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Today's Featured Article
Identifying chart patterns is vital in determining momentum, support and resistance, and other indications of strength or weakness in the price of a commodity, currency, bond, stock or index. Chart patterns can help traders to gauge market direction as well as time entries and exits, but a trader must be able to recognize them correctly. In this article we will discuss basic Fibonacci chart patterns, including the ABCD and Gartley "222" patterns to use in daily trading. Fibonacci patterns can reveal where price may be headed next, as well as the key support and resistance levels likely to be encountered along the way.
Leonardo Fibonacci da Pisa was a famous 13th century mathematician. He helped introduce European countries to the decimal system, including the positioning of zero as the first digit in the number scale. Fibonacci also discovered a number sequence called "the Fibonacci sequence." That sequence is as follows: 1,1,2,3,5,8,13,21,34 and so on to infinity. Adding the two previous numbers in the sequence comes up with the next number.
After the first several numbers in the Fibonacci sequence, the ratio of any number to the next higher number is approximately .618, and the next lower number is 1.618. These two figures are known as the Golden Ratio or Golden Mean. Its proportions are known to be pleasing to the human eyes and ears. It appears throughout biology, art, music and architecture in shapes that are based on the Golden Ratio; some examples are sunflowers, snail shells, the galaxies of outer space, hurricanes and DNA molecules.
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Lightning Bolt ABCD Chart Pattern
Most market participants know that the market can do only three things: move up, down or sideways and it usually does it in ABCD fashion. Therefore one relatively simple and key chart pattern to follow is the lightning bolt ABCD pattern. It is a leading indicator that may help determine entry points in the market. ABCD patterns are based on price and time; they consist of three consecutive price swings, or trends, resembling a lightning bolt. It helps to identify buying (and selling) opportunities in any market for any timeframe.
ABCD Pattern 
If you cannot view the ABCD Pattern Example 1 chart, go here.
ABCD Pattern
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Completed Buy Side AB-CD Pattern
If you cannot view the Completed Buy Side AB-CD Pattern chart,
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Each turning point (A, B, C, and D) represents a significant high or significant low on a price chart. These points define three consecutive price swings, which make up each of the three pattern "legs." The highest-probability trade entry may be at the completion of the pattern (potential sell point D). A retracement level of 61.8% to 78.6% suggests a higher probability for another retracement (a reversal in the movement of a stock's price, countering the prevailing trend) to occur.
Retracement at 61.8%
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Extension level at 127.2%
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Gartley Pattern
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Completed Buy Side Gartley "222" Pattern
If you cannot view the Completed Buy Side Gartley "222" Pattern chart,
go here.
Another chart pattern within the ABCD formations is the Gartley "222" pattern. In this example the buy side Gartley "222" chart represents a visual price and time pattern comprised of four consecutive price swings or trends. Its pattern forms the letter "M" (conversely, the sell side forms a "W"). It contains a bullish ABCD pattern preceded by a significant high or low (point X) and is an indicator that may help determine where and when to enter a long position. The X point becomes the anchor price that all technical traders watch daily.
For this pattern to be valid, each turning point (A, B, C and D) should represent a significant high or significant low on a price chart. These points define four consecutive price swings, or trends, which make up each of the four pattern points, referred to as the XA point, the AB point, the BC point, and the CD point. The BCD leg will be at 127.2% to 161.8% extension while the X to D leg will be at 61.8% to 78.6% retracement.
The Gartley chart may help identify potentially higher-probability buying opportunities in nearly any market and in nearly any time frame. It reflects the meeting of Fibonacci retracement and extension levels at point D, suggesting a potentially stronger level of support, and higher probability for market reversal.
All charts from GFT Dealbook 360
The risk of trading can be substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Futures trading involves risk of loss. Trading advice is based on information taken from trades and statistical services and other sources which R.J.O'Brien believes are reliable. We do not assure that such information is accurate or complete and it should be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no assurance that the advice we give will
result in profitable trades. All trading decisions will be made by the account holder. Past performance is not necessarily indicative of future trading results.
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About the Author
Vincent Hayes
is the Director of Sales for RJO Futures. His previous experiences include working as a Commodities Broker for ZAP Futures and a Foreign Exchange Broker for Global Forex Trading. He trained with Larry Pesavento and Mark Douglas on Fibonacci Ratios, Pattern Recognition and Trading Psychology. Vincent has a degree in Finance from Western Michigan University. Additionally, Vincent has appeared on Bloomberg Radio and CNBC. Vincent's favorite film is Wall Street.
Vincent Hayes can be reached at (312) 373-5303 or via email at
vhayes@rjofutures.com | |
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