All trading charts show patterns that, when studied carefully, can guide the trader in their next move.These patterns offer helpful information for profitable trades in the financial market.
Both Price Action and Technical traders use the chart patterns alongside other indicators in their trading analysis.
Among them, the Harmonic patterns are the most commonly used. They are favored because they present accurate conditions to properly evaluate price patterns in the chart and a high reward to risk ratio.
One of the most well-known harmonic patterns is the Gartley pattern, introduced in 1935 by Harold M. Gartley.
This harmonic pattern help traders identify the best entry or exit points when a trend is temporarily interrupted. In this material, we will explain its use in forex trading.
What is a Gartley pattern in forex?
The Gartley pattern was introduced by H.M Gartley in his book ‘Profits in the stock market. He explained this pattern on page 222 of this book, describing it as “the best trading opportunities. So it is sometimes called the ‘Gartley 222 or the 222 patterns’.
It is a chart pattern that forex traders can use to identify the points at which a trend resumes after a temporary reversal. As a “retracement and continuation pattern, Gartley’s pattern provides the opportunity to enter the market once a trend restarts its original course.
Though Gartley focused more on stocks in his book, forex traders employ this pattern to look for good trading opportunities in the forex market.
The Gartley pattern looks like an M for a bullish market and a W for a bearish. Some specific Fibonacci numbers and ratios are used to ensure the formation of this pattern is accurate.
Having a good knowledge of the ABCD pattern can help you properly understand this approach since it is structured the same way.
The Gartley pattern contains 5-points marked X, A, B, C, D, with 4-consecutive price swings.
There are 2-versions of the Gartley or 222 patterns, they include:
- Bullish Gartley pattern
- Bearish Gartley pattern
Rules for bullish and bearish Gartley pattern
As we mentioned, specific Fibonacci numbers are used to plot the lines for each price swing, and its starting point is X to point A.
Point XA: There are no Fibonacci numbers required here. A significant price move on the chart is the XA.
AB: Point A to B should be 61.8%.This swing should be bullish in a bearish Gartley pattern and reaches 61.8 Fibonacci retracements of the XA.
Note that the AB point should not extend beyond point X. If it does, it is invalid and not a Gartley pattern.
BC: On the BC move, the price should swing in the opposite direction and should reach 38.2% Fibonacci levels, or it should finish before the AB point at 88.6%
CD: At this point, another price reversal occurs at 127.2% extension of the BC point if the BC is 38.2%. If it is 88.6% of AB, then the reversal should be at 161.8% extension of BC.
Note that the CD leg may sometimes be equal to the AB leg.
AD: Once the CD move is complete, you should measure point AD to ensure the correct formation of the pattern. A valid Gartley pattern will show an AD of 78.6% retracement of the XA move.
Note that the AD point at 78.6% retracement represents a stronger signal to enter the market. However, it may not always be exact. A Fibonacci level of 61.8% to 78.6 shows a valid AD point for the Gartley pattern.
Is the Gartley pattern in forex bullish?
The Gartley pattern can be in a bullish or bearish version, but the bullish version is more commonly used by traders who focus on major currency pairs.
It looks like an M in the chart and consists of a bullish ABCD pattern that comes before a significant high or low.
The benefits of the Gartley pattern in forex trading
Helps spot BUY and SELL opportunities
This pattern helps forex traders spot the opportunity for a BUY position at any given time in the market.
Helps identify breakouts
The pattern is useful for identifying breakouts or breakdowns in a trending market. Traders can make better decisions using it.
Can lower trading risks
The Gartley pattern offers traders low-risk opportunities to join an ongoing trend after it resumes. The reward to risk ratios is favorable to the trader with this approach.
Helps find price correction in an uptrend
In this pattern, points X to A show you the upward trend in the market. So price moves from point A to D represent a correction in this market.
How do you draw Gartley?
To draw the Gartley pattern, first, identify point X. The point at which there’s a significant price move is point X.
Follow these steps to draw the pattern after finding point X:
- Point A should begin from the first price swing in the opposite direction. So point AB will be .618 retracement of the XA move.
- Plot your BC, ensuring it reaches .382 or .886 retracement of the AB move.
- The third step, the CD line, should reach 1.272 if your BC retracement is .382. If it is .886 of move AB, your CD retracement should be longer at 1.618 of the move BC.
- Complete the pattern by plotting an AD line, and ensure a retracement from move XA between .618 and .786.
Now you have plotted the Gartley pattern. Below, we explain how to enter and exit a trade using this pattern.
How to trade forex with the Gartley pattern
To trade this pattern, you first identify the four price swings by plotting the lines from point X to D. (X, A, B, C, D). Confirm the patterns are valid using your Fibonacci numbers.
Remember that with the bullish Gartley pattern, AB is bearish, BC is bullish, and CD goes bearish again.
At point D, you measure the price move up to 161.8% of AD point.
Confirm that your CD point finds support at 1.272 or 1.618 Fibonacci levels of the BC move. Then place your BUY trade.
