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Trading the GARTLEY 222 Sometimes old trading ideas are the best ideas — if you can quantify them with modern analysis and testing procedures. Here, a "classic" chart pattern is defined mathematically and tested to see if it can produce profits. BY AARON BEHLE AND MARK CONWAY
s an increasingly challenging market has weeded out traders over the past few years, many survivors in search of an edge are revisiting the works of the original technical analysis masters, including Richard Schabacker, J.M. Hurst, W.D. Gann and Harold M. Gartley. Gartley wrote Profits in the Stock Market in 1935, and what makes the book striking is not that it shows how much technical analysis has advanced since then, but rather, how little it has changed. In many cases, "modern" patterns with catchy names are simply rehashes of price behavior observed long ago by people like Gartley. One example is a pattern commonly known as the "butterfly," named for its resemblance to a pair of butterfly wings (see Figure 1, right). However, Gartley described this pattern in Profits in the Stock Market as the "Gartley 222," a reference to the page number on which the discussion occurred. The Gartley 222 can be defined objectively by establishing specific proportions for the four price swings (XA, AB, ВС and CD in Figure 1), or legs, that comprise the pattern, as well as by setting criteria to define the magnitude of the swing ("pivot") highs and lows — points А, В and C.
peak-to-trough or trough-to-peak) as a certain percentage of a preceding price swing. Pesavento required these percentages to be Fibonacci ratios: 0.618, 0.786, 1.00, 1.27 and 1.618. The problem is that if you disregard those patterns whose price swings are not proportional using precise Fibonacci ratios, the Gartley 222 pattern is quite rare. Using a "tolerance percentage" (T%) that expands the range of acceptable priceswing ratios produces more patter