Back in the mid-1930s, a remarkably brilliant trader named Harold McKinley Gartley ran a top-rated stock market advisory service. His service was among the first to utilize scientific and statistical methods to scrutinize market behaviour.
Gartley claimed to have cracked two of the most challenging questions for traders: what to buy and when to buy it. It didn’t take long for traders to discover that these patterns were not just limited to the stock market but could be applied across various other markets.
Since then, numerous books, trading software, and additional patterns (discussed later) have emerged, all rooted in Gartley’s original ideas.
Gartley Pattern
The Gartley pattern is a bullish or bearish ABCD formation composed of four consecutive price movements. When a Gartley pattern appears, it often signals the continuation of an existing trend.
Similar to the three-drive pattern, the Gartley pattern is a variation of the ABCD pattern but includes an additional leg. In the Gartley, this extra movement is a significant high or low preceding point A, commonly known as point X. The movement from X to A represents the prevailing trend, which is expected to resume once the Gartley pattern is complete.
This pattern is named after H.M. Gartley, an early technical analyst who first introduced it in his book Profits in the Stock Market. Gartley patterns are not exclusive to stock charts; they can be observed across a wide range of markets.
Trading the Gartley Pattern Explained
The Gartley pattern is one of the most prevalent harmonic chart patterns. Harmonic patterns are based on the idea that Fibonacci sequences can be used to create geometric structures, such as breakouts and retracements, in price movements.
The Fibonacci ratio, which frequently occurs in nature, has become a central focus for technical analysts who utilize tools like Fibonacci retracements, extensions, fans, clusters, and time zones. Gartley pattern trading helps you to be a successful trader.
Many technical analysts combine the Gartley pattern with other chart patterns or technical indicators. For instance, the Gartley pattern might offer a broader perspective on where the price is likely to move over the long term, while traders focus on making short-term trades aligned with the anticipated trend. The breakout and breakdown price targets identified by the Gartley pattern can also serve as support and resistance levels for traders.
The primary advantage of these chart patterns is that they provide detailed insights into both the timing and extent of price movements, rather than focusing on just one aspect.
Other popular geometric chart patterns include Elliott Waves, which similarly predict future trends based on the formation and relationship of price movements.
Identifying Gartley Patterns
In the example above, the Gartley pattern starts with an uptrend from point 0 to point 1, followed by a price reversal at point 1. Using Fibonacci ratios, the retracement from point 0 to point 2 should be approximately 61.8%. At point 2, the price reverses again towards point 3, which should reflect a 38.2% retracement from point 1.
The price then reverses once more at point 3, moving towards point 4. Upon reaching point 4, the pattern is considered complete, triggering buy signals with an upside target based on point 3, point 1, and a final price target at a 161.8% extension from point 1. Point 0 is often used as a stop-loss level for the trade.
Although these Fibonacci levels don’t have to be exact, the pattern tends to be more reliable when they closely align. The bearish Gartley pattern is simply the mirror image of the bullish one, predicting a downward trend with specific price targets once the pattern completes at the fourth point.
Examples of Gartley Pattern with Entry Rules
The above example demonstrates a reversal using the Gartley pattern on the daily chart of Exide Industries, constructed using the XABCD tool available on Investing.com.
To be recognized as a Gartley pattern, specific criteria must be met:
Point B: The retracement of the original XA leg should fall between the 0.618 and 0.786 Fibonacci levels. In this example, the 0.618 level is at 209.68, and Point B is at 209, which satisfies this requirement
Point C: This point should be within the 0.618 to 1.0 retracement of the AB leg but should not exceed Point A. As illustrated in the example, Point C falls within these specified levels.
Point D: Unlike the other points, D represents a zone, known as the Potential Reversal Zone (PRZ), where the price is likely to reverse. The PRZ is determined by the following two criteria:
- A 0.786 retracement of the primary XA leg.
- An AB projection of either 1.27 or 1.618.
In this example, the 0.786 retracement occurs at 202.9, and the 1.272 projection is at 202. Therefore, the PRZ is defined as the zone between 202 and 202.9, which serves as an entry zone. For the Gartley pattern to be considered valid, this zone should ideally be no wider than 1%, ensuring it qualifies as a reliable entry point.
Target and Stop Loss
After entering at point D within the PRZ zone, the first target is typically set at the 0.618 Fibonacci retracement level, with the next target at the 0.382 level. The stop loss is generally placed just below point X, as illustrated in the accompanying figure. The closer point D is to point X, the more favourable the risk-reward ratio becomes.
In the example provided, the stock has already reached the first target with a gap up and is nearing the second target, which is expected to unfold shortly.
Example 1: HDFC (Continuation Pattern)
Another example of the Gartley pattern, this time as a continuation pattern, can be seen in the 4-hour chart of HDFC Ltd, formed between April 18 and May 2, 2019. In this case, the PRZ is located between 2014.5 and 2017.5. The stock continued its selloff in line with the original trend without triggering the stop loss and successfully hit all targets.
Conclusion
For traders new to Harmonic trading, the Gartley pattern is an excellent starting point due to its simplicity and ease of understanding. One of the key advantages of this pattern is its favourable risk-reward ratio, along with its frequent appearance on charts. By adhering to the guidelines outlined in this article and practising disciplined money management, traders can increase their chances of making profitable trades.