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In Figure 1, which shows a bullish 222 pattern, low X to high A defines segment XA; high A to low  defines segment AB, and so on. The first thing to determine is how the size of these price swings should relate to each other.

Low  retraces a certain percentage of high A, but is higher than low X. Segment ÂÑ is an even smaller retracement of high A, but segment CD retraces all of segment ÂÑ but is above low X. Point D is the buy point.
To measure the retracements, we'll use the proportions defined in Appendix I of Pesavento's book:

AB should be 61.8 percent of XA
ÂÑ should be 61.8-78.6 percent of AB
CD should be 127.0-161.8 percent of ÂÑ
AD should be 78.6 percent of XA

Figure 2 (above) shows a bearish 222 pattern, which resembles the letter "W." Reversing the logic of the bullish pattern, peak X to trough A defines the segment XA, trough A to peak  defines the segment AB, etc.
High  retraces a percentage of trough A but is lower than high X. Again, segment CD retraces all of segment ÂÑ but does not reach the point X high. Point D is the sell short point.

The pattern lines in Figure 2 are based on the following criteria:
1. Pivot strength = 3
2. Maximum number of bars in pattern =100
3. T% = 10 percent

Gartley 222 strategy

A Gartley 222 setup should always have a minimum potential reward/risk ratio of 2:1. This system uses a stop-loss at Point X and a profit target equal to 61.8 percent of segment CD ("DT" in the following calculations). The profit target for a bullish butterfly will be equal to Point D + DT, and the short target for a bearish butterfly will be D - DT. The calculations used are:

XA = | X - A |
AB = | A - Â |
BC= | B-C |
D = A - (0.786 * XA) for bullish butterfly
D = A + (0.786 * XA) for bearish butterfly
C D = | C - D |
AD = | A - D |
DT = 0.618 * CD
Tolerance = T%
Entry rules

Bullish Gartley 222:

1. A > Ñ and Ñ >  and  > D and D > X
2. The pattern must be a trough-peak-trough-peak sequence
3. AB / XA > 0.618 - T% and AB / XA < 0.618 + T%
4. ÂÑ / AB > 0.618 - T% and ÂÑ / AB > 0.786 + T%
5. Repeat for CD / ÂÑ and AD / XA.
6. If the conditions above are true, then buy at price D with a limit order.

Bearish Gartley 222:
1. A < Ñ and Ñ <  and  < D and D 2. The pattern must be a peak-troughpeak- trough sequence
3. AB / XA > 0.618 - T% and
AB / XA < 0.618 + T%
4. ÂÑ / AB > 0.618 - T% and
ÂÑ / AB > 0.786 + T%
5. Repeat for CD / ÂÑ and AD / XA.
6. If the conditions above are true, then sell short at price D with a limit order.

Exit rules

Bullish Gartley 222:
1. Profit Target: D + DT
2. Stop Loss: X
Bearish Gartley:
1. Profit Target: D - DT
2. Stop Loss: X

Example 1

Figure 3 (left) is an example of a very favorable reward/risk ratio for a Gartley 222 trade. The stock twice closed within 10 cents of the pattern high. A short trade initiated at this level would have a profit target of at least 60 cents with risk limited to 10 cents - a 6:1 reward/risk ratio.

Note the two different lines denoting segment CD. In a bearish 222 pattern, D is the price level at which to short — e.g., it is based on the high of a bar satisfying the condition that segment CD retraces at least 127 percent of segment BD. If this condition is true, the pattern is drawn. Now, suppose the next bar's high price is lower, and that segment CD now retraces only 125 percent of segment BD.

This is not a valid Gartley pattern and no pattern is drawn. In this case, though, the second bar did have a higher high, so a new segment CD line is drawn. Although the strategy calls for entry at point D on the initial bar that completes the pattern, it is useful to keep tracking subsequent bars that fulfill the pattern criteria in the event you miss the first opportunity and need a second chance to enter the trade.

However, if the next bar's high is higher and comes back into the "Gartley range," the pattern will be drawn again. These "multiple" patterns tend to develop when price is trading in a range. The T% has been loosened to 20 percent in this case; the higher the tolerance, the more patterns that will occur.

Although this is a modified version of the Gartley setup, we prefer to see all potential patterns as they take shape. Varying the input parameters to reflect different swing proportions and pivot strengths will identify different kinds of Gartley setups. For example, higher pivot strengths will reveal setups that are developing over longer time frames. A higher-strength pattern combined with a lower-strength pattern is a powerful combination for trading these setups. In some situations, a lower-strength (shorter-term) pattern will form within a higher-strength pattern, in which case you can enter a trade based on the shorter-term pattern and have the potential to capitalize on the longer-term pattern.