Have you ever heard of a Gartley Pattern?
In trading, this is one of the most popular chart patterns used by technical traders.
It’s easy to spot and can help you make informed decisions in a volatile market environment.
In this article, you will explore what a Gartley Pattern is, how to identify it in charts, and some typical examples of this powerful tool.
If you want to get ahead in the stock market, keep reading!
And, prepare to take your trading game to the next level.
What is Gartley Pattern Strategy?
As a trader, you may have come across the Gartley Pattern before.
What is a Gartley Pattern?
The strategy is named after H.M. Gartley, who first outlined it in his book “Profits in the Stock Market.”
This is a type of chart pattern used to identify potential market movements.
It is made up of three waves and usually lasts about three weeks.
The first wave is made up of high volume and low price.
How does Gartley Pattern Work?
The Gartley Pattern is based on the Fibonacci sequence, which is a series of numbers where each number is the sum of the previous two.
The Fibonacci sequence can be found in nature.
Many traders believe it can also be found in financial markets.
The basic idea behind the Gartley Pattern strategy is to buy or sell when the price reaches certain Fibonacci levels.
There are four main levels, including 23%, 38%, 50%, and 62%.
These levels represent how far prices typically retrace before resuming the overall trend.
They are known as “retracements.”
A retracement happens when the price moves in the opposite direction of the overall trend.
Example
For example, let’s say the overall trend is up.
The price will sometimes retrace or move lower before continuing higher.
This retracement gives traders an opportunity to enter a trade in the direction of the overall trend.
The Gartley Pattern strategy can be used for both long and short trades.
To enter a long trade, wait for the price to retrace to one of the Fibonacci levels listed above and then start moving back.
How Do I Recognize a Gartley Pattern?
There are two main ways to recognize Gartley Patterns:
The first way is to look for specific geometric shapes that form within the price action.
These shapes can be either bullish or bearish.
And, each has implications for the future direction of prices.
The second way is through Fibonacci ratios.
Specific Fibonacci ratios are often found within Gartley Patterns.
And, these ratios can be used to help predict future price movements.
We will explain more about this later on in this article.
How to Draw Gartley Pattern?
First, start by drawing a Fibonacci retracement from the most recent swing high to low.
Then, use the Fibonacci extension tool, extend the Fibonacci retracement from the swing high to beyond the Swing low.
This will give you your potential reversal zone.
To confirm that a Gartley Pattern is forming, wait for the price to retrace back to the 0.618 or 0.786 Fibonacci retracement level before entering a buy order.
Make sure to place your stop below the most recent swing low.
What is the Best Time to Apply the Gartley Pattern in FX Trading?
The Gartley chart pattern is used to signal potential reversals in the market.
The best time to use it in FX trading is when an overall trend is in the opposite direction of the price action.
This will help you to identify potential reversal points better.
It would be best if you also looked for instances where the price has retraced back to a key Fibonacci level.
As this can be an indication that a reversal is about to occur.
Why Gartley Patterns Work?
Gartley Patterns are a critical tool for technical traders.
It helps identify key turning points in the market.
There are five main reasons why it works:
1. Geometric Patterns
Gartley Patterns are formed when prices move in a specific geometric pattern.
This can include bullish or bearish formations, which have different implications for the future direction of the price.
2. Fibonacci Retracements
Gartley Patterns often form as prices move in the opposite direction of the overall trend.
This is due to the fact that Fibonacci retracements are a common occurrence in the market.
3. Ratio Analysis
Certain Fibonacci ratios are often found within Gartley Patterns.
4. Reversal Zones
By waiting for the price to retrace back to a key Fibonacci level, you can confirm that a Gartley pattern is forming.
This will help you to identify potential reversal points better.
5. Time Frame
Gartley Patterns are typically found within a specific timeframe.
Why are Gartley Patterns Based on Fibonacci Ratios?
Fibonacci ratios are found throughout nature.
It also has been proven to be accurate predictors of market behavior.
For example, the Golden Ratio is a Fibonacci ratio that traders often use to identify key turning points in the market.
In addition to being based on Fibonacci ratios, Gartley Patterns incorporate multiple technical analysis forms.
The technical analysis studies price action and chart patterns to identify trading opportunities.
As a result, the patterns give traders a well-rounded view of the market.
And, improve the chances of correctly identifying market turns.
Gartley Patterns have a long history of success in the markets because of its sound principles.
