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# Gartley Harmonic Pattern Trading Strategy

Author: Consultant Finmaxfx

The Gartley pattern is the first-known and most commonly used type of harmonic chart patterns in technical analysis. It was introduced in H.M. Gartley’s book “Profits in the stock market” in 1935. Since then, this method became popular in many areas of trading in the financial markets including indices, currency pairs, commodities and stocks. The main idea of the pattern is that asset prices form trends with a certain tendency in terms of relations between corrections and new waves in the previous direction. Harmonic patterns are based on Fibonacci ratios and relations between several points of the trend.

The main goal of harmonic patterns is to show the trend's direction, identify entry points, calculate levels of stop-loss orders and define potential targets to take profits. In most cases on monarch butterflies are used together with other technical analysis tools, including indicators and graphical analysis.

This article shows several types of harmonic patterns, explains tips and tricks on how to use them in Forex trading, as well as sheds light on the most popular harmonic chart setup - Gartley pattern.

## What is a Gartley pattern?

The Gartley pattern is a type of XABCD or harmonic pattern. It is a continuation pattern, reflecting several waves of a counter-trend retracement measuring the depth of the correction and highlighting the entry point as well as levels for the stop-loss and take-profit orders. Relations of all the distances between touchpoints are equal or close to Fibonacci retracement levels.

Here are the key conditions of the Gartley chart pattern:

• Point C has to be lower than point A;
• Point D has to be lower than point B but higher than point X;
• The distance AB relates to XA as 0.618, which means that the point B is a retracement of 61.8% counting from point X;
• The leg BC relates to AB as 32.8%. In other words, point B is a correction of 32.8% counting from point A;
• The wave CD is higher than the distance BC by 61.8%, reflecting the second leg of the retracement, which is deeper than the first one;
• The point D completes the continuation pattern, signalling the end of the retracement and generating entry signals. Targets for trading positions are equal to the level of the point C, A and 161.8% counting from point A as the final destination of the trend.

An example below shows the Gartley continuation pattern. Forex traders should keep in mind that the distances and relations mentioned in the conditions do not necessarily have to match exact figures. Even if the ratios are close to Fibo levels, the pattern can be used for profitable trading.

### How to identify Gartley patterns?

The best approach to identify Gartley patterns is similar to spotting such chart setups as triple tops and bottoms, head-and-shoulders patterns and so on. The most simple way to support such formations is to switch to the line chart view instead of Japanese candlesticks. In this way, traders will see peaks and bottoms much easier because candles come together with too much noise and unnecessary information sometimes. The most important part is to identify a trend, find reversal points of counter trend price action and figure out consecutive lower highs or higher lows depending on the trend's direction. After a trader found a similar formation on the price chart, in my open the special tool in the grass analysis menu on the left side of the chart. It is called XABCD formation. All of the touchpoints have to be connected consequently according to the order of their appearance on the chart. The tool will show the necessary relations and percentage of the replacement. Horizontal marks equal to touchpoints will highlight appropriate levels for taking profits or cutting losses. In case if ratios between the legs of the pattern are far from Fibonacci levels then search our formation could not be considered as Gartley pattern and have to be ignored.

## Rules of the Gartley pattern

After all of the conditions of the Gartley pattern indicator are met, forex Traders have to move on to planning the trading deal. Here is the list of trading rules using the Gartley pattern trading strategy.

The stop-loss order has to be hidden below or above the X point. The distance between the point and the stop-loss order depends on several factors such as the currency pair, trading volume volatility and other additional market conditions. There is also an option to manually control the trading position, checking the Technical sentiment on additional tools, and cutting losses manually in case if the price goes far below the point X. If the price goes in the right direction right from the entry point D, traders should remove the stop-loss order into the non-risk mode after a predetermined number of positive pips. This distance also depends on the exact asset, trading conditions and the time frame.

The initial take-profit target has to be equal or close to point C. Traders should consider taking at least partial profit in case of a failed test of the first target. If the price breaks through the level C, then they take profit order has to be moved to point A.

General long-term target using the buy and hold trading strategy can be calculated by multiplying the distance XA by 1.618.

It is also important to make sure that the direction of the trading position comes in line with the general long-term trend and fundamental environment. For example, when trading on the hourly chart using the Gartley pattern, twitter should look back on daily charts, analysing the current market conditions. Additional technical analysis tools may include powerful trend indicators to double-check the current momentum and the trend's direction and oscillators to identify overbought and oversold levels. Traders should remember that the most sustainable profits come from deals that follow long-term trends.

### Bullish Gartley pattern

Bullish Gartley pattern continues the previous uptrend. It is used to identify moments when the counter-trend correction is coming to an end and the bearish momentum is getting exhausted, offering an attractive entry-level for the general uptrend. All of the conditions and rules mentioned above apply. Bullish formations are used to open long positions and benefit on the price appreciation. Additional technical indicators to measure the current bullish momentum or useful in terms of confirming or denying the signal coming from the Gartley pattern. Traders should ignore harmonic patterns in case of the do not come in line with other technical indicators, while the level of stop-loss orders has to be kept tighter in case if they intraday trading is made in the opposite direction to long-term charts. Here is an example of a bullish Gartley pattern:

### Bearish Gartley pattern

Bearish Gartley pattern is a mirrored reflection of the bullish formation. Relations between replacement legs and continuation waves remain the same, while the sequence of higher lows changes to lower highs. The rest of the conditions and rules are the same with the only difference that should consider opening short positions to follow a long-term downtrend. The screenshot below shows an example of a bearish Gartley pattern:

## How to use Gartley patterns in Forex trading?

Gartley patterns are used in forex trading to answer one of the most essential questions: is the current trend is going to continue and what we see here is just a temporary rebound all the asset price, or should the market players expected long-term brother's open change of the trend direction? The approach of using Fibonacci levels is similar to measuring the depths of correction during strong trends with the help of Ichimoku Cloud indicator. The main idea is that until the rebound did not reach a certain depth, then the continuation of the price action in the same direction is likely. On the other hand, if the correction reached a critical level, then the previous trend might come to an end, thus, deals in the opposite direction could become more attractive.

## Examples of Gartley patterns

The chart below shows EUR/GBP on the hourly timeframe. The initial uptrend formed a local peak at point A. After that, a bearish replacement formed the first bottom at point B. Although the depth of the replacement was rather large, the relation between two legs was closed to 61.8% Fibo levels. The following bullish movement formed point C which was lower than point A. And there was another bearish run towards point D, which completed the formation. It would have seemed that the formation reminds the reversal head-and-shoulders pattern, but that was Gartley pattern and it's continued the uptrend. A trader spotted the Gartley pattern and decided to go long on the currency pair. The stop loss was set at point X. As the price chart shows, all of the three targets were hit consistently, and the trader took nice profit.

If you like this strategy, you might also be interested in this Shark pattern Forex trading strategy

## Conclusion

The Gartley pattern is the most commonly used harmonic pattern for the graphical analysis. It is used to identify the continuation of the previous trend, calculate the possible depth of retracements and entry points, as well as determine stop-loss and take-profit orders. The formation is based on Fibonacci levels of relations between waves of correction. There is a list of conditions and rules for trading Forex using the Gartley pattern, while additional indicators and long-term technical analysis can help to increase the efficiency of a trading system.