The famous Gartley pattern has a proven trackrecord. Some traders might question how come, a pattern introduced in 1935, is still applicable today. The answer lays in the fundamentals of trading psychology and the power of Fibonacci retracements. It is about time we show you how you set up a simple trading strategy and start to exploit this high predictability, high risk-reward harmonic trading pattern.
As you can read in our introduction into harmonic trading, the Gartley pattern is a powerful multi-rule based trade set-up that takes advantage of exhaustion in the market. A bullish Gartley pattern is often formed early in a trend. On some blogs or forums this pattern is referred to as the “Gartley 222” because the pattern originated from page 222 of H.M. Gartley’s book “Profits in the Stock Market” published in 1935.
The trading methodology of Gartley patterns, and harmonic trading in general, is based on finding major turning points or fractals in the market. When these turning points happen in concession of each other trend reversal exhaustion can be spotted. The strict rules, based on the Fibonacci retracement levels, need to be fulfilled before the pattern is complete. Before moving into more advanced stuff needed for the simple trading strategy, let’s quickly recap on these important rules.
The picture below illustrates the strict Fibonacci reversal and extensions rules needed to complete a Gartley pattern.
Gartley Strategy Rules
- Point B should be a retrace 0.618 from the XA move.
- Point C should retrace anywhere from 0.382 – 0.886 of the AB move.
- Point D should be a retrace 0.786 from the XA move and creates an entry zone.
- Point D should be a 1.27 or 1.618 extension of the BC move
Once a pattern aligns with all the requirements of the Gartley pattern and moves into the zone near Point D we call this a Potential Reversal Zone (PRZ). This is where you should monitor for evidence of a possible reversal. In case of a bullish Gartley, price action should stall from the down move and look for signs of strength (this can be by looking for candlestick patterns on a smaller time frame for example). If you find this type of evidence you can place a (long) trade at the PRZ.
Before moving into more details on where to place stop-loss orders and target orders, the picture below gives you a quick idea on how it looks like, and why the risk-reward ratio is so great with this harmonic pattern.
The buy pattern will always look like an “M” with an elongated front let. The sell pattern will always look like a “W” with an elongated front leg.
In order to be able to execute this trading strategy a trader needs to have a basic knowledge of
- Fractals: Being able to identify turning points or swings in the market. When familiar with reading market structure you will be fine without the use of the indicator of Fractals
- Fibonacci retracements: An absolute must! Update your knowledge on Fibonacci retracements and extensions here. The strict rules based on these Fibonacci levels make or break the validity of patterns used in harmonic trading.
Where to place target levels
As expected, in order to predetermine target levels you will also need your Fibonacci tool. The most common targets levels are a 38.2 and 61.8 Fibonacci retracement draw from the AD-leg. From here the most common approach is the use of a so called “T1-T2 profit taking method”.
This means that you take of half of your position once price action hits Target 1, which is located at the 38.2 Fibonacci retracement level. Once T1 has been hit, move your stop loss and place it a few pips above (so it accounts for transaction costs) your entry price. This way you create a trade on which you can’t lose any money on anymore.
Target 2 (T2) is placed at a 61.8 Fibonacci retracement.
Where to place stop loss levels
You should place your stops below the X leg. Your risk-reward ratio should be at least 1:1 on every trade to the 38.2 Fib from Target 1. If this can’t be achieved then it is advisable not to take the trade.
Although harmonic patterns, like the Gartley, hold great probabilities, it’s of utterly importance that traders stay disciplined. This means that the pattern can only be traded once it hits point D. If you believe a pattern is about to unfold, but the pattern is only at point C, traders should stay patient and hold off until all rules are fulfilled. The power of the Gartley pattern comes from converging all Fibonacci levels from point X to D and to use the pattern once it is completed for a well-defined risk.
Gartley patterns occur quite frequently on any time frame. They can be traded on any timeframe.
Confluence in trading Gartley patterns
The Gartley pattern is a pattern which can be traded on a standalone basis but can also be combined with classic technical analysis tools like chart reading. Having additional support levels close to PRZ helps adding an even higher probability for getting a retracement into the target areas.