Countless traders have used it successfully to profit from market moves over the past decades.
If you want to add this pattern to your technical trading arsenal, study the theory behind it and learn how to apply it in the market.
How to Identify Bullish Gartley Patterns?
A bullish Gartley Pattern occurs when the market has been in a downtrend.
Then, retrace back up to a certain Fibonacci level before resuming its downtrend.
Different Fibonacci levels can be used in bullish Gartley Patterns.
Yet, the most common is the 38.2% Fibonacci retracement level.
Below are steps to identify this type of pattern.
Two Main Steps to Identify a Bullish Gartley Pattern
Step 1:
You should first look for a market that has been in a downtrend.
Step 2:
Once you have found such a market, you should look for a retracement back up to the 38.2% Fibonacci level.
If the market retraces to this level and resumes its downtrend, a bullish Gartley pattern is likely forming.
Why are Bullish Gartley Patterns Important?
This is a significant chart pattern technical analysts use to make trading decisions.
It is created by drawing a Fibonacci retracement from point X to point A and then a Fibonacci extension from point A to point B.
The Fibonacci extension is used to find the target price for the trade.
The target price is found by taking the difference between the high of point B and the low of point A, and adding it to the low of point B.
This gives us the target price for the trade.
The bullish Gartley Pattern can help traders make money in both up and down markets.
In an up market, it can be used to buy pullbacks.
In a down market, it can be used to short rallies in a downtrend.
How to Identify Bearish Gartley Patterns?
A bearish Gartley Pattern is entirely different from a bullish pattern.
It is the opposite of what we want to see in the market.
It occurs when the market is in an uptrend.
Then retraces back down to a certain Fibonacci level before resuming its uptrend.
In addition, the Gartley Pattern occurs when a security’s price moves in a specific, predictable pattern.
Traders often use it to identify potential reversals in the market.
Four Main Steps to Identify a Bearish Gartley Pattern
Step 1:
The very first step is to look for a market with clear uptrends.
Step 2:
Look for a retracement against the trend.
For the pattern to be valid, there must be a clear retracement against the overall trend.
Step 3:
Look for the “neckline” of the pattern.
This is typically formed by a horizontal line connecting the retracement’s lows.
Step 4:
Look for confirmation of the pattern with a new low below the neckline.
This final step is key in confirmatory support and resistance patterns like the Gartley.
What is the Target for the Bearish Gartley Pattern?
The target for the bearish Gartley Pattern is the D point, which is the bottom of it.
This is where the price should reverse and start to move back up.
How to Trade Forex Using the Gartley Pattern?
The Gartley Pattern is a bullish reversal pattern that can be used to trade forex.
The pattern is formed by four price points: two tops and two bottoms:
The first top is point A.
The second top is point B.
The first bottom is point C.
The second bottom is point D.
In addition, the Gartley Pattern can be used to trade both long and short positions.
To go long, place a stop order below point D.
To go short, set a stop order above point B.
The pattern can be found on any time frame chart.
However, it is often seen on longer-term charts such as the daily or weekly chart.
Understanding the Animal-illustrated Gartley Pattern
There are three main types of animal-illustrated Gartley Patterns.
They are crab pattern, bat pattern, and butterfly pattern.
Crab Pattern
It is a bearish reversal pattern that is formed when the price moves in a symmetrical pattern.
It consists of two stages: an advance and a decline.
In the first stage, the price moves up and then falls back down.
This is followed by a second stage in which the price moves up again.
But this time it falls back down below the original level.
The target for the crab pattern is the E point, which is the bottom of the pattern.
The ideal characteristics of a crab formation are as follows:
There are two possible locations for the AB move relative to the XA move: 0.382 or 0.618
BC might be a 0.382 or 0.886 retracement of AB, so keep a watch on it.
The correct value for CD is 1.618 times the length of the XA sequence.
Bat Pattern
It occurs when the price moves in a symmetrical pattern, but it is preceded by a false breakout.
It is similar to the crab pattern, but its second stage is different.
In the bat pattern, the price moves up and then falls back down.
But this time it stays above the original level.
The target for the bat pattern is the F point, which is the bottom of the pattern.
These are some of the bat's distinguishing features:
Move AB may land at the 0.382 or 0.500 retracement of XA.
CD will usually always fall at the 0.886 retracement of XA, whereas BC will always be the 0.382 or 0.886 retracement of AB.
The bat variant of the Gartley design may be recognized by its shape.
