The Gartley pattern is the most commonly used harmonic pattern that predicts a bullish or bearish retracement and continuation.
Harmonic chart patterns were developed by H. M. Gartley in 1932 and published in his book, Profits in the Stock Market. The Gartley pattern, or Gartley 222 pattern, is one of the most popular harmonic patterns to predict a continuation of a prevailing trend. While it’s similar to the AB=CD pattern, the Gartley pattern contains one more leg.
Let’s take a closer look at how to identify and use the Gartley pattern, as well as see an example of its use in the wild.
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What is the Gartley Pattern?
The Gartley chart pattern is a continuation pattern that helps you predict if a price will continue its original trend after a retracement. Depending on its orientation, the pattern can be used to predict either a bullish or bearish continuation. It also appears relatively frequently in price charts, which makes it a relatively useful form of analysis.
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Let’s take a look at a diagram of the pattern:
The Gartley pattern consists of three legs:
- X-A: The X-A leg is the initial move higher or lower.
- A-B: The A-B leg is a 61.8% Fibonacci retracement of the X-A leg.
- B-C: The B-C leg is a 38.2% to 88.6% Fibonacci retracement of the A-B leg.
- C-D: The C-D leg is a 78.6% retracement of the X-A leg.
These reversals usually don’t fall exactly on key Fibonacci levels, but they should be roughly in the area to qualify the pattern.
How to Use Gartley Patterns
Buy and sell signals are generated when the price reaches Point D, which is a 78.6% retracement of the X-A leg. At that point, there’s a high likelihood that the price will reverse its short-term trend and continue on its long-term trend. Any significant move beyond these levels invalidates the pattern and the position should be exited at a small loss.
Stop-loss points are best placed just below the initial Point X, which leaves relatively little downside compared to the upside potential. Take-profit points vary depending on the situation, but many traders look for a 61.8% retracement of the A-D levels. Other traders look for a move to retest Point A’s levels, which are usually at the prior high or low of the long-term trend. It may be a good idea to take-profit at multiple levels to average out gains.
As with many other forms of technical analysis, Gartley patterns work best in conjunction with other forms of technical analysis, including chart patterns and technical indicators. Long-term trend lines and price channels can be helpful for showing areas of support and resistance, while technical indicators can provide insight into when the price is overbought or oversold.
Example of a Gartley Pattern
Let’s take a look at an example of the Gartley pattern in WTI Crude Oil:
In this example, a Gartley pattern emerged in the WTI Crude Oil futures market. The A-B leg’s retracement is 62.7% of X-A, which is very close to the 61.8% Fibonacci level. The C-D leg’s retracement is 77.4% of X-A, which is very close to the 78.6% Fibonacci level. Traders could have entered the position near Point D to capitalize on the subsequent rebound.
Traders could have also looked for long-term support trend lines that supported a rebound at Point D. The only major red flag in the above examples was the lack of volume following the reversal, but the strong trend line support and other technical indicators may have been enough to justify a buy signal.
The Bottom Line
The Gartley pattern is one of the most popular harmonic patterns used to predict continuations of the underlying trend. Since it appears relatively frequently, traders often use it as a starting point for further technical analysis. The key is matching up Fibonacci levels and setting the right position management trades (e.g. stop-loss and take-profit points).