Today, we will discuss the Gartley pattern and how we can implement this trading tool in the forex market to gain an extensive profit.
As a Forex trader, you should have a trading strategy that has a strong history of success. There are numerous profitable forex trading strategies in the world, and harmonic trading patterns are one of them.
Many professional and institutional traders use Gartley harmonic pattern in their trading strategy, which indicates the effectiveness of this.
Furthermore, the Gartley pattern is similar to the basic ABCD pattern, but there are more to know.
Before going a depth insight of the Gartley pattern, we will see what the basic ABCD pattern is.
What is an ABCD pattern?
ABCD is the basic harmonic pattern that consists of three leg- AB, BC and CD. AB and CD is the major leg, and BC is the correction between these two legs.
The ABCD pattern is almost similar to Gartley or Butterfly harmonic pattern except for some changes in the calculation Fibonacci ratio.
Like other harmonic patterns, ABCD pattern has both bullish and bearish formation at the top and bottom of the price to show a detailed market insight.
The bullish ABCD pattern appears after a bearish trend, and the bearish ABCD pattern appears after a bullish trend. In both cases, the ABCD pattern works as a correction of the primary trend.
Besides the ABCD pattern, Gartley harmonic pattern is a price reversal pattern that works almost the same as ABCD pattern, but in Gartley pattern, there is for legs and different Fibonacci calculations that we will see in the following section.
What is the Gartley Pattern in the Forex Market?
Harmonic chart patterns are the geometric chart patterns in the forex market that form with the combination of the price and specific Fibonacci levels.
We can distinguish Harmonic patterns in two classifications- internal and external, where the Gartley pattern is one of the internal patterns.
Like other harmonic patterns, Gartley pattern is a technical analysis tool with a unique formation using the price and Fibonacci levels.
It is very easy to draw the Gartley figure in a chart, as trend lines and Fibonacci are basic technical indicators and free in all trading platforms.
The Gartley pattern is created by H.M Gartley who introduced it as the best trading opportunity in the financial market. Furthermore, harmonic traders refer to this pattern as Gartley 222 or the 222 patterns.
The visual formation of this pattern looks like the M/W shape on the chart.
Furthermore, there are 5 points in the Gartley Pattern marked as X, A, B, C, and D. In the image below, and we will see an example of a Gartley pattern:
Like other harmonic patterns, there are some essential characteristics that a trader should know to identify this pattern in the chart.
How Do You Identify Gartley Harmonic Pattern?
We know that the Fibonacci level is an essential tool to identify harmonic patterns, which is the same for the Gartley harmonic pattern.
Let’s have a look at the components of the Gartley figure and how it looks like:
- XA: The XA is the primary price movement in the chart. Therefore, there are no specific rules for it regarding how long it should be.
- AB: the AB leg should be at a 61.8% correction level of XA. If the XA leg is bullish, the point B should be the bearish correction of it. On the other hand, if the XA is bearish, the point should be a bullish correction of it.
- BC: BC should move towards the direction of XA and the opposite direction of AB. However, it will not create any new high above or below point A. Furthermore, BC should be at 38.2% or 88.6% correction level of XA.
- CD: CD leg is the final leg of a Gartley pattern. If point C stays at a 38.2% correction level of AB, then the point D would bet at 127.2% extension of BC. However, if point C stays at 88.6% correction level of AC, point D would be at 161.8% extension of BC.
- AD: AD is the combining leg of AB and CD. In a solid Gartley pattern, AD should be at 78.6% correction level of XA leg.
In the image below, the Gartley figure is explained with how it forms in the real chart with the combination of price and Fibonacci siquence.
Rules for the Gartley pattern
Fibonacci levels that we use in a Gartley pattern is an approximate value. The price in your broker might not be the same as others. Therefore, make sure to use an estimated value in Fibonacci.
Overall, a Gartley pattern should follow the rules mentioned below:
- Leg AB should be the same as leg CD
- Point B should be at 78.6% Fibonacci correction of the XA leg
- The point should be at 127% or 161.8% Fibonacci extension of the BC leg.
Like other Harmonic patterns, Gartley figure has both bullish and bearish formation.
In the following section, we will see a trading strategy using the Gartley pattern in both bullish and bearish market scenarios.
How Do You Trade a Gartley Pattern?
If you have any trading plan that consists of technical or fundamental analysis, you can follow the Gartley pattern to increase the probability.
However, you can use these tools as an individual trading strategy as it covers the trading opportunity with the exact entry and exit point.
Bullish Gartley Trading Strategy
The bullish Gartley pattern will appear after a bearish trend and will indicate an upcoming bullish move.
Identify the starting point of the Gartley pattern and match with Fibonacci levels from Point X to point D. Point D will be at 78.6% correction level of XA leg and indicate the potential buying point.
Look at the image below to see how to trade the Gartley pattern in a bearish market.
- Entry: Wait for the price to come at Point D and monitor the price action to find an appropriate reversal candlestick pattern. Enter the market as soon as the candle closes.
- Exit: In a bullish Gartley pattern, X is the lowest point. Therefore, put your stop loss below the point X with a 10-15 pips buffer.
Profit target: The take profit level will depend on the market structure and your trading objectives.
In an aggressive approach, draw a Fibonacci correction level from point A to point D and close your trade at a 61.8% correction level of AD leg. However, in an impulsive bullish market condition, you can set yourself the price target level at the level of point A.
In the image above, we can see how the aggressive and conservative take profit level is set in the market.
Bearish Gartley Trading Strategy
Like the bullish Gartley pattern, a bearish Gartley pattern will appear after a bullish trend and will indicate an upcoming bearish move.
Identify the starting point of the Gartley figure and match with the Fibonacci levels from Point X to point D. Point D will be at 78.6% correction level of XA leg and indicate the potential selling point.
Look at the image below how the bullish Gartley pattern forms in the bearish market.
- Entry: Wait for the price to come at Point D and show a bullish rejection with an appropriate candlestick pattern. Enter the market as soon as the candle closes.
- Exit: In a bearish Gartley pattern, X is the highest point. Therefore, put your stop loss above the point X with a 10-15 pips buffer.
- Profit target: The aggressive take profit level would be 61.8% correction level of AD leg. Furthermore, if the market momentum supports, you can hold your trade until it reaches point A.
In the image above referring to a Gartley chart, we can see how the aggressive and conservative take profit level is set in the market.
Examples of gartley
If you read the whole article, you would know how the Gartley figure explained above. We can summarize the rules for trading the Gartley Pattern as follow:
- The Gartley pattern is a trend reversal pattern.
- Leg AB should be the same as leg CD and Point B should be at 78.6% Fibonacci correction level of the XA leg.
- Point D is the potential entry point from where the price is likely to reverse.
- Enter the trade at point D after a closing candle and put the stop loss below or above point X.
- 61.8% correction level of AD is the aggressive take profit level.
Furthermore, trading forex consists of some unavoidable risks. There is not a trading method that can guarantee you that all of your trades will hit the TP. Therefore, you need to minimize the risk as low as possible by using an appropriate lot size and risk: reward ratio.