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PTMC team 31.08 2015

Gartley models in Protrader

Hey there, Protraders!

One of the leading places in the modern technical analysis rightfully belongs to the theory of harmonic patterns which is based on the ratio of Fibonacci numbers. The founder of this analysis method is Harold McKinley Gartley, who in the 30s published the book with the first at that moment statistical patterns that allow defining the price reversal points. Hereinafter, these patterns have been completed and improved by Scott Carney and Larry Pesavento, who found that the main elements of the patternsare formed based on the proportions of the Fibonacci coefficients.

gartley patterns

Features of the harmonic patterns

The concept of "pattern" implies a certain formation, the model or price combination, which is periodically repeated onthe chart, thus allowing with a certain degree of probability to predict the future course of the price. This can be:

  • Candlestick patterns on the type of outside, inside bars, “shooting star”, etc.;
  • Statistical patterns which are based on the time of their formation or on the size (the correction value, the value of the impulse);
  • Graphical models – figures of the technical analysis ("head and shoulders", "double top", etc.).

Harmonic patterns or Gartley patterns are related to the graphical and statistical patterns simultaneously, since they can be formed for any time interval, herewith their shape has substantially the same look. One of the important factors of trading by harmonic patterns is the use of Fibonacci numbers ratios. The closer the pattern to its reference proportion values, the higher the probability of a positive reproduction of this pattern. The most popular ratios when working with harmonic patterns are: 0,382; 0,618; 1,618. Below is a general view of one of the Gartley patterns, on which tops of waves are indicated by letters (on the principle of the Elliott waves), and ratios between these waves are indicated by numbers.

butterfly Gartley

This pattern is classic, but there are other variations of this pattern, which have similar shape, but different Fibonacci proportions. The most popular models are: “The Crab”, “The Bat”, “The Butterfly”, “The Shark”, “The ABCD pattern”, “Three drives”. Developers’ team of Protrader trading terminal have added the automatic search functionality of the harmonic patterns that significantly simplifiesthe trading. But at first, we will build these models by hand, to sort out in detail with their internal structure.

The internal structure of Gartley models

On the chart below, we’ve allocated one of the Gartley models, which is called “model 222”, built by the following ratios:

  • point B has reached 61.8% of the wave XA;
  • wave BC has made the correction by 50% of the wave AB;
  • lengthof the wave AD is slightly more than 78.6% of the wave XA. Point D is known as the potential reversal zone, therefore it is advisable to place limit orders at this point. The advantage of this model is that the stop order is located beyond the X point, and the minimum target of the profit fixation is in the area of the point C. But we should not forget that the model can take a different shape, i.e. transform into a different pattern.

example gartley model

In order to find Gartley patterns on your own, there are several steps, under which you can recognize these patterns.

  1. At the first step, it is necessary to define the startingwave XA, which often is impulsive, therefore it can be easily found on the chart.
  2. Once we’ve defined the impulsive wave, it is necessary to wait for the correction to determine the point B (the size of correction can be from 38% to 88,6%, previously indicating on the forming model).
  3. Once the wave AB has formed, the wave BC should be displayed correctly on the following stage. Relatively to the wave AB, the top C must be formed at the level from 38% to 88.6%. Herewith, sometimes some extended formations appear, in which the top C is higher than top A.To determine the location of point C more exactly, it is important to use indicators-filters, such as moving averages or oscillators. The key levels of support and resistance, which can be defined using PPZ tool, are also additional filters to determine the potential completing zone not only of the wave BC, but also CD.
  4. Final point of the pattern (D) is the reversal point in which traders are entering the trade. The key feature of the good model is the correct ratio of all the waves.

The formation of the first three waves will give the preliminary information about which of the Gartley models is now forming. Thus, it is necessary to wait for the full completion of these waves, since if the correctness of the first three waves’ formation is disturbed, the pattern will not be formed properly.

 how to find gartley model

On the chart above, it can be noted that several patterns were brwoken. How to determine that pattern is not going to work, and we should search for a new one? The answer again is to find the correct ratios of the waves. In the first pattern, the correction hasn’t reach the minimum level of 38,2%, after that the price has updated its local maximum (point A). Thus, the pattern was not formed properly. The second pattern, as we see, has the correct structure:

  • Impulsive wave XA;
  • Correctional wave AB made 46.3% of the impulsive wave;
  • Relatively to the wave AB, the wave BC rolled back by 61%, herewith the top C reached 81.5% of the wave XA;
  • Wave CD has the ratio to the wave BC – 180%, and to the wave XA – 68,7%. Herewith, point D has formed on the EMA 200. The moving average is adjusted under each instrument and timeframe separately.

Next pattern was also broken, since the correction has not been formed. Instead, a new impulse wave that gave the background to the formation of a new pattern was formed.

In the last pattern, the wave AB consists of smaller waves. In this case, we have combined them into one large wave, since small waves did not fulfill the condition of the correct construction, herewith the wave BC has not updated its local maximum. The last wave of the pattern was formed by all the rules of wave ratios, herewith point D has coincided with the zone of support and resistance (PPZ).

two gartley models

Quite often can occur the situations when Gartley models are formed one after another allowing to trade in one or the other side. If to look more carefully at these two models (chart above), then you can note that in the first model which is called “Butterfly Pesavento”, the wave CD has updated its local minimum (point X). In this case, if we entered the trade with limit order from the level 78,6% (marked on the chart), then trade would be closed by Stop loss (point X). For this reason, patterns are working out more efficiently in the direction of the main trend.

Gartley model in Protrader

To search quickly different harmonic patterns in the Protrader trading terminal, graphical tool “Butterfly Gartley” was created. The distinguishing feature of this tool is that drawing of the patterns is performed only after their final formation that allows avoiding the preliminary drawing of not completed models.

automative seach of gartley models

When calling the tool of automatic search, the user simply limits the area of the chart by two lines, when moving which, patterns can be added to the chart. In the instrument settings, the user can choose:

  • price type, based on which the search of patterns will be performed;
  • control points, which determine the calculation limits of this instrument.

choose the type of price on which will be calculated Gartley models

Tool “Butterfly Gartley” can be used on any timeframes, but if there is the overlay of the models consisting of different timeframes, the signal of patterns is enhanced. For example, "Bearish Gartley" model is formed on the 30min chart, herewith the same model is formed on the 4H chart, the probability of a positive working out of this pattern increases.

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