The Gartley Pattern

Have you ever thought about how professional traders always seem to notice market reversals in real-time? While sometimes there is a bit of luck involved, the reality is that many of them are using reliable chart patterns or models that allow them to see market changes before they happen.

One of the more well-known chart patterns is called the Gartley pattern. While it may appear simple to the eye, the Gartley pattern is a compelling trading model that combines geometry, specific Fibonacci ratios, and careful analysis of price action, allowing traders to apply disciplined trading strategies. By the end of this article, you will understand precisely what the Gartley pattern is and how to identify and use it to enhance your Forex trading.

What Is the Gartley Pattern?

The Gartley pattern is a type of harmonic chart pattern that was first discovered and introduced by H.M. Gartley in 1935 in his book Profits in the Stock Market. It is considered one of the most recognized patterns among traders. The pattern is made up of four total legs; in the bullish setup, the legs are labeled XA, AB, BC, and CD, where XA is the leg that is forming the bullish trend, point A becomes the first retracement, B would depict the second leg up, point C depicts the retracement between legs before point D, the terminal point.

It will be the end of the trend trading and will represent firm reversal decisions in price action. The pattern resembles an "M" in Bullish and "W" in Bearish shapes.

What makes the Gartley pattern unique is the reliance on the Fibonacci retracement and Fibonacci extension ratios. Each leg must conform to the leg's requirements to meet the ratio requirements, thereby creating the structure and predictive characteristics of the trading model. The potential reversal zone, or the last point D, determines when traders will jump in and take action within the pattern built above.

Characteristics of the Gartley Pattern

To qualify as a true Gartley, the pattern must meet specific Fibonacci guideline requirements, irrespective of whether it is a bullish or bearish formation.

1XA leg - first move, which could be bullish or bearish.

2. AB leg - retraces about 61.8% of XA.

3. BC leg - retraces between 38.2% and 88.6% of the AB leg.

4. CD leg - completes in the vicinity of the 78.6% retracement of the XA leg.

This alignment creates a structure where point D is not random, but highly probable. Point D is therefore a potential entry point for traders.

Bullish vs. Bearish Gartley Patterns

• Bullish Gartley - appears after a downtrend. The structure suggests that the price will reverse upward from point D, making this a potential opportunity to go long.

• Bearish Gartley - forms during an uptrend. At point D, traders expect to see the price reverse downwards, meaning there is the potential to sell short.

Both variations of a Gartley employ the same rules. The only difference is the direction.

How to Identify the Gartley Pattern

Identifying the Gartley requires patience and practice. Here is a step-by-step process:

1. Identify a strong initial leg (XA).

2. Use Fibonacci retracement to measure AB, checking for ~61.8% of XA.

3. Measure BC against AB - this should be between 38.2% and 88.6%.

4. Project CD checking if it terminates near the 78.6% retracement of XA.

5. Check that multiple Fibonacci levels cluster around point D. This overlap creates the PRZ.

Trading the Gartley Pattern

The Gartley is not just an analysis model; it is a tradable model. Here is a common framework for how a trader will approach this:

• Entry: At or near point D, once the price enters the PRZ and shows some sort of reversal candlestick (e.g., pin bar, engulfing candle pattern).

• Stop-loss:  Just beyond point X. If the price action trades through X the pattern is no longer valid.

• Take-profit targets: Often, the first target will be at point B, and the second target at point C Some traders will then create further targets beyond C based on Fibonacci projections.

• Risk management: False signals do exist, and accordingly, the size of the position should be kept small enough to risk only 1-2% of the account balance.  

Example of a Gartley in Action

Imagine EUR/USD trades down from point X to A, then takes an upward retracement back to point B, just around the 61.8% Fibonacci level. Then, the price trades back down to C, which is back to 50% of AB, before taking another move up to point D, where the price is at the 78.6% retracement of XA.

At this point, the trader looks for confirmation. Suppose we have a bearish engulfing candle at point D, which further builds the case for the short entry. The stop is placed above point X, and target profits are taken at points B and C, respectively. Instead of a gaggle of directions, the market trades down directly, and the opportunity presents itself as high reward and low risk.

Why Should You Care About the Gartley Pattern?

Traders appreciate the Gartley for its precision. A trader does not have the benefit of looser chart formations; the trader is ultimately required to respect the rigid Fibonacci levels the pattern flourishes off of, thus subjectivity is reduced and the precision of the outcome increases. This pattern also lays out a framework for when to have stops in place and targets. For this reason, the pattern serves as another helpful guideline for organizing and executing trades with discipline.

Common Misconceptions with the Pattern

Even though the Gartley pattern is a solid, reliable pattern, traders tend to make mistakes. Here are some of the things to be aware of:

• Forcing patterns—the trader wants to label any M or W as a Gartley pattern without the context of ratios.

• Confirmation—Entering at D without a differentiation signal indicator or a different candlestick without a confirmation to enter the trade.

• Ignoring the context—Entering a trade against the trend without the support of other indicators.

• Poor stop placement—Placing the stop too far away from X, or not placing stops at all.

Gartley Pattern Tips for Success

• Practice on historical charts or past performance. When training, be sure to isolate your eye for the different structures to spot valid structures.

• Combine with other indicators. Divergences on RSI or MACD are different ways to gain confidence in the reversal signals.

• Look at the higher timeframes. Gartley patterns on daily or weekly contracts are usually a stronger indication.

• Be patient. Be very cautious when entering any structure while waiting for confirmation. The best Gartleys take the longest to develop.

When the Gartley may fail

No pattern will be successful every time. However, here are a few reasons why a Gartley doesn't work.

• News events can create increasing volatility in the marketplace.

• The market is in consolidation, which can create false swings to test support and resistance.

• Fibonacci ratios aren't lining up, confirming that the Gartley may not be as reliable.

That is why confirmation and money management are always key!

Conclusion

The Gartley is still one of the most respected harmonic patterns in Forex trading. The pattern itself combines symmetry, Fibonacci ratios, and market psychology as a construction that traders have used to identify better reversals they observe in charts. If you observe how to clearly spot XA, AB, BC, and CD while waiting for confirmation near point D, you will have a tool to plan your trades with efficient risk and target reward.

The Gartley pattern won't show as evidence 100% of the time, but if you embrace patience, practice, with strict money management it could become one of your best allies in managing the ever-changing Forex market.