods to
analyze the stock market behavior.
According
to Gartley, he was finally able to solve two of the biggest problems of
traders: what and when to buy.
Soon
enough, traders realized that these patterns could also be applied to other
markets. Since then, various books, trading software, and other patterns
(discussed below) have been made based on the Gartleys.
Gartley a.k.a. "222" Pattern
The Gartley "222" pattern is named for the page number
it is found on in H.M. Gartleys book, Profits
in the Stock Market. Gartleys are patterns that include the basic ABCD pattern we've
already talked about, but are preceded by a significant high or low.
Now,
these patterns normally form when a correction of the overall trend is taking
place and look like 'M' (or 'W' for bearish patterns). These patterns are used
to help traders find good entry points to jump in on the overall trend.
A Gartley forms when the price action has been going on a recent uptrend (or downtrend) but has started to show signs of a correction.
What makes the Gartley such a nice setup when it forms is the
reversal points are a Fibonacci retracement and Fibonacci extension level. This gives a stronger indication that the pair may actually
reverse.
This
pattern can be hard to spot and once you do, it can get confusing when you pop
up all those Fibonacci tools. The key to avoiding all the confusion is to take
things one step at a time.
In any case, the pattern contains a bullish or bearish ABCD pattern, but is
preceded by a point (X) that is beyond point D. The "perfect" Gartley
pattern has the following characteristics:
1. Move AB
should be the .618 retracement of move XA.
2. Move BC
should be either .382 or .886 retracement of move AB.
3. If the
retracement of move BC is .382 of move AB, then CD should be 1.272 of move BC.
Consquently, if move BC is .886 of move AB, then CD should extend 1.618 of move
BC.
4. Move CD
should be .786 retracement of move XA
The Animals
As time
went by, the popularity of the Gartley pattern grew and people eventually came
up with their own variations.
For some
odd reason, the discoverers of these variations decided to name them after
animals (Maybe they were part of PETA?).Without further ado, here comes the
animal pack...
The Crab
In 2000, Scott Carney, a firm believer in harmonic price patterns, discovered the "Crab".
According
to him, this is the most accurate among all the harmonic patterns because of
how extreme the Potential Reversal Zone (sometimes called "price better
reverse or imma gonna lose my shirt" point) from move XA.
This
pattern has a high reward-to-risk ratio because you can put a very tight stop
loss. The "perfect" crab pattern must have the following aspects:
1. Move AB
should be the .382 or .618 retracement of move XA.
2. Move BC
can be either .382 or .886 retracement of move AB.
3. If the
retracement of move BC is .382 of move AB, then CD should be 2.24 of move BC.
Consquently, if move BC is .886 of move AB, then CD should be 3.618 extension
of move BC.
4. CD should
be 1.618 extension of move XA.
The Bat
Come 2001, Scott Carney founded another Harmonic Price Pattern called the "Bat." The Bat is defined by the .886 retracement of move XA as Potential Reversal Zone. The Bat pattern has the following qualities:
1. Move AB
should be the .382 or .500 retracement of move XA.
2. Move BC
can be either .382 or .886 retracement of move AB.
3. If the
retracement of move BC is .382 of move AB, then CD should be 1.618 extension of
move BC. Consquently, if move BC is .886 of move AB, then CD should be 2.618
extension of move BC.
4. CD should
be .886 retracement of move XA.
The Butterfly
Then, there is the Butterfly pattern. Like Muhammad Ali, if you spot this setup, you'll surely be swinging for some knockout-sized pips!
Created
by Bryce Gilmore, the perfect Butterfly pattern is defined by the .786
retracement of move AB with respect to move XA. The Butterfly contains these
specific characteristics:
1. Move AB
should be the .786 retracement of move XA.
2. Move BC
can be either .382 or .886 retracement of move AB.
3. If the
retracement of move BC is .382 of move AB, then CD should be 1.618 extension of
move BC. Consquently, if move BC is .886 of move AB, then CD should extend
2.618 of move BC.
4. CD should
be 1.27 or 1.618 extension of move XA.
