The Gartley pattern is one of the harmonic patterns, which are special chart patterns used in technical analysis to show where an extended pullback in a trend is likely to reverse and continue the trend. As the oldest recognized harmonic pattern, the Gartley pattern is one of the most traded of all the patterns in the harmonic group.
Created by HM Gartley for trading the stock market, the pattern found its way to other financial markets, including the spot forex market, where it is widely used by traders to analyze and trade price retracements. The original pattern does not make use of the Fibonacci retracement and extension levels, but that has been added to make it more unique and reliable.
The Gartley pattern, just like other harmonic patterns, can be useful in identifying potential reversal levels for trend-following swing trades. Even day traders can use the pattern to spot intraday swing highs and lows that can act as potential price reversal zones. Owing to its popularity, we will explain the pattern in detail in this post. Some of the things you will learn here include:
- What the Gartley pattern is
- The psychology behind it
- The two types
- The tools you can use to draw the pattern
- How to draw the pattern
- How to trade the two types of the pattern
What is the Gartley pattern?
The Gartley chart pattern is a special chart pattern that traders can use to predict whether the price will reverse and continue its original trend after a retracement and where the retracement is likely to reverse. It was the first harmonic pattern and was described in 1932 by Harold McKinley Gartley — and was rightly named after him.
Mr. Gartley was a very popular stock trader in the early and mid-1930s because of his stock market advisory service, which had a huge following. He used scientific and statistical methods to analyze market behavior and price movements.
In 1935, he wrote a book, “Profits in the Stock Market”, where he described a series of four price swings that constitute an extended pullback with a trend continuation implication. The pattern is also called the ‘222 pattern’ or ‘Gartley 22’ because the details of how to identify and trade it are found on page 222 of the book.
As a member of the harmonic patterns family, the Gartley pattern has the basic ABCD pattern that occurs as a multi-legged pullback after a significant impulse wave in the trend direction. Thus, in an uptrend, the pattern starts with a swing high that is followed by a downswing and then another upswing that failed to reach the previous swing high, giving it an M shape or a descending double top appearance.
In a downtrend, the pattern starts with a swing low followed by a rally and then a second downswing that failed to reach the previous low. So, it has an up-slanting W shape or an ascending double bottom appearance.
When Mr. Gartley described the pattern, he did not use the Fibonacci retracement and extension levels to mark the price swings. Later on, Larry Pesavento improved the original pattern by using Fibonacci ratios to explain the swing points, which also helped to differentiate it from a similar pattern later described by Scott Carney — the Bat pattern.
As with other harmonic patterns, one of the main features of the Gartley pattern, which comes from the Fibonacci ratios, is that it leads the price. That is, you know where the pattern will be completed before the price gets there. This is known as the potential reversal zone because the pullback is expected to finally reverse at that level.
The components and structure of the Gartley pattern
The Gartley pattern is a simple XABCD pattern that consists of four waves and five swing points — points X, A, B, C, and D. The four waves are the XA, AB, BC, and CD swings. Here is how they are structured:
- The XA wave: This is an impulse wave in the direction of the trend preceding the formation of the pattern. It starts from point X and ends at point A, which could be a swing high or swing low. In an uptrend, the XA wave is an upswing that creates a local high at point A, while in a downtrend, it is a downswing that bottoms at point A.
- The AB wave: Starting from point A to point B, the AB wave is a pullback on the XA wave, and it is usually a 61.8% retracement of the XA wave. So, in an uptrend, the B point is above the X point, while in a downtrend, the B point is below the X point.
- The BC wave: It starts from the B point to the C point. The wave is an attempted continuation of the XA wave but was stopped before it could reach the A point. Thus, it ended up becoming a retracement of the AB swing. It is usually about 38.2% or 88.6% retracement of the AB swing.
