Harold Gartley ran a stock market advisory firm in the 1930s that was one of the first advisory services to use technical chart analysis in its position trades. Gartley looked at stock market behavior in a way that revolutionized the way chart analysis is conducted and his research led to the development of what we now call harmonic trading. Gartley’s analysis did not actually use Fibonacci relationships to identify reversal points but the overall structure of Gartley’s patterns provided a basis for later traders to improve on his research and create higher probability trade setups.
Gartley’s trading structures, it was soon discovered, could be applied to any asset market and in the years since there have been many books, periodicals, trading applications and even new patterns that have been created. What this essentially means is that these patterns should not be viewed as static structures but instead as charting tools that can be researched and built upon. The Gartley Structure
The Gartley pattern is a visually based geometric price pattern that uses both price and time to identify four consecutive price swings (a series of trend changes) that form structures that resemble “M” and “W” formations on a price chart. The “M” patters signal a bullish pattern is forming, where a “W” pattern signals a bearish pattern is forming. The overall structures relies on the development of an ABCD pattern (discussed previously) and this is preceded by a substantial price movement (the X point).
In practice, the Gartley pattern is a leading indicator that can help to forecast significant reversal points. Bearish patterns help to identify when short positions can be established of when long positions should be closed. In contrast, bullish Gartley patterns signal buy entries and closures in short positions. Bullish Gartley Bearish Gartley Additional Characteristics
The Gartley pattern can be used in a variety of trading strategies, for example in intraday, position, or swing trades. Fibonacci retracements converge with Fibonacci extensions at the D point, which is the reversal level and trade entry. Ideally, the direction of X to A should match the direction of the larger trend. The move in total from A to D is representative of smaller correction within the larger trend. When the pattern develops on smaller time frames and matches the direction of the trend seen on larger time frames, probabilities are higher as well. Pattern Calculations
The Gartley pattern becomes valid when the reversal points (the X, A, B, C, and D points) will come at a significant high or low within the time frame. These price swings comprise a series of 4 pattern legs that are essentially miniature moves within the larger structure. In the pattern movement from A to D, price should retrace 61.8% or 78.6% of the move from X to A. Without a properly structured ABCD pattern within the ABCD move, the Gartly structure becomes invalid.
Additionally, the time duration from the X to A move should match the move from A to D, in both proportion and ratio. The time duration of the A to D move tends to be seen at 61.8% or 161.8% of the X to A move. In some cases, the ABCD structure will finish at the 100% measurement of the double top created by the X to A move. When this occurs, the time duration of X to A should also match the previous move. Instances of pattern failure occur when prices surpass the X point, and this indicates that a much stronger trend is actually in place. When this happens, prices are generally seen continuing to the 127.2% or 161.8% extension of the move from X to A.