‘Trade what you see, not what you believe’
Larry Pesavento
Every trader will agree that their goal is to be profitable. Few people come to the forex for purely scientific research or invention of a new type of analysis or fame.
Of course, there were both inventors and their inventions, particularly in the field of technical analysis where the dialectic connection between the psychology and behavior of a human being and objective economic results serves as an inexhaustible source of scientific and semi-scientific disputes. What one needs to make money is only to simply test a certain price pattern and choose the most suitable one rather than waste energy inventing the bicycle.
So, it’s best to look for bicyclists going back to… the future. It turns out that behavior of financial market participants has not changed over the past hundred years and results that researchers arrived at in the 1930s hold true today as well.
This article deals with Harold Hartley and his patterns. One of the founding members of the New York Society of Security Analysts, a successful trader, a great teacher and respectable financial advisor, Mr. Gartley became kind of a symbol of the financial market of that epoch.
Born at the dawn of the previous century, he dedicated all his time and resources to one sphere alone – the stock market. He studied at New York University and got his MBA degree in Management, and a BA in Finance. In his professional activity he stuck to the financial sphere even though the duties he performed during different periods of his life varied to a certain degree. For example, he worked as a runner and charter for the price board. Eventually, however, we know him as a financial advisor and tutor.
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The fame he enjoys today derives from teaching and research. He taught a lot and wrote many articles. The very fact that many traders were prepared to buy his books sold at the peak of the Great Depression for an amount comparable to the price of three brand-new Fords says a lot about his talent. This book is titled Profits in the Stock Market and was published in 1935 (number of copies – 1000).
This was a textbook on stock market trading. It described different approaches to technical analysis, in particular, the so-called ‘Gartley patterns’. Different sources label them as either the Butterfly Pattern or the Gartley 222 pattern.
This pattern in made up of two waves. The first one is a large impulse followed by the second wave, a pullback. In the chart, Point D is an ideal market entry for a BUY.
This structure is ideally combined with Elliott’s wave theory. This is why traders that use this technique are recommended to catch the beginning of the wave or the low of wave C.
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It was later, after Gartley’s death, that his follower Larry Pesavento republished Profits in the Stock Market with his own ideas. In particular, he suggested using Fibonacci ratios to Gartley’s harmonic patterns to increase their accuracy. But Pesavento is not the only researcher who extended the existing patter. For example, Scott Carney uncovered two other patterns in 2000 and 2001 based on Gartley’s patterns - ‘Crab’ and ‘Bat’.
An experienced trader always remembers that any method should only confirm or disprove the initial assumption about the birth of a new tendency or a price reversal. The accuracy of the forecast is, in any case, measured in percentages. This is why one first needs to test a certain method ‘on paper’ before using it for the first time or, better still, rely on a couple of methods. The excellent combinability of Gartley’s method and Elliott’s wave theory was already referred to. This is the case with Wolfe waves, too.
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Based on Wolfe waves, point 5 is a long entry, and point 6 is the price target.
Traders that use these patterns in trading together with basic principles of channel trading and wave theory can get quite a powerful tool to trade in markets of any kind even though all these methods are almost… a hundred years old!
