Call me late bloomer, but I only recently discovered the power of Gartley patterns. I have found that combining price action trading techniques with chart patterns such as the bullish and bearish butterfly Gartley patterns benefits both the price action trader and the avid chartist. In this post I will discuss how I combine the two in my trading.
Historically respected levels of support and resistance combined with technical study levels (e.g. Fibonacci retracements and previous period levels), have, for me, always been a great way to trade. They generally provide early entries at the best possible price and such entries typically offer great risk/reward ratios with a very low initial risk, just the way I like it. Recently, I started incorporating chart patterns such as those created by H. M. Gartley in the mid 1930’s into my price action trading for confirmation purposes, as chart patterns and price action trading seem to complement each other very nicely. The price action trader will watch historically respected levels and wait patiently for price to reach them, and the chart pattern trader will watch for Gartley patterns (e.g. butterflies and three drives) begin to form, and wait patiently for them to complete. Ultimately, they are the same in that they are both waiting for a signal, which for the price action trader will be a price reaching a price level, and chartist will be the formation of a specific pattern.
Before I started using chart patterns and use them in my trading, I would watch the same price levels that I have programmed into the Price Action Pro indicator, and patiently wait for price to reach them. My charts would be clean and the historically respected as well as technical study levels I like to watch would be automatically drawn on my chart. Simple. Trading like this is great, as you’re not forced to sit in front of your screen all day, as you simply decide which levels are of relevance and set up alarms so that you’re informed when price approaches them.
The following screen-shot of the GBPUSD H1 chart illustrates what my charts might look like before chart patterns are been added:
Trading like this has always suited me as the process is relatively slow (for the time-frames I like to use) so I always have ample time to assess my trading decisions. The price levels I watch are generally very well respected due to their historical significance and yet I still find myself looking for verification before I enter a trade. This is where chart patterns shine. So how is this useful to the price action trader? Due to the fact that roughly 70% of valid Gartley patterns form correctly and as expected, if a bearish butterfly pattern happens to form right at the historically respected level presented above, we have another great reason for the level to hold.
Continuing with the example above, if we now draw the bearish butterfly pattern that formed at precisely the same level as the one I had a keen eye on, we get the following:
Chart patterns are great as they can tell you something about the current state of a given price movement. As an example, if a bearish butterfly pattern is not yet complete then we know that the price movement is still in cycle and that the more conservative choice would be to let it complete before entering. More aggressive traders may wish try and capitalise on the price movement whilst it forms. Ultimately, the choice is up to the trader.
Here is another example on the EURJPY H1 chart, which again illustrates the power of historically respected levels combined with technical study levels and chart patterns, which in this case is a bearish Gartley butterfly:
The example above is a great example of a multi-day price cycle, once which took seven days to form. When this is the case, price often reacts very aggressively as illustrated via the example above. This pattern in particular would certainly have been worth the wait. Risk wise, stops need only to be placed above the previous major high (X) which in the example above is only 30 pips away.
Sometimes, if the opportunity arises, I’ll take trades intra-day. Here is an example of the NZDUSD M15 chart, which illustrates another beautiful trade. This setup is nice in that multiple technical levels align at the same level. The purple level, which I would have been watching, lined up with a minor psychological level (the thin violet line) and a 78.6% Fibonacci retracement from the low to the high of the left wing:
As previously mentioned, I spend most of my time on the higher time-frames, but there will be the occasion where I see a chart pattern forming right at one of my levels on a much smaller time-frame. When this happens I will often consider the trade if everything looks good. These smaller time-frames are preferred by some, as they offer perhaps a slightly more exciting ride. Watching price volatility on such time-frames can provide many trading opportunities for the trader who prefers intra-day volatility and excitement.
Here is another example of a trade I took yesterday on the GBPUSD M5 chart, again at one of my preferred levels. As can be seen via the screen-shot below, my stop had been moved to the green side of break-even, as I had already reached my first target. The second target was reached shortly after, which was followed by price pulling back to the marked psychological level drawn as a thin violet line:
I hope the examples presented above help illustrate how combing traditional support and resistance levels with chart patterns can be very beneficial – and in fact, help increase the quality of trade opportunities. Considering the success rate of Gartley patterns in particular, properly aligning them with historically respected levels can greatly increase the quality of the trade, as the Gartley pattern trader will have a better idea of which level the pattern in question will complete. Gartley patterns such as butterflies and the bullish and bearish Gartleys are typically traded at overlapping internal and external Fibonacci retracements. Now, the price action trader, who harnesses the power of chart patterns, will be looking for these overlapping Fibonacci levels to converge with the historically respected levels he/she would normally traded. Ultimately that’s the only modification I have made with my trading and the results look very promising. I will certainly continue to embrace chart patterns in my trading, and most likely add such functionality to the Price Action Pro indicator in a future release.
To me, trading is a waiting game. You see something you like and then you sit tight and wait for it to materialise. Most people lose money as a result of their inability to wait, they simply need the excitement that being in a trade can provide, and they actually feel that they are losing money by not being in a trade. The reality of the situation is that spontaneous entries often result in loss, as they are rarely a part of the initial, well considered trade plan. Having the patience to sit on your hands until a chart pattern forms at your historically respected will greatly improve your trading.