What is the Gartley pattern?
A Gartley pattern is a harmonic chart pattern based on the assumption that the market moves in certain patterns, and that these patterns can be used to identify potential reversal points. The Gartley pattern is based on Fibonacci retracement and extension levels, which are used to identify potential reversal points in the market. The Gartley pattern was first described by H.M. Gartley in his book "Profits in the Stock Market" in 1935.
How does the Gartley pattern work?
The Gartley pattern is the most commonly used harmonic chart pattern. Harmonic patterns are assuming that Fibonacci sequences can be used to form geometric structures such as breakouts and retracements in prices. The Fibonacci ratio is widely found in nature and has become a popular focus among technical analysts.
The Gartley pattern consists of five points and exists in both bullish and bearish forms. These five points are referred to as X, A, B, C, and D.
The bullish and bearish Gartley Pattern with its 5 points depicted schematically in direct comparison
The pattern starts with an impulse called the XA movement. This is a strong price movement in a certain direction. After the XA movement, there is a correction in the form of an AB movement. The AB movement is a counter-movement to the XA movement, which usually makes up about 61.8% of the XA movement.
After the AB movement, there is another impulse movement called the BC movement. This movement should make up about 38.2% to 88.6% of the AB movement. If the BC movement reaches the 61.8% retracement level of the AB movement, then this is a good sign that the pattern is valid.
After the BC movement, there is another correction in the form of the CD movement. This movement should make up about 78.6% of the XA movement and should go in the opposite direction of the XA movement. If the CD movement reaches the 127% extreme level of the BC movement, then this is a good sign that the pattern is valid.
The pattern is complete when the CD movement reaches the 78.6% retracement level of the XA movement. Once the CD movement reaches the retracement level, a long position can be entered and a Stop Loss order can be placed below the low of the CD movement. The price target is usually determined based on the 127% or 161.8% extreme levels of the BC movement.
The bullish Gartley pattern with the exact rules that movements are allowed to make for the pattern to be valid
The bearish Gartley pattern with the exact rules that movements are allowed to make for the pattern to be valid
It is important to note that the Gartley pattern has a higher success rate when used with other analysis tools such as support and resistance levels, trend lines, and technical indicators. The Gartley pattern is often used with other chart patterns or indicators. For example, the pattern can provide an overview of where the price will develop in the long term, while day traders focus on executing short-term trades in the direction of the predicted trend. Traders can also use the individual points of the pattern as support and resistance levels.
Example of the Gartley pattern
Gartley patterns not only occur in specific markets but can be found in any market. Although advanced pattern trading is particularly applicable to the forex market, harmonic patterns also arise in the stock market, for example.
Even in the daily chart at $TSLA, valid Gartley patterns emerge that could ultimately have been traded. Here in the chart, you can see a bullish Gartley pattern that has emerged over several days and could have led to a long entry at point D.
Summary
- The Gartley pattern consists of four main movements, which are described with the points X, A, B, C, and D.
- The validity of the Gartley pattern is determined by certain retracement levels and Fibonacci ratios.
- A Gartley pattern alone is not sufficient to guarantee successful trading. It is always advisable to use various analysis methods and develop a sound trading strategy to be successful in the long term.