While Gartley described both buy and sell patterns identically, he had different diagrams for each. It was the AB=CD pattern within the Gartley sell pattern that led to the nickname Gartley “222.” Gartley applied this particular pattern to all the market indexes, and he also published it in his weekly newsletter. Larry Pesavento found about 20 years ago that by further adding the ratios from the Fibonacci summation series, he could develop a solid trading pattern. Gartley also used ratios of
one-third and two-thirds with this pattern but did not use ratios from the Fibonacci summation series. The main Fibonacci retracement ratios that we apply to the Gartley pattern include:.618,
and .786. Gartley stated in his 1935 masterpiece that over a 30-year period he found these patterns to be profitable in 7 out of 10 cases. The statistics validating this are still the same as Gartley suggested over 70 years ago.
GARTLEY “222” PATTERN STRUCTURE
The structure of the Gartley “222” pattern is almost identical to the AB=CD pattern, with one main difference: It has one added leg that anchors the AB=CD. Whereas the AB=CD pattern is
formed with three legs, the Gartley pattern is formed with four legs. The Gartley pattern must contain an AB=CD in order for it to be a valid Gartley pattern. The pattern is labeled from its initiation with an “X.” Once this leg is complete, the high or low from “X” begins the AB=CD formation. As with the AB=CD pattern the Gartley pattern is also found in all time frames and in all
markets. The pattern is a retest of a high or low price and offers the trader an entry into a trade in the direction of the trend. The same rules apply to the AB=CD within the Gartley pattern. It is important to know what invalidates the Gartley “222” pattern. Here are three items that invalidate the pattern.
- . The D completion point cannot exceed X.
- 2. The C point cannot exceed A. C can be a 1.00 or double top or double
- bottom of X, though; this is a rare pattern but it is valid.
- 3. The B point cannot exceed X
PSYCHOLOGY OF THE GARTLEY “222” PATTERN
It is formed by fear and greed levels of the market participants. When the Gartley pattern formsat a major top, the initial move from the top finds support at the A point. (We use a sell pattern
as an example here to describe the crowd psychology; refer to Figure 5.4.) Markets rarely gostraight up or down without any correction. This point in the pattern is formed when enough
market participants view this area as a buying opportunity and the price can rally from there.This is also true from the C point of the pattern. Since there are always buyers and sellers in a market, as the price forms the B and D points, sellers step in, seeing these as areas either toexit the market or to initiate short positions. The D point of the pattern is the moment of truthto determine if the buyers or the sellers will be the winners. A price decline will reward the sellers, and price above the X point will deem the pattern a failure.