Gartley pattern explained: how to use it in your trading
The Gartley pattern is a technical indicator used to establish definitive levels of support and resistance, based on the Fibonacci sequence of numbers. Here, we explain what the Gartley pattern is and how to identify it.
What is the Gartley pattern?
The Gartley pattern was first described by Harold McKinley Gartley – a trader in the 1930s who was one of the first to use statistical analysis to assess stock market prices. It is also known as the ‘222 pattern’ because details of how to identify and use it are found on page 222 of Gartley’s book, ‘Profits in the Stock Market’.
The Gartley pattern is a harmonic chart pattern, because it uses Fibonacci numbers to attempt to identify precise price points at which a trend will either breakout or retrace. The Fibonacci sequence is a series of numbers in which each number is the sum of the two previous numbers (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144). Traders use the Gartley pattern to highlight levels of support and resistance in the financial markets, and it is most popularly used in the forex market.
For reference, support and resistance refer to separate levels which appear to restrict an asset’s price movements. Support is the level at which an asset’s price might stop falling; resistance is the level at which an asset’s price might stop rising. The chart below highlights respective levels of support and resistance.
The Gartley pattern will resemble either an ‘M’ or a ‘W’ shape on a price chart; it will be ‘M’ if the price movement is bullish, and it will be ‘W’ if the price movement is bearish. This pattern is the most common of the harmonic patterns, the others of which include ‘the butterfly’, ‘the bat’ and ‘the crab’.
How to identify the Gartley pattern
The Gartley pattern relies on a series of different labelled points within an overall price movement. In the below example, the Gartley pattern is for an overall bullish trend (as the point from X to A is moving upwards) that is currently experiencing a bearish retracement.
The method for identifying the Gartley pattern is as follows:
- X to A – the movement starts with X to A and there are no specifics for identifying the X to A leg of the Gartley pattern
- A to B – this is where Fibonacci becomes relevant to the pattern. The distance between A and B should be close to 61.8% of the size of the movement from X to A
- B to C – this movement should be a retracement of 38.2% or 88.6% of the movement of A to B. If the B to C move retraces above point A, the Gartley pattern is void
- C to D – this should be a 127.2% to 161.8% extension of the B to C leg
- A to D – when C to D is complete, you should measure the A to D move overall, which should be a 78.6% retracement of the price change of X to A
The percentages used are achieved by looking at the Fibonacci sequence. 61.8% is gained by dividing a number in the sequence by the number immediately to its right and multiplying the result by 100. For example, if you divide 89 by 144, you get 0.618 and if you multiply that by 100, the result is 61.8%.
38.2 is achieved by dividing a number in the sequence by the number two places to its right, for example 55 divided by 144 gives 0.3819, which can be rounded to 0.382 and when multiplied by 100, gives us 38.2%.
127.2 is the result of the square root of 1.618 multiplied by 100, and 78.6 is achieved by the square root of 0.618 multiplied by 100. 127.2% is the target level that a trader would ideally like the price to rise to after it hits point D.
Gartley pattern example
As an example of the Gartley pattern, we’ll look at both a bullish continuation pattern and a bearish continuation pattern – the ‘M’ and ‘W’ patterns of Gartley theory.
First, the below chart shows an example of a bullish Gartley pattern. Notice how the pattern completes its course according to the Fibonacci ratios between points X to D, and then it continues the overall trend before point X and the beginning of the pattern.
This is why the ‘M’ Gartley pattern is considered to be bullish, because it is a window of downward movement in an overall upward trend (between X to A). As a result, a trader could open a long (buy) position at point D to profit from future highs, because this represents an opportunity to buy low on the expectation that the price will rise following the completion of the Gartley pattern.
Conversely, the Gartley pattern below is an example of a bearish continuation because after the market price has hit point D – according to the Gartley pattern – it will continue the overall bearish trend that was in effect between point X to A. Again, this is assumed according to the Fibonacci ratios between the points from X to D.
In this example, a trader would open a short (sell) position once the price has hit the level of resistance at point D, on the expectation that the trend will once again turn bearish. The idea is that by entering a sell position on an asset when it has reached its highest price, the trader can realise the greatest profits when the price falls.
How to trade the Gartley pattern
When trading the Gartley pattern, you will want to place a buy order at point D if you think that the market will rise; or you will place a sell order at point D if you think that the market will fall. Of course, this depends on whether the pattern is in the shape of an M (for bullish markets) or in the shape of a W (for bearish markets).
You can trade the Gartley pattern with financial derivatives such as CFDs and spread bets, which you can access by opening an IG trading account. These products enable you to speculate on the price of an asset without taking direct ownership of it, meaning that you can go either long or short.
Because you are making a prediction about an asset’s price either rising or falling, your profit is determined by the degree to which your prediction is correct. You can also open your CFD with leverage. This means you receive full market exposure for a fraction of the cost – but remember that while leverage can magnify your gains, it can also amplify your losses.
Gartley pattern summed up
- The Gartley pattern is a technical indicator used to identify levels of support and resistance and trend continuations
- It relies on the Fibonacci sequence of numbers to be effective, and is regarded as being accurate as a result
- Traders will be able to identify either a bullish or bearish market with Gartley theory, depending on whether the pattern resembles an ‘M’ or a ‘W’
- In either case, the best time to buy or sell is at point D on Gartley patterns
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