- The CD wave: This wave is an extension of the AB pullback wave. It extends beyond point B but falls short of reaching point X where the pattern started. It is usually a 127.2% to 161.8% extension of the BC wave, and the D point is at 78.6% retracement of the XA wave. The entire pattern ends at the D point, which is known as the potential reversal zone (PRZ).
Why does the Gartley pattern form?
The Gartley pattern is a description of a complex pullback with multiple legs. It is basically an AB = CD pattern occurring as a pullback after an impulse wave in the trend direction — the XA wave. With the BC wave making a failed attempt at the prior top/bottom (the A point) and the CD point extending beyond the intervening swing low/high (point B), the pattern seems like a double top/bottom pattern that has broken the neckline.
But far from being a reversal pattern, the Gartley pattern signifies a potential trend continuation. The extended pullback, which started with profit taking, was just to trap naïve traders that are quick to pursue a trend reversal. Here is the psychology behind it:
As the price makes the big XA impulse wave, some of the big boys (professional traders) try to take some profits off the table. This caused the price to start a pullback, which moves up to point B. With the price now trading at an attractive level, retail traders who have been waiting for a price correction floods the market with their orders.
This reverses the pullback and pushes the price to continue the previous trend, but the swing was cut short by continued profit taking and stop loss hunting by the big boys — they hunt the stop loss orders of those who entered at point B, which naturally would be beyond the B swing point.
As a result, they push the price beyond the B point, not only triggering stop loss orders but also attracting those who would read the price action as a trend reversal signal — a double top/bottom pattern with a broken neckline. All these provide more liquidity for the big boys to add to their position at a better price level. When the big boys have absorbed all the liquidity, they push the price around to continue the previous trend.
The types of the Gartley pattern
Depending on the orientation of the chart formation and the trend where it occurs, the Gartley pattern can be used to anticipate either a bullish or bearish price continuation. So, there are bullish and bearish Gartley patterns.
The bullish Gartley pattern
A bullish Gartley pattern is seen in an uptrend. It has an M shape and may be taken for a double top pattern with a lower second top. The pattern starts with an upward impulse wave — the XA wave — and ends with a downward CD wave that does not get to the X point. Of course, there is an intervening downward AB wave and upward BC wave.
The pattern is completed at the D point, which is regarded as a potential bullish reversal zone because it creates a bullish signal, indicating that the price is likely to turn back upwards at that level to continue with the preexisting uptrend.
The bearish Gartley pattern
The bearish Gartley pattern has a W shape and may be taken for an ascending double bottom pattern. It starts with the XA wave, which is a downward impulse wave, followed by an upward AB wave and then by another downward wave, the BC wave, which forms a higher low. The pattern ends with another upward wave, the CD wave, extending from the C point to the D point, which does not get to the X point.
Mostly seen in a downtrend, the pattern is completed at the D point, which is seen as a potential bearish reversal zone. The price is likely to reverse at that zone and head downwards to continue with the preexisting downtrend. Interestingly, with the Fibonacci ratios, the D point can be estimated before the price gets there.
Tools for tracing the Gartley pattern in a price chart
As with other patterns in the harmonic family, the Gartley pattern is a complex chart pattern, but it can be drawn manually using some basic tools in your trading platforms, such as the trend lines for tracing the price swings, the Fibonacci retracement and extension tools for measuring the ratios, and a labeling tool to indicated the swing points.
There are tools that perform all the three functions — tracing the price swings, labeling the price swing points, and showing the Fibonacci retracement and extension ratios — simultaneously in a very efficient manner. For the MetaTrader 4 platform, there are custom harmonic indicators for that, the most common of which is the ZUP indicator. It was formulated with the MetaTrader 4’s zig-zag indicator and the Fibonacci retracement and extension tool.
In the TradingView platform, there are different built-in harmonic pattern tools — such as the XABCD Pattern tool, the Cypher Pattern tool, and the ABCD Pattern tool — for drawing the various harmonic patterns. The harmonic tool you can use to draw the Gartley pattern is the XABCD Pattern.
