How to Trade the Gartley Pattern. I Test If It Really Works!

The Gartley Pattern is one of six harmonic patterns in technical analysis. Based on Fibonacci ratios, it is frequently employed by traders to pinpoint potential market reversal points.

Traders can utilize the Gartley Pattern to identify and capitalize on potential trend reversals. It consists of four key pivot points: XA, AB, BC, and CD. These pivot points are connected by Fibonacci ratios, which indicate specific price levels where traders can expect to see trend changes.

There is little evidence of structured backtesting on the Gartley pattern. I attempt to discover if it really works and if you should trade it.

Understanding the Gartley Pattern

The Gartley Pattern, or Gartley 222, developed by H.M. Gartley, is a harmonic chart pattern used in technical analysis to identify potential reversal zones. Utilizing Fibonacci ratios, the pattern segments price movements into specific retracements and extensions to pinpoint buy or sell opportunities.

The Gartley Pattern originates from H.M. Gartley’s book Profits in the Stock Market, published in 1935. This work introduced harmonic patterns, including the bullish and bearish Gartley patterns.

However, in this or any publication, no backtesting was performed, and there was little evidence that this pattern actually worked consistently. In this article, I will attempt to quantify its importance in trading.

How It Works

The key to the Gartley Pattern lies in its specific formation, which consists of five points (X, A, B, C, D), each defined by Fibonacci retracement levels. This harmonic pattern is renowned for its accuracy in signaling reversals, making it a valuable tool for technical analysts.

The role of Fibonacci ratios, such as 61.8% and 78.6%, is crucial in forming the Gartley Pattern. These ratios help establish key levels of support and resistance, facilitating strategic entry and exit points during trades.

The structure of the Gartley Pattern consists of five key points: X, A, B, C, and D. Each segment—XA, AB, BC, and CD—corresponds to specific Fibonacci retracement and extension levels.

• XA: The initial move from point X to A.
• AB: A retracement from A to B, typically 61.8% or 78.6% of XA.
• BC: An extension from B to C, often 38.2% or 88.6% of AB.
• CD: The final leg, where the pattern completes, at 127.2% or 161.8% of BC.

These ratios help in determining the potential reversal zone, where traders expect a change in price direction.

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Identifying the Gartley Pattern

Identifying the Gartley Pattern involves recognizing the specific Fibonacci-based retracements and extensions in the price movements.

1. Locate Point X: Start with an initial significant move.
2. Measure XA and Retrace to B: Ensure point B aligns with a 61.8% or 78.6% retracement of XA.
3. Find BC Extension: Measure the move from B to C, confirming with an extension hitting 38.2% or 88.6% of AB.
4. Complete Point D: Identify the final leg and check that CD aligns with a 127.2% or 161.8% extension of BC.

This systematic approach aids traders in detecting the Gartley Pattern and making informed trading decisions based on harmonic patterns.

Automating Gartley Pattern Identification

Harmonic patterns like the Gartley are difficult to identify manually. However, you do not need to manually hunt for them because TradingView has a special indicator that can detect all harmonic patterns automatically.

I have tested most of the harmonic indicators in TradingView, and the best one to enable is below.

To enable automated harmonic pattern detection in charts, follow these steps:

1. Visit TradingView
2. Select Indicators -> Search for Harmonic
3. Select Harmonic Pattern Detection by User “Reees”

This script not only identifies the patterns but also performs backtesting automatically. Congratulations to Reees on such a good indicator.

Trading a Gartley Pattern

The first rule of trading a Gartley Pattern is to trade the bullish Gartley in a bull market and a bearish Gartley in a bearish market; this improves the likelihood of profitable trades.

The Gartley Pattern signifies a possible change in trend, whether bullish in a downtrend or bearish in an uptrend. As the stock market’s default direction is up, the bullish Gartley is more profitable than the bearish variation.

Effective trading strategies with the Gartley Pattern involve identifying optimal entry points and setting strategic stop-loss and take-profit points. Traders may enter a position at the completion of the CD leg when clear Fibonacci retracement levels confirm the pattern.

