Butterfly, Bat, Cypher, Shark, and Gartley pattern. These are not just fancy names. Harmonic trading, is acquiring an increasing attention among technical traders and investors: you MUST know what they are supposed to be used for.
Patterns like the Harmonic Gartley provide excellent opportunities to find accurate entries in financial marets, especially during phases of consolidation, in which price moves in ranges: since in about the 70% of the cases price moves inside limited areas on a chart, I think you should definitely understand how to trade harmonic patterns if you aspire to be a profitable trader.
In this article, I will teach you how to use one of the most famous and iconic harmonic pattern: Gartley. We will discuss about rules, ratios, methods of trading; then, we will see some real-life example trying to put in practice the theory presented. Are you ready?
What you will learn today:
- Gartley pattern explained: why you should study and understand how to trade this harmonic indicator;
- How to draw Gartley pattern in the right manner: check these simple rules;
- The PRZ: Potential Reversal Zone;
- The Gartley pattern trading strategy: how to identify stop loss and multiple take profit points in ranging markets;
- No matter what: always trade in the context!;
- Bullish and Bearish Gartley patterns: real world examples from Forex, Crypto and Commodities markets;
- Conclusion – what we’ve learned today.
Gartley Pattern Explained: why you should study and understand how to trade this harmonic indicator
Gartley pattern, is for sure one of the most traded, and so reliable, harmonic pattern. It was firstly introduced in 1935 by H.M. Gartley in the book “Profits in the Stock Market“. Nevertheless, it was only after S. Carney book “The Harmonic Trader” published in 1999 that this pattern acquired today’s connotation.
The increasing popularity of these kind of pattern it’s strictly connected to the peculiarities of this price formation. Harmonic patterns, due to their shapes, figure and rules of identification, tend to develop inside ranging markets, and help traders to find accurate entries even in condition of apparent “caos” in which price direction is not clear.
If you don’t trust me, I invite you to check youself: visit tradingview.com and look at how many of these patterns are identified everyday by traders!
How to draw Gartley pattern in the right manner: check these simple rules
Ok let’s dive into some basic rules of definition and identification for Gartley. As I already told you when we’ve discussed about bat pattern, what I really like about harmonic trading is precision and objectivity. These figures are based on clearly understandable and fixed rules, so that there is no room for subjectivity.
Gartley pattern relies on Fibonacci’s levels (extensions and retracements), and it’s formed by 4 leg movements. Starting from an impulse leg (XA):
- B point – should be at least at the 61.8% retracement of XA but it must be less than the 78.8%;
- C point – should be at least at the 61.8% retracement of AB but it must not exceed point A;
- D point – should be at least at the 78.8% retracement of the primary XA leg; if this level appear nearby the 127.2 extension of AB it is considered even more reliable;
Graphically, it appears as:
Please remember one important aspect! Gartley is a reversal pattern, so that a bullish Gartley is prelude to an uptrend phase after a downside movement (CD leg), while a bearish Gartley indicate a possible decrease in price action after an up movement (CD leg).
The PRZ: Potential Reversal Zone
Please, be enough smart to not sell or buy immediately after price hit the target level of 0.778 to form the D point! We should expect for a confirmation in price action before to actually enter in a new trade.
D point, indeed, provide us clues about the so-called “potential reversal zone”, an area on the chart in which we might expect price to reverse in the opposite direction. Then, inside this sensible area, we should look for a true entry reason to actually begin a new trade.
Look a this example:
In this case, the PRZ was characterised by the appearance of a tweezer bottom, a reversal candlestick formation able to corroborate our bullish sentiment after the manifestation of a bullish Gartley. Moreover, this tweezer bottom can be seen as part of an higher double bottom formation constituted by this pattern and D point, as we can see in the chart.
In this case, this Gartley bullish chart pattern provided an amazing opportunity in the forex market (AUDUSD), spotting a strong change in market behaviour:
the Gartley Pattern trading strategy: how to identify stop loss and multiple take profit points in ranging markets
There is another reason why I like harmonic trading beside the objectivity connected to the pattern recognition: as for any other harmonic indicator, even Gartley provide multiple targets and clear rules for stop loss identification.
This contribute to enhance the Gartley pattern success rate, providing us with the possibility to maximise profits and cutting losses at the same time.
Stop Loss: protect your position
When you fix Stop Loss, you should always consider the overall market context. Nevertheless, often harmonic traders just fix the exit order at the level of X point. Personally, I prefer to lower the risks connected to a narrow stop by increasing my stop level in one of these two ways:
- X point + 1 ATR (for manual entries);
- X point + N pips (for automatic orders; the amount depends on backtest and timeframe used);
Useful tip: when take profit level 1 is reached, I usually move my stop loss to zero, so that I can enjoy a risk-free trade. Very useful also by a psychological point of view.
Take Profit: time to put some money in your bank account
Once Gartley is completed, whether we are talking about a bullish o bearish formation, we can fix at least 2 targets for our trades.
We fix target looking at the retracements of AD leg
- at 38.2% retracement;
- at 61.8% retracement.
Look at the figure below:
No matter what: always trade in the context!
Context is ALWAYS crucial. we cannot just enter in the market buying or selling without taking into account where we are.
By considering the overall market condition, we can avoid a large number of false signals. A bullish Gartley will be more reliable nearby support zones, while bearish Gartley will likely to be prelude of market reversal nearby resistance areas.
Considering an example for EURGBP:
In addition, context will help to increase the accuracy of stop loss, helping you to improve considerably the risk-to-reward ratio. As you can see in the picture below, by just looking at previous market structures, we can narrow the SL level, increasing the R/R of the trade.
bullish and bearish Gartley patterns: real world examples from Forex, Crypto and Commodities markets
We can find Gartley pattern in almost every kind of market. The example below relates crypto market, daily timeframe. As you can see, in this case once D point developed, price tested this level a second time before to actually invert its direction.
Here instead, an example of bearish Gartley spotted in the forex market, EURCHF cross:
I think it could be useful for you to see even how a Gartley may appear before it’s completion. Here below, an example of a potential pattern in the commodity market:
Conclusion – what we have learned today
In this article, we have seen a complete tutorial for Gartley pattern, one of my favourite harmonic configuration. We have seen the basic rules and ratios you need to master if you want to implement this pattern in your everyday strategy and some example from several markets, even crypto and commodity ones.
They key message I tried to pass you is that Gartley provides clear and standard rules to spot entries in the market, lowering the impact of subjectivity in your analysis. In addition, the possibility to identify multiple target zones and at the same time reduce the amount of stop loss by looking at the overall context, will definitely improve the success rate of Gartley pattern among other “classic” formation.
I hope you enjoyed this content, if so please share it and support the growth of this blog! Before to leave I suggest you to check the other articles of the blog, like the complete Harmonic Bat pattern tutorial. See you next time!