Use a stop-loss to protect your trade from unexpected price moves. In a bullish Gartley pattern, your stop loss can be right below point D.
Rules for trading Gartley pattern
Follow these simple rules after identifying the four price swings and the five points:
- Place your trade when the price finishes the CD move and swings in the opposite direction.
- Protect your trade by putting a stop loss below point D.
- Your profit increases if you leave your positions open to complete the four price swings.
Other variations of the Gartley pattern
The Gartley pattern is highly effective both in stocks and forex trading. With time, it grew so popular, and people started coming up with different variations of it.
These offshoots were named after certain animals, no one knows why. They include the following:
- The butterfly
- The bat
- The crab.
They’re all similar to Gartley pattern but with minor differences and are used for different trading styles.
The butterfly pattern
Like the 222 patterns, the butterfly pattern has four legs and 5 points. It is known as a ‘reversal pattern and shows you when a price movement is coming to an end.
There is a bullish and bearish version of this pattern as with most other harmonics.
With the butterfly pattern, you have the opportunity to enter a trade when the price moves to its extreme highs or lows.
Steps to identify the butterfly pattern
- Find point XA. This should be the point of significant price swings, either upward or downward. In a bearish version, the price falls sharply to point A.
- From A, the price travels 78.6% of the XA move to point B, forming the AB leg.
- In the BC leg, the price changes direction from the previous point, retracing between 38.2% to 88.6% of the AB move.
- The CD point is the longest leg and most crucial part of the pattern since you enter your trade at point D. You achieve your CD leg by plotting the lines at 127% or 161.8% of the AB leg.
Most trading platforms come with a Fibonacci tool that helps you mark vital Fibonacci levels on your chart. So it’ll be easy enough to use this indicator.
The Bat pattern
The purpose of this pattern is to provide the opportunity to enter the market when the trend resumes after its temporary pause.
To identify a bullish bat pattern, find XA where there’s a sharp price rise. The XA is the longest leg for this pattern.
In the AB leg, the price moves between 38.2% to 50% in the opposite direction. Note that this pattern becomes invalid if the AB leg appears longer than the XA leg.
The price then retraces in the BC leg from 38.2% to 88.6% of the AB leg.
In the CD leg, the pattern is completed, and the trader can enter a position at point D. The CD leg should retrace at 88.6% of the XA leg. You should place your trade at this point; a buy trade for a bullish pattern and a SELL for bearish.
For this trade, in a bullish pattern, a suitable position for your stop loss will be below point X.
The crab pattern
This pattern is similar to the butterfly and indicates when a certain price movement is nearing its end.
You can place your trade as soon as the price switches direction with it.
Its main difference to the butterfly is that it ends (CD leg) at a deeper Fibonacci extension of 161.8% of the XA leg.
That means you place your trade at point D, where the CD leg has reached 161.8% of the XA move.
What is the Cypher pattern in forex?
The Cypher pattern is another harmonic pattern used in forex and stocks trading. Like the other geometric patterns, it has four legs, five points and follows strict Fibonacci measurements.
This pattern is considered highly profitable and reliable, with a higher win rate than the others.
It can be bullish or bearish and works for every market and timeframe. Traders use this pattern by finding price reversals so that they can place breakout trades.
How to find the Cypher pattern on your chart
This pattern resembles the butterfly, but it’s not as common as other harmonic patterns.
Point XA is the point at which there’s a drastic price movement, bullish for the price increase and bearish for a sharp drop.
AB leg is a price reversal between 38.2% and 61.8% of the XA leg. Note that if this reversal extends beyond 61.8%, the pattern is invalid.
BC leg is achieved between 127.2% to 141.4% of the AB move.
The pattern completes at point D with 78.6% retracement of the BC move, forming the CD leg.
Point D is the area of another potential price move where you enter a position.
How to trade forex with the Cypher pattern
After identifying the four legs and the five points, look out for the point where the CD leg reaches 78.6% of the XC point. In a bullish pattern, enter a BUY position at this point.
Protect your trade from sudden price moves by placing a stop loss just below point X.
An early take-profit is recommended with this pattern due to its constant retracing nature, and this can be placed at point A.
Characteristics of the bullish Cypher pattern
- The notable points in the pattern are the X, C, and D points.
- In a bullish market, point X is low while point C is the high point. While the X is the high point in a bearish market, and the C is low.
- In a bullish Cypher pattern, the price’s high and low points are always trending upwards. For the bearish, they trend downwards.
- Point D lies below point X in a bearish pattern but is above in the bullish version.
Like the other harmonic patterns, the Cypher looks like an M in the bullish form and a W in the bearish version.
Traders find it exciting because of its high win rate and reliability.
A major drawback though is that it is one of the rarest patterns to spot in the chart.
Conclusion
None of these strategies are 100% accurate, but as a trader, it helps to be conversant with all of them. That way, you can apply any of them appropriately for your successful forex trading.
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