A common approach includes setting the stop-loss point slightly below the recent support D point for bullish setups or above the D-point resistance line for bearish setups.

Trading a Bullish Gartley

The Bullish Gartley should be traded in a downtrend during a bull market.

6 Steps for Trading a Bullish Gartley

1. Ensure the pattern occurs in a downtrend in a bull market.
2. When point D is confirmed, wait for a price increase to begin.
3. Set a stop-loss between point D and point X.
4. The initial price target is a Fibonacci retracement of 61.8% of point CD. That means if point C was $10 and D was $5, you can expect the price target to be approximately $8.09. ($10-$5)*0.618 + $5 = $8.09
5. Once the price reaches the initial target, consider taking partial profits and trailing your stop-loss to secure any gains.
6. If the price continues to rise, you can use additional Fibonacci retracement levels as potential exit points or set a new take-profit point at a key resistance level.

Is the Bullish Gartley Reliable?

Yes, based on our backtested trades on 23 years of Nasdaq 100 exchange data, the bullish Gartley pattern achieved its price target 60% of the time, with a 4.46% average return per trade. Performance varies incredibly for each stock; for example, Tesla had a 42% chance of a 9.27% gain per trade.

Trading a Bearish Gartley

One variation of the Gartley pattern is known as the Bearish Gartley, which can be used in bear markets for short-selling opportunities. The Bearish Gartley should be traded in an uptrend during a bear market. Here are six steps for trading it.

6 Steps for Trading a Bearish Gartley

1. Ensure the pattern occurs in an uptrend in a bear market.
2. When point D is confirmed, wait for a price decrease to begin.
3. Set a stop-loss between point D and point X.
4. The initial price target is a Fibonacci retracement of 61.8% of point CD. That means if point C was $10 and D was $15, you can expect the price target to be approximately $13.36 ($15-$10)*0.618 + $10 = $11.91
5. If the price reaches the initial target, consider taking partial profits and trailing your stop-loss to secure any gains.
6. If the price continues to decrease, you can use additional Fibonacci retracement levels as potential exit points or set a new take-profit point at a key support level.

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Is the Bearish Gartley Profitable?

Yes, based on our backtested trades on 23 years of Nasdaq 100 exchange data, the bearish Gartley pattern achieved its price target 50% of the time, with a 4.01% average return per trade. Performance varies incredibly for each stock; for example, Netflix had a 45% chance of a 7.79% gain per trade.

Do Gartley Patterns Work?

Yes, Gartley patterns work, but only between 36% and 60% of the time. The profit per trade can vary widely between stocks, from fractions of a percent to 4 or 5% per trade.

Is the Gartley Pattern a Good Trade?

Yes. trading the Gartley pattern can be profitable. However, my backtesting confirms it does not occur very often. Combine that with a low reward-to-risk ratio, and it might be worth avoiding.

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Harmonic Patterns Beyond Gartley

There are six important harmonic patterns in technical analysis: Gartley, Bat, Crab, Butterfly, Shark, and Cypher. While the Gartley pattern is one of the most commonly used, it’s essential to understand and recognize all patterns if you want to be a harmonic trader.

The Bat pattern is similar to the Gartley pattern but has more extended retracements of 88.6% instead of 61.8%. The Crab pattern has an even more extended retracement level of 161.8% and is considered one of the most reliable patterns for short-term traders.

Both shark and butterfly patterns have deeper retracements at 127% and 161.8%, respectively. These patterns are often seen as high-risk but can also offer high rewards for those who are patient and disciplined.

Finally, the Cypher pattern is a newer addition to harmonic trading and has a retracement level of 113%, making it one of the most shallow patterns. It’s important to note that while these patterns have specific rules and ratios, they can still vary slightly in each occurrence.

Understanding these different patterns allows traders to identify potential entry and exit points based on their preferred risk-reward ratio. By combining harmonic patterns with other technical indicators, traders can improve their accuracy in predicting market movements and increase their chances of success.

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