Why the Simplicity of Price Patterns Helps a Trader Achieve More by Doing Less

In 1935 the US published a book for traders that sold at a staggering $1,500 apiece. The number of copies was quite modest – only 1,000. But it all sold at once and record proceeds of $1,5 mln. hit bank accounts of the publishers and the author. At those times, given that the Great Depression in American economy was just over, this looked like quite a huge fortune that could provide for comfortable old age not only to right holders but also to their posterity. We should regretfully point out that this bestseller has not been translated into Russian yet. This is why we offer you only some abstracts from this fundamental piece on trading. The overall volume of the book is 500 pages. But it is the second part of the book that is most interesting in terms of its practical application as here the author, a professional analyst and trader, describes regularities he noticed in price movement in the American stock market. On page 249 Gartley describes the pattern chart ‘Practical Use of Trend Line’ which we now call the AB=CD pattern. Gartley’s description of the AB=CD pattern illustrated how the market would rally in an uptrend and then retrace. It would then rally to another uptrend then make another retracement forming an up sloping parallel channel. It was from this description that the AB=CD pattern achieved its nickname as the “Lightning Bolt”. There are three legs that make up this pattern. The first leg is labeled as AB. When completed, the first leg will be followed by a retracement or correction which usually stops at one of Fibonacci levels that serve as a support or resistance - 0.382; 0.50; 0.618 or 0.786. This retracement or correction is marked as BC and is the second leg of the pattern. (Note: the price usually pulls back only to 0.382 in strong trending markets). As soon as the price resumes movement in the direction of AB, the CD leg starts forming. When we identify that CD has started, we can project potential completion of the pattern and form our trading strategy. Since CD finishes the price pattern, we can control the conclusive stage of pattern formation. However, we should be focused here on warning signals of possible changes in the market dynamics. Then we make our final decision and will either open a pattern-based trade or wait for other confirmative signals. Warning signals could include: The slope or time frame of the BC move can also be helpful in determining the pattern.

U-bolt size chart

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