Thursday, November 4, 2010

Beck, The Gartley Trading Method

It’s odd that just as buy and hold is pronounced dead a spate of books arrives advocating a more patient approach to trading. Ross L. Beck’s The Gartley Trading Method: New Techniques to Profit from the Market’s Most Powerful Formation (Wiley, 2010) is the latest. Beck invokes Jesse Livermore’s classic quotation, “It never was my thinking that made the big money for me. It always was my sitting.”

Although there are several modern renditions of the Gartley pattern (the most notable coming from Larry Pesavento and Scott Carney), Beck returns to the original pattern to begin building his own version. In Profits in the Stock Market (1935), H. M. Gartley discussed this pattern under the heading “One of the Best Trading Opportunities.” It is a reversal pattern after a substantial trend move (A-B). There is a corrective B-C leg with expanding volume typical of what happens when traders cover their shorts in the first instance or close out their longs in the second case. Focusing on the first case to keep things simple, the B-C rally exceeds the previous rallies in the A-B downtrend in both price and time. “And when a minor decline, after canceling a third to a half of the preceding minor advance (B-C) comes to a halt,” Gartley writes, “with volume drying up again, a real opportunity is presented to buy stocks, with a stop under the previous low.” (p. 44)

In its general outlines this pattern should be familiar to traders, though not under the Gartley trademark. Think, for instance, of the Trader Vic 1-2-3.

It’s hard to leave well enough alone. Beck re-labels the pattern and suggests that “in addition to conforming to Elliott Wave, … the real key to making this pattern work has to do with angles and the geometry of W. D. Gann.” (p. 73) He also agrees with Scott Carney that “the best Gartleys are the ones that complete at .786.” So overlaid on Gartley’s simple pattern are Fibonacci ratios, Elliott waves, and Gann geometry.

Beck also introduces trade-continuation Gartleys. Here there is no need for volume analysis, and Gartley’s A-B leg is absent. Instead, “when there appears to be a corrective phase, such as an Elliott Wave 4 taking place during an impulsive phase, then look for the following: 1. AB = CD is apparent in the corrective phase. 2. AB = CD price projection clusters appear with one of the [Fibonacci] ratios.” (p. 75)

Beck then outlines entry and exit strategies. Entry strategies include the Fibonacci entry method, the 1-bar reversal entry method, the candlestick entry method, and the technical indicator entry method. Exit strategies are more difficult; Beck advocates a single in/scale out approach. He demonstrates his technique with several case studies.

In the appendixes he looks at Elliott Wave theory, Gann’s mysterious emblem, and the Wolfe wave.

Fibonacci and Elliott wave traders will find a lot to like in this book. The basic Gartley pattern lends itself to all sorts of emendations, and Beck’s is one of the more clearly articulated.

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