Simple's Green Room

[pennies2007]

How To Trade the Gartley Pattern***Live G/U Trade Example

Ok, we're getting lots of questions on how to trade the Gartley pattern indicator that's been brought to the board. I've studied up on using this pattern and I've been able to close two successful trades today for 70 pips of profit.

I thought it would be beneficial to show you how to use this indicator to place profitable trades. The main questions I'm seeing are on entries and exits.

First and foremost, you have to understand what a bearish pattern and what a bullish pattern looks like. The name Gartley butterfly gets its name from the butterfly pattern that looks like two wings.

Here are the two forms of the Gartley pattern...



Basically, the bearish pattern is in the shape of a W and the bullish pattern is in the shape of an M.

Notice that the whole concept behind the Gartley pattern is a combination of fibonnaci levels. So, using the fib tool is essential in being able to identify not only your entry points but your exit points as well.

The first thing we have to do is be patient...we have to wait on the indicator to tag a potential Gartley pattern. Once the pattern is in progress, you do not necessarily have a good entry. What we must do is identify an ideal entry since there are several possible entry levels using the Gartley pattern. I must stress again...DO NOT ENTER JUST BECAUSE YOU SEE THE GARTLEY PATTERN ON THE CHART IN THE FORM OF BLUE WINGS.

What we are looking for is an entry near common fib levels. Let's look at an example...

This is a trade I just completed. This is a 1 hour GU chart on MT4 using just the Gartley indicator. I don't have any other indicators loaded. I wanted to do this to test the Gartley for reliability. The indicator tagged a potential bearish gartley earlier this afternoon. Here is the chart...



This particular pattern in a W so this is a bearish pattern, meaning we're watching for an opportunity to go short. In a gartley pattern, the wings are always lopsided. In this case, the right wing is higher than the left wing. So, we need to understand that the right wing is in excess of a value of 1 on the fib level (or 100%). In other words, if the two wings were exactly the same height, then the tips would be exactly equal or at a value of 1 which is parity (100%). So, the question becomes...what level are we looking for?

We're looking for fib levels. When these pairs are in excess of a value of 1, they will almost always go to 1.618. Remember, how .618 is a very common value on a fib tool? Well, the same is true in extended fib values as well. In this case, when the pattern was identified, the numbers on the chart were white like some of the other numbers you see on the chart. I think the numbers read something like 1.54. In any case, it was not sitting at a common fib level so I knew there was more topside coming.

One of the neat things about this indicator is that when the fib number reaches a common fib entry point, the numbers turn yellow or green. In this case, when the 1.618 value appeared and turned green instead of white, I immediately knew that the level had been reached where a reversal would very likely occur. I entered short at 1.57081.

So now we have what we believe to be a good entry. It's not that the price couldn't have gone higher. It could very well have. But if you notice the rectangular colored box on top of the right wing, you can see the possible levels of extension listed by the horizontal colored lines. Also, notice the downtrending long yellow dashed line. That is a probable trend line drawn in automatically by the software. So, the 1.618 fib level and the yellow dashed trendline gave me the ability to determine that this would be a good short entry level.

Now that we have our entry, the question becomes...where do we take profit?

Again, we must turn to the fibonacci levels to give us our answer.

The Gartley pattern is most successful when applying the fib retrace tool to the current price action wing length. In other words, whatever wing you are currently on is the one you need to place your fib retrace tool on, using the high and low of the wing as your fib top and bottom.

The absolute best place to take your profit is what the market is watching...the 61.8 level (or, coming up from the bottom, the 38.2 level). Set your TP at that level. This is a conservative area to collect your profit and the market will almost always take the price action back to that level to test it.

Notice the fib tool I have drawn in on the right wing. The very top of the fib tool is at the top of the wing at 1.5717. The bottom of the fib tool is at the bottom of the wing at 1.5583. So, what we're gonna do is set our order to take profit at the first major fib retrace of 61.8 at a price of 1.5665. The fib tool shows 1.5666 but I like to calculate entries and exits at multiples of 5 since that's what the market does.

So we have our entry and we have our exit. Now, we just wait. If you're interested in setting a stop loss, use the tall rectangular box as your guide. In this case, if the price action moved above the top of the rectangular box, the Gartley pattern would be voided. The top of the box is at approx. 1.5740 so you could set your stop loss somewhere above there if you wish.

So how did all of this work out for me? Let's take a look and see...

Here's a shot of my Oanda platform that I use to actually place my trades. I use MT4 just for the charts, not for trading...



The down pointing arrow at the top shows where I entered short. Notice that the gartley got me in right at the top. The price action moves sideways for a while testing that top over and over and then it gives up and drops like a rock. Remember, our TP was at the 61.8 fib level. My TP order triggered on the chart where the little gray circle is. Notice how the price action reverses almost immediately afterward and moved back up again. Have you ever wondered why price action seems to stop "in mid air" sometimes? This is why...fib levels. These levels are what the major institutions watch for.

So, this one trade netted me 43 pips. The other Gartley pattern I traded today was a bullish one on EU. But, since EU was my first Gartley entry, I entered too soon and exited too soon. That Gartley told me to set my TP at 1.3675 and I got out at 1.364. So, I missed out on 35 additional pips of profit.

If you go back and look at the history on pretty much any time frame, you will begin to see where the Gartley reversals are likely to occur. Make note of the fib levels around the Gartley pattern at the time and you will then be able to watch for those levels to appear during live price action.

Note: As of this posting, the price action bounced and the price action has still not returned to our level where we took our profit. This is why you should ALWAYS stick to conservative profit targets and not try to make a killing on these pairs. Take the pips you have and be glad you have them.