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Gartley pattern – Harmonic trading

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What is a Gartley?

The Gartley pattern is probably the most familiar harmonic trading pattern out there. It was first found in page 222 in the book “profits in the stock market” (H.M Gartley) and published in 1935. It was first called Gartley 222 pattern and later on it became known as the Gartley pattern.

The outline of the pattern did not specify the Fibonacci ratios that this pattern holds, it was later on that the Fib’s ratios were defined. Scott Carney (theharmonictrader.com) and Larry Pesavento included the detailed pattern in their books.

The Gartley pattern is actually a combination of Eliot wave techniques with Fibonacci ratios – It provides a potential reversal zone for the underlines in which it apears (stocks, forex, futures etc..). This PRZ (Potential Reversal Zone) can be used to find entries with clear definitions of stop loss and target levels.

Although it could be traded as a standalone pattern, Gartley (as do the other harmonic trading patterns) is better used by combining basic technical analysis tools such as Support/Resistance, Trend line, Basic pattern etc.

The Gartley structure:

gartley pattern

The XA leg of the Gartley is the initial price swing. X is usually found following a powerful price action that breaks previous support or resistance.  For the purpose of the example I will use the Bearish Gartley pattern (like the one you see above):

As I mentioned above, the XA leg is the initial price swing lower (perhaps a breakdown of a strong support zone).
Point A is a reversal point in which the price starts a bullish pullback.
At point B the price turn around again and move in the direction of XA as a retracement for the A to B move.
Point C is another turning point that sends the price up again towards the completion zone of the pattern – Point D.

Point D is where the Potential Reversal Zone starts. The completion of the harmonic trading pattern. The PRZ is where the price is expected to reveres back lower and reach the pattern’s target zones (read more below).

*Some of you, who familiar with Eliot waves should already recognize the wave structure and count shown in the Gartley pattern. The AB and CD legs are similar to Eliot waves ABC (Zig Zag) correction pattern. 

The rules of the Gartley pattern (bearish Gartley)

  1. Point B shouldn’t exceed X.

  2. Point B in Gartley is the 61.8 Fibonacci retracement move of the XA leg (you’ve probably seen people using different levels for B but the classic Gartley is with the 61.8 ratio).
  3. Point C shouldn’t be lower than point A (61.8, 78.6, 88.6 or 100% retracement of AB is allowed – no more than that).
  4. Point C should be a 61.8 Fibonacci retracement of leg AB (as mentioned above also 78.6 and 88.6 retracement levels are valid).
  5. Point D shouldn’t be higher then point X – A close above X will violate the pattern
  6. Point D should be a 78.6 Fibonacci retracement of leg XA.

These are the basic and the more common rules for the Gartley pattern.

As mentioned above, these days there are many traders using more flexible rules (like in some automatic algorithms that I’ve seen), but the rules explained above are the classic ones and more important, the basic rules should never be violated (Rules 1,3 and 5).

The difference between Gartley and other harmonic trading patterns is usually in the location of points B and D.

Extra confirmations rules:

In technical analysis it is very common to look for confirmation signs in the charts.

In harmonic trading we have also confirmation signs which are part of the patterns structure.

I use the rules below as extra confirmation for the validation of the Gartley pattern. I don’t think that these rules are mandatory rules to use, but it all depends on your trading system and how you want to use the harmonic patterns in your trading plan.

  1. Point D should be a Fibonacci extension ratio of leg AB (preferably 1.618 or 1.27)

  2. Legs AB and CD should be with the exact same length (creating AB=CD pattern)

As I said, these rules for me are – “nice to have rules”, but I do check them in my chart analysis.

I’d much rather like to see confirmation in the completion of the pattern (point D) on a support area then a confirmation of a 1.61 Fib extension of leg AB.

Using classic analysis with harmonic trading patterns

As mentioned above, you can trade Gartley as a standalone chart pattern or with combining classic technical analysis tools.

Gartley pattern trading rules:

Once you recognized Gartley pattern completion, you should monitor price action at the PRZ.

In case of a bullish Gartley, price should stall from the downward move and you should see signs of strength (Candlesticks patterns in smaller time frame for example).

If that is the case than you can place a trade (long position) at the PRZ with stop loss below the X point and target levels as shown below:

Gartley pattern

To mark target levels you need to draw the Fibonacci tool from point A to Point D and then your

target levels are:

38.2 Fibonacci retracement of AD – Target 1

61.8 Fibonacci retracement of AD – Target 2

*Some are using 50 Fibonacci retracement level as additional target level.

Gartley and the classical technical analysis

See in the same pattern how the classical technical analysis served me in making my decisions trading this pattern:

Gartley pattern

The stock broke out of a 2 daily downtrend lines with the initial swing (XA leg).

You can see how XA fits the strong price swing I’ve mentioned in the beginning of this article.

After the stock reached point A, it started it retracement move. The downtrend line (Downtrend line 2) should have acted as support once the price broke out, and as you can see it did just that.

In point D there was a combination of:

  1. Broken trend line (Support – bullish sign)

  2. Daily Support (Support – bullish sign)

  3. Completion of harmonic trading pattern, bullish Gartley (Support – bullish sign)

3 major bullish signs (classic technical analysis and harmonic trading) were enough and as you can see, immediately after Gartley completion the price rallied to touch Target 1 and Target 2.

Summary

Gartley patterns are very common in the financial markets price charts.

You can recognize them at daily charts, hourly charts and most of the harmonic traders I know use them in smaller time frames (like 5 min, 15min etc) in the Forex and Futures markets.

This article showed the bullish Gartley pattern as example but the same goes for the bearish Gartley, only in the opposite direction (see the image above).
Gartley, as do other harmonic trading patterns, gives you the opportunity to trade with predefined set of rules. That is why most of the harmonic traders use computerized algorithms to trade harmonic patterns.
The example I gave here was harmonic trading on a stock but if you want to see an example of how harmonic trading is done in Forex, you can see the article – “Using Harmonic trading patterns” as I demonstrate harmonic trading on the $USDJPY 

This article gives you just a taste of trading harmonic patterns – There is a lot more to learn on how to trade these patterns. You can subscribe here to the Weekly Markets Analysis and see the weekly trading setups I send to my subscribers or become an Elite Zone trader and see how I use these patterns as part of the Price Zones strategy on a daily basis.

Trade smart and always Trade the Zone.
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