Forex Trading Articles

USING FIBONACCI RATIOS FOR FOREX TRADING

(Part IV)

By Dick Thompson for Forexmentor.com
©2007, Currex Investment Services Inc.

January 13, 2007

One of the most powerful ways to trade Fibonacci ratios is with a pattern called the Gartley pattern. This pattern was first discussed by H.M.Gartley in a book published in 1935. The beauty of the Gartley is that the whole pattern is constructed from Fibonacci retracements, thus giving a strong confluence of indicators.

Figure 1

These patterns are often traded at tops and bottoms of trends. Visualize, for instance, a long downtrend that bottoms at point X in Figure 1 above, then forms this Gartley such that X–A–D form a 1-2-3 bottom. Knowing that the Gartley is there, you know where the point D will be and your trade is set.

Gartley patterns typically have these characteristics: (a) the move from X to A is fairly direct with few significant retracements; (b) the move from A to D always contains a strong A-B-C-D pattern as described in the previous article. While perhaps strongest at tops and bottoms, the Gartley appears quite frequently elsewhere and can be traded anywhere.

Figure 2 below shows the daily chart of the USD/JPY from January 2006. This is very clearly defined Gartley that preceded a more than 500 pip move. To trade this pattern we would look to do a top down analysis and look at smaller time frames for entry. In that process, we would discover another Gartley pattern on the hourly chart, which gives us a detailed look at the area within the circle surrounding point D on Figure 2.

Figure 2

This second Gartley, Figure 3 is a good example of deviation one can expect from the “ideal” shape. Note that X – A is not quite a direct move, having a significant retracement in the middle. The A–B–C–D move is not as clean because of the long consolidation in the B – C leg. Nevertheless, this is a valid pattern and can be traded.

Figure 3

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