Both Gartley and Bat patterns have a similar structure — they both have a descending double top (for the bullish patterns) or ascending double bottom (for the bearish patterns) appearance, with the D point not extending beyond the X point where the initial impulse swing started. The only difference lies in the Fibonacci retracement and extension levels of some of the swing points.
Hence, if you see a price formation with two descending tops in an uptrend or two ascending bottoms in a downtrend, keep an open mind, since it can either be a trend reversal double top/bottom formation or a trend continuation harmonic pattern. At this stage, three of the four swings that make up a harmonic pattern has completed, and the fourth one is forming.
Since it’s better to be on the side of the trend, anticipate a continuation formation. So, grab your harmonic pattern tool and trace the price swings, measuring the Fibonacci retracement and extension ratios of the various swings. These are the steps to follow:
- Identify the origin of the first impulse wave that started the formation of the pattern — this is your first swing point
- Pick the XABCD Pattern tool on the left side of the TradingView platform or the ZUP indicator in the MT4 platform, which you must have previously installed, and click on that first point — it’s automatically labeled X
- Trace the first, second, and third price swings to the second, third, and fourth swing points, ensuring that the swing points take the A, B, and C labels in that order
- Drag the tool further to a potential fifth swing point and drop the D label there, which should be a 78.6% retracement of the X point, even though the price has not got there yet — this becomes your potential reversal zone
After this, check the Fibonacci ratios of the swing points to be sure that they meet the criteria for a Gartley pattern.
Gartley pattern rules: the checklist
- The AB swing should be around 61.8% retracement of the XA swing.
- The BC swing should be a retracement of 38.2% or 88.6% of the AB swing.
- The CD wave should be 127.2% to 161.8% extension of the BC swing.
- Point D is at 78.6% retracement of the XA swing
The guide for trading the Gartley patterns
Harmonic patterns, generally, are complex, so they require advanced chart analysis, which may be difficult for new traders — the Gartley patterns are not any exceptions. However, if you can follow these rules and step-by-step guides, you can master how to trade the Gartley patterns.
The trading rules
When you want to trade the Gartley pattern or any of the harmonic patterns, these are some of the rules to observe:
- Allow the price to reach the PRZ (D point) first: The harmonic patterns are leading indicators since you know the potential reversal zone or the D point (where the pattern completes) before the price gets there. However, you should avoid the temptation to place limit orders at that level with the expectation that the price would reverse once it reaches there. That would be a mistake because the price can go significantly beyond the identified zone, and the pattern may not hold. The best thing is to wait for the pattern to complete first before deciding how and when to enter the market.
Make use of a trade trigger: A trade trigger tells you when the price is probably about to start a new wave. It is a vital component of any reasonable trading strategy. While the PRZ of the harmonic pattern tells you where the price is likely to reverse and continue the previous trend, you need a trigger to know the right moment to place a trade after the price has gotten to the PRZ. Some of the triggers you can use to trade the Gartley pattern are counter-trend line
- breakouts, oscillator divergence, and, of course, reversal candlestick patterns, such as pin bars, engulfing patterns, inside bars, and morning or evening stars.
- Take note of the right place for your stop loss order: Before placing any trade, make sure that you have determined the right place for your stop loss. Normally, it should be some pips below the lowest point or above the highest point of the PRZ, depending on the type of the pattern.
- Plan how you take profit: The Gartley pattern and other harmonic patterns have many price swing points which can serve as potential profit targets. So, most harmonic traders tend to take partial profits at multiple levels, such as before the C and A swing points, as well as some significant Fibonacci levels. You may also trail your profit, but make sure you bring your stop loss to breakeven point once the price has moved significantly in your favor.
