Gartley Pattern Trading Strategy — What Is It? (Backtest and Trading Example)

Named after H.M. Gartley who was the first to discover harmonic chart patterns, the Gartley pattern is one of the most traded harmonic patterns. But what is the pattern, and how is it used in trading?

The Gartley harmonic chart pattern is a retracement and continuation pattern that occurs when a trend temporarily reverses direction. It is based on Fibonacci numbers and ratios, which helps traders identify reaction highs and lows.

This article describes the Gartley pattern, and at the end of the article we make a backtest.

What is the Gartley pattern?

Also referred to as the ‘222’ pattern, the Gartley pattern is a simple XABCD harmonic pattern that consists of five pivot points and four swing points. The pattern starts from point X and swings through points A, B, and C, eventually ending at point D.

The pattern starts with an initial impulse swing (XA), followed by a retracement swing (AB). Then, the price makes the BC swing, which fails at point C before reaching point A level. It then makes another swing to point D, the CD swing, which is an impulse wave that goes beyond point B but does not get the point X level. The D point is known as the potential reversal zone (PRZ). Most often, the pattern is seen as a 2-legged price correction in an uptrend or a downtrend and mostly in the Forex market.

Trading the Gartley Pattern: Ratios, Rules, and Best Practices

This unique chart pattern follows specific Fibonacci ratios and rules.

The ratios and rules

Here are the rules for identifying the Gartley pattern:

• The AB wave should be a 61.8% retracement of the XA wave.
• The BC wave should be either 38.2% or 88.6% retracement of the AB wave.
• If the BC wave is 38.2% of the AB wave, then, the CD wave should be 127.2% of the BC wave, but if it is 88.6%, the CD wave should up to 161.8% of the BC swing.
• The CD wave should be a 78.6% retracement of the XA swing.

How to trade the Gartley pattern

Here are the steps for trading this chart pattern:

1. Spot a potential Gartley pattern: With three price waves, you may suspect the Gartley pattern. What you do is use the harmonic pattern tool in your trading platform to trace and label the price swings and project the D (PRZ) point, which would be at a 78% retracement of the first price wave, XA.
2. Wait for the pattern to complete: Monitor what happens when the price gets to your projected D point. A reversal candlestick pattern, such as the engulfing pattern, pin bar, or an inside bar, at that point, may confirm a potential reversal.
3. Place the right order: Place a market order if everything looks good — you go long if it is a bullish Gartley and short if it is a bearish Gartley.
4. Place your stop loss: Your stop loss should be beyond the next structure support/resistance level at the X-point.
5. Put your profit targets: The best way to take profit with harmonic patterns is to take partial profits at multiple levels: the first target would be the 38.2% retracement of CD and the second target at 61.8% retracement of CD. You may put a third profit target at the level of the C point.

Gartley pattern: bullish and bearish examples

The pattern can have bullish or bearish reversal effects, depending on its orientation. Below are examples of a bullish Gartley and a bearish Gartley:

A bullish Gartley harmonic pattern

A bearish Gartley harmonic pattern

Gartley pattern trading strategy (backtest and example)

Unfortunately, we are not able to make a meaningful backtest of the Gartley pattern trading strategy. Any backtest requires strict trading rules and some additional settings, but because this is a somewhat subjective pattern, we are not able to jot down what is needed. It’s simply too many rules that are needed for a historical test.

Because of the lack of objectivity, we believe traders are better off NOT trading on classical chart patterns. Why spend time on something that is mostly based on subjectivity and not any objective standards based on historical data? How do you know a pattern is profitable if you have not backtested it and found any statistical advantage and edge?

Backtesting and a data driven trading approach is no sure thing, but at least you have an idea that something has worked in the past – you have historical performance and performance statistics. If it has not worked in the past, you can skip it immediately. If you know how to backtest with historical data you can develop a portfolio of trading strategies pretty fast. There is no best trading strategy because you need many to smooth returns.

(If you are new to backtesting and statistical testing and it looks like a daunting task, you might be interested in our backtesting course.)

FAQ:

– What are the key characteristics of the Gartley pattern?

The Gartley pattern consists of five pivot points labeled X, A, B, C, and D. It starts with an impulse swing (XA), followed by a retracement swing (AB). The BC swing fails to reach point A and is followed by the CD swing, which extends beyond point B but does not reach point X. The D point is the potential reversal zone (PRZ).

– How is the Gartley pattern traded?

Trading the Gartley pattern involves spotting a potential pattern, waiting for it to complete, and placing the right orders. Traders use the harmonic pattern tool to trace and label price swings and project the D point. A reversal candlestick pattern at the D point confirms a potential reversal, and traders place market orders with appropriate stop-loss and profit targets.

– Is backtesting important for the Gartley pattern trading strategy?

Backtesting is crucial for trading strategies, including the Gartley pattern. While a complete backtest may be challenging due to subjectivity, historical data-driven approaches provide insights into performance and statistical advantages.