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These patterns can also be traded on intraday charts. A Gartley 222 setup on a 60-minute chart is suitable for a swing trade with an approximate holding period between one and three days.

In Figure 4 (opposite page), the stock does not initially hit the profit target, but pulls back to the buy point. However, it stays above the stop-loss point at the bottom of the chart and, finally, the real move occurs two days later.

Remember to adjust the pattern parameters to your holding period. In this case, the pivot strength was set to 5 and the pattern developed over seven trading days. A trader may decide to hold a position over the same period for "time symmetry" - that is, sometimes the moves that spring from a Gartley setup are proportional to the original pattern length (in time).

Figure 5 (left) is a good example of time symmetry. The bullish setup develops over 16 trading days, and 16 days later EBAY had gained more than six points from the entry. Here, the stop-loss amount is less than one point, so even if you chose to exit the trade on the first up move, the trade's reward/risk ratio was at least 3:1.

As long as price stays in the zone between the troughs, the pattern is valid until price either breaks below the first trough or moves above the second trough. Some traders wait for a confirmation bar - a close above the open or a close greater than the previous close. However, if the reward/risk ratio is good, place a limit order close to the bottom of the pattern and let the price action do the rest. Figure 6 (below) shows another intraday (five-minute bars) setup. Like the Figure 5 example, this pattern is time-symmetric, and the high occurs around one hour later. Also, this setup was based on a pivot strength of 4, and the pattern is 16 bars in length — referred to as a "4x4" because of its perfect symmetry and compact form.

Gartley 222 patterns can be traded on 1-, 2-, and 3- minute charts. The only caveat regarding these time frames is to be careful of a bullish setup that occurs after a run-up - you could be looking at an "M" top pattern. Similarly, a bearish setup after a mid-day correction may be a "W" bottom pattern.

Context is important for intraday patterns, so keep an eye on the longer-term time frames.

Test results

Table 1 (above) shows the back-testing results for daily Gartley 222 setups using the rules we defined earlier. The results reflect 165 trades in 100 stocks. In all the tests the profit factor (gross profit divided by gross loss) was consistently in a range of 1.4 to 1.5. These trades were not filtered in terms of their reward/risk ratios (that is, all setups were traded, not just those above a favorable threshold, such as 3:1). The test reflects only one set of pattern parameters, in this case, a T% of 10 percent and a pivot strength of 7. One parameter set does not capture all the possible patterns that occurred over the three-year period.

The approach used here makes it possible to find price patterns using objective criteria, which in turn makes it possible to test trading ideas based on the pattern to see if they have potential.

Additional reading

Professional Stock Trading: System Design and Automation by Mark R. Conway and Aaron N. Behle. (2003, Acme Trader LLC, Waltham, Mass.).

Profits in the Stock Market by Harold M. Gartley (1935, Lambert-Gann Publishing Co., Pomeroy, Wash.).

Profitable Patterns for Stock Trading by Larry Pesavento (1999, Traders Press Inc., Greenville, S.C.).