A step-by-step guide for trading a bullish Gartley pattern
These are steps you can follow when trading a bullish Gartley pattern:
- Spot a newly forming bullish Gartley pattern: The first step is to identify a potentially forming bullish Gartley pattern in an uptrend. It is very difficult to tell at the early stages which harmonic pattern is forming because many of them look alike at that stage and may even be taken for a double top reversal pattern. Nevertheless, when you see three price swings with the fourth swing coming down, which looks like a descending double top, in an uptrend, suspect a potential harmonic pattern, possibly a bullish Gartley.
- Trace the pattern and identify the PRZ: Use the harmonic pattern tool in whatever platform you are trading with and trace the various price swings. The pattern will look like an M, but the fourth leg hasn’t completed. Drag your tracing down to the PRZ (the D point), which is 127.2% to 161.8% extension of the BC swing and 78.6% retracement of point X, even though the price has not yet reached there.
Wait for the pattern to complete at the PRZ: Now that you know the PRZ, wait for the price to get there. When it does get there, check whether the price finds support at that level. There is a higher chance that the level would support if it forms a confluence with other price structures, like a previous swing point, trend line, or long-period moving average.
Check for a bullish trade trigger: If the PRZ is supporting, check for a bullish trade trigger, such as a bullish reversal candlestick (morning star, hammer, bullish engulfing, or bullish inside bar) pattern, a bullish divergence in an oscillator, or the breakout of a counter-trend line placed on the CD wave.
Buy at the open of the next price bar after the trigger: Enter your buy order at the close of the candlestick that completes the trigger or the open of the next candlestick. It is possible to place a buy stop order above the price bar that completed the trigger.
Place your stop loss order: Put your stop loss order a few pips below the lowest point in the PRZ. You are better off with a hard stop loss, as the market can move violently against your position.
Manage your trade: You can manage your trades by taking partial profits at multiple levels, such as the B, C, and A swing points, as well as the 161.8% extension of the A-to-D move. Plan when to move your stop loss to the breakeven — probably when the price crosses above the B point.
A step-by-step guide for trading a bearish Gartley pattern
Follow these steps when trading a bearish Gartley pattern:
Identify a newly forming bearish Gartley pattern: You must first identify a newly forming bearish harmonic pattern and watch to see if it completes as a bearish Gartley pattern. At this stage, many harmonic patterns look alike and even resemble an ascending double bottom reversal pattern in a downtrend. So, when you see a price formation like that, you should suspect a potential harmonic pattern, which may end up being a bearish Gartley pattern.
Trace the pattern and mark the PRZ: Pick the harmonic pattern tool in your platform and trace the various price swings. The pattern will have a W shape, but the fourth leg will still be forming.
Drag your tool up to a 127.2% to 161.8% extension of point B and 78.6% retracement of point X, even though the price has not yet reached there. This becomes your point D or the PRZ.
Wait for the pattern to complete at the marked D point: After marking the PRZ, wait for the price to reach there and check to see how the level is holding up. If the level corresponds to a previous price swing point or a trend line, it is more likely to hold.
Check for a bearish trade trigger: If the PRZ looks like it’s strongly resisting, look for a bearish trade trigger — a bearish reversal candlestick, such as the shooting star, evening star, bearish engulfing, or inside bar) pattern. Your trigger can also be a bearish divergence in an oscillator or the breakdown of a counter-trend line placed along the CD wave.
Enter a sell order at the open of the next price bar after the trigger: Go short at the close of the candlestick that completes the bearish trigger or the open of the next one. You can also place a sell stop order below the price bar that completed the trigger.
Put your stop loss order: Place your stop loss order some pips above the highest point of the PRZ. Please make use of a hard stop loss, as the market can move violently against your position.
Manage your trade: Plan how to manage your trade — moving your stop loss to breakeven and taking profits. You may move your stop loss to breakeven when the price falls below the B point and take partial profits at multiple levels, such as the C and A swing points, as well as the 161.8% extension of the A-to-D move.
The Gartley pattern is the oldest harmonic pattern and is still one of the favorites among traders. It is useful in identifying potential levels where a complex pullback will reverse for the trend to continue.