Harold M Gartley was one of the early masters of technical analysis. In his book Profits in the Stock Market, published in 1935, Gartley described this classic chart pattern. The pattern is sometimes referred to as the "Gartley 222" for the page number of the book where it first appeared.
The pattern is a four swing analysis, the retracements of which have precise mathematical relationships with one another. A valid pattern will also provide trade entry and stop loss levels.
The proportions used by Gartley to determine the relationships amongst the swing ranges are Fibonacci based. A variable tolerance factor was employed in the calculations so as not to exclude trades that generally fit the pattern, but whose price levels did not fall exactly on the Fibonacci levels. Your SOFTWARE's Hi-Lite tool also employs adjustable tolerance levels.
The Gartley Pattern is a formation of four swings, each having a precise mathematical relationship to another in the formation:
For the long formation in the example above, the following relationships must exist amongst the swings:
Swing/Range | Relationships and Remarks |
XA
| A swing in the direction of the trade, in this case long i.e. Price at X is lower than price at A. |
AB
| Range equals 61.8% of XA range i.e. Range AB retraces 2/3 of the original swing range |
BC
| Range is between 61.8-78.6% of AB i.e. Again the swing reverses back to the direction of the trade, and retraces less than the previous swing in the opposite direction (range AB) |
CD
| Range is between 127-161.8% of BC i.e. The swing against the trade retraces quite a lot more than the previous swing in the opposite direction (BC), but D must not be less than the starting point X. |
AD | Range is 78.6% of XA |
The mathematical requirements set out in the above table are strict.
In order to identify a reasonable number of trades the strict mathematical requirements are relaxed by a certain percentage on either side of the exact Fibonacci based levels, see Tolerance Settings, below.
Settings for both the calculation of the Gartley patterns, and its actual display, are found in the Gartley Pattern Settings dialog box:
Settings for the calculation of the Gartley patterns are found in the General area of the Gartley Pattern Settings dialog box:
Set the interval for analyzing the swings. The Default is Daily.
Set the maximum number of previous trading intervals to search for Gartley formations. The Default is 100.
Set the number of intervals for analyzing the swings.
Similar to the Turning Points Hi-Lite, the Swing 'Period' defines how many consecutive bars up or down are required to change the trend.
A setting of 3 would look for X, A, B, C and D based on 3 Daily Turning Points. The higher the number used, the longer the time frame of the patterns found.
Consider increasing the Max Data Bars figure when using long time frames, e.g. greater than a 3 period Swing.
This setting allows the XA range to include previous invalid A points, this is accomplished by ignoring invalid A points until a valid A point is detected and a Gartley formation can be plotted. For example a setting of 3 will allow the Gartley formation to be plotted using the first valid A point of three potential A points.
Effectively this allows for turning points within the XA range based on the period used, as not all XA ranges will be a single swing up or down.
As mentioned previously, the mathematical requirements are very strict (refer to the table above) and very few formations meet the exact criteria. To allow detection of formations that largely meet the criteria, and which can be expected to provide profitable trades, users can adjust the level of tolerance for each of the Ranges.
Adjusting the tolerances does not affect the relationships that they must have between another range, but it expands the price range at which they can meet the criteria in both directions from the price or price range set out in the table above.
The default is set at 10% for all of the ranges.
The display of the Gartley Pattern has the normal visual display controls, as well as controls relating to Long/Short and incomplete formations.
This setting allows potential Gartley Patterns to be displayed before point D is confirmed. When checked, incomplete Gartley patterns will be displayed on the chart with an asterisk (*) after the D label.
In order to display an Incomplete Gartley Pattern, points X, B and C must be definitely identified, leaving only a possible D point, which is yet to be confirmed or eliminated.
Displaying incomplete patterns is particularly useful when current patterns are identified, that is potential patterns that are forming in the current data. These potential trades can be closely monitored and trades entered when the pattern confirms itself.
It can also be useful when backtesting to see the changes in results when different settings are applied.
This turns the display of the X, A, B, C, and D markers on or off.
To only show Gartley patterns for long trades, select Display Bullish Patterns.
To only show Gartley patterns for short trades, select Display Bearish Patterns.
Both, one or the other, or none can be displayed.
Different Color and Style (line weight) controls exist for Bullish and Bearish patterns.
Changes to these settings will also apply to Bullish and Bearish incomplete patterns as well.