What are the Differences between Gartley Patterns and Bat Patterns?
The Gartley Pattern is created by drawing a series of Fibonacci retracements and extensions from a swing high and low.
The bat pattern is similar to the Gartley Pattern, but it uses different Fibonacci ratios and has a more defined structure.
The below section summarizes three main differences between these two types.
3 main differences:
The bat pattern uses a 50% Fibonacci retracement from the swing high to the swing low.
Meanwhile, the Gartley Pattern uses a 61.8% Fibonacci retracement.
The bat pattern also has an extended leg that goes beyond the 100% Fibonacci extension.
On the other hand, the Gartley Pattern only goes to the 161.8% extension.
Additionally, the bat pattern has an internal structure that consists of three legs,
The Gartley Pattern only has two.
This difference in structure means that the bat pattern is considered to be more reliable than the Gartley Pattern.
Finally, another key difference between these two patterns is that the bat pattern tends to form in markets that are range-bound or trending sideways.
Meanwhile, the Gartley Pattern can form in both ranging and trending markets.
Butterfly Pattern
In this pattern, there is a brief advance followed by a decline.
It is similar to the crab and bat patterns, but its second stage is different.
In detail, the price moves up and then falls back down.
But this time it rebounds and moves higher.
The target for the butterfly pattern is the G point, which is the bottom of the pattern.
While observing a butterfly, keep an eye out for these details:
Take action AB at the 0.786 retracement level of the previous action XA.
An optional retracement of 0.382 or 0.886 for the BC move, and an optional extension of 1.27 or 1.618 for the XA move.
It’s normal to fail to see the pattern at work when you first start looking for it.
It may take some time for the Gartley Pattern to become noticeable.
Given that it took a lot of people a long time to figure out the patterns that traders employ today.
It’s not surprising that there’s still a lot to learn about the patterns that exist in the world of trading.
The 8 Main Variations of the Gartley Pattern in Trading
There are 8 main variations of the Gartley Pattern that traders use to trade in the markets.
1. Bullish Gartley Pattern
This is the most common type of Gartley Pattern.
It signals a potential reversal from a downtrend to an uptrend.
2. Bearish Gartley Pattern
This pattern gives a sign of a potential reversal from an uptrend to a downtrend.
3.
This variation may indicate that price action is likely to continue moving higher after the completion of the pattern.
4. Bearish ABCD Pattern
It may reveal that price action is likely to continue moving lower after the completion of the pattern.
5. Bullish ABCD Pattern
This pattern signals that price action is likely to continue moving higher after the completion of the pattern.
Yet, with a possible reversal at point E.
6. Inverted Hammer
The price action is likely to continue moving lower after the completion of the pattern.
But with a possible reversal at point F.
7. Head-And-Shoulders
It signals that price action is likely to continue moving higher after the completion of the pattern.
Yet, with a possible reversal at point G.
8. Dragonfly
It may suggest that price action is likely to continue moving higher after the completion of the pattern.
But, with a possible reversal at point H.
How to Automatically Add Fibonacci Retracements in Metatrader 4?
If you’re a trader who uses the Fibonacci Retracement tool, you know that manually adding Fibonacci retracements to your charts can be time-consuming.
Fortunately, there’s a way to automate this process in Metatrader 4 (MT4).
Here’s how to do it:
1. Right-click on your chart and select “Template.”
2. Click on “Load Template”, then select the “Fibonacci Retracement” template.
3. Click “OK.”
Your Fibonacci retracements will now be automatically added to your chart whenever you load it.
Gartley Pattern Trading: Ratios, Rules, and Best Practices
When trading the Gartley Pattern, it’s important to keep in mind the following:
1. The Gartley Pattern is considered to be complete when price action moves back above point D.
2. Its target is the G point, which is the bottom of the pattern.
3. It is a bullish chart pattern that signals a potential reversal in the markets.
4. Remember the following ratios:
R = the distance of (point A, point B)
T = the distance of (point B, point C)
F = the distance of (point C, point D)
5. Traders should also be aware of false breakouts, which can occur when prices move outside of the expected pattern but then quickly reverse course.
Conclusion
The Gartley Pattern is a powerful trading tool that can give traders an edge over the market.
The key takeaway is understanding how the Fibonacci ratios are used to create an entry, stop loss, and take the profit level on each trade setup.
By mastering this chart pattern, you will become a more informed trader with greater precision when taking positions in the market.
