GEOMETRIC TRADING

In part 6 of this series, we examined the main differences between the original Gartley pattern and the modern day version. As discussed, the original Gartley pattern did not discuss Fibonacci ratios. Larry Pesavento was the first person to apply Fibonacci ratio’s to the Gartley pattern. Larry observed that the Gartley pattern appeared to be a more reliable pattern if it completed at a 61.8% retracement or 78.6% retracement. Based on my 10+ years of experience with the Gartley pattern, it appears that if you have to choose between the two of these ratios, 78.6% seems to work the best. With my personal trading, I will only trade the 78.6% Gartley patterns. Why? I would rather trade less often and increase the chances of my wins on the few trades that I make. If you feel a need to trade more often, it may be time to take a personal inventory. We need patience to wait for good Gartley Patterns, remember Gartley himself said, “The art in conducting an operation of this kind lies in..Having the patience to wait …”.

 In addition, one of the added benefits of using the 78.6% retracement is its proximity to where our protective stop is located. Remember Gartley said,” In the other two cases, only small losses have to be taken”. So if we choose the 78.6% versus the 61.8% Fibonacci level to enter, our risk will be reduced if we use the location Gartley suggested for our stop. If we are wrong, we will risk less money with an entry at 78.6% versus 61.8%.

One of the other reasons that I prefer the 78.6% level is that the public is typically unaware of this level as it does not appear in the defaults of most Fibonacci retracement drawing tools. Therefore there is contrarian value in using this level. Also, by the time a market arrives at 78.6%, most of the typical 61.8% fib traders have been stopped out. At this point in time, there is a lot of uncertainty as traders watch for a bounce or a break based on their focus on the previous high or low. Also, typically there is an increase in the volatility in the 78.6% retracement area as the market begins to reflect the uncertainty of its participants. The volatility in this zone will help us if we enter with a multiple contract strategy that allows us to the scale out of the market. We will discuss this in more detail in a future lesson.

In part 8 of this series we will continue to examine the benefits of the some of the modern day Gartley improvements.

Ross Beck, FCSI