Introduction to Harmonic Patterns

In this article, we will introduce you to the concept of harmonic patterns. We will explain what harmonic patterns are and how they are interpreted. We will also present the Gartley pattern, demonstrate some examples of it, and discuss how this pattern can be traded. In subsequent articles we will present more patterns, showing how they can be used in enhancing your trading decisions.

Harmonic patterns are geometric patterns that can be detected on price charts. They are used to predict future price movements and are usually composed of five points, connecting lows and highs in four line segments. The core idea behind harmonic patterns is the use of Fibonacci numbers and Fibonacci ratios. Unlike other patterns, like the head and shoulders trading pattern, which allow a lot of room for interpretation to the trader, harmonic patterns have a strict constraint that the various price points forming the pattern respect a certain Fibonacci ratio, or else the pattern is either not valid or probably inaccurate.

What is the Gartley Pattern? 

The Gartley pattern is the first documented harmonic pattern used for trading, which has been proposed by technical analyst H.M. Gartley. The Gartley pattern is in fact an XABCD pattern that respects the Fibonacci ratios between the pattern’s four legs An XABCD pattern is a five points chart pattern composed of two triangles, connecting important high and low points on the price chart. Below we will see two examples of the Gartley pattern. 

First, we will have a look at the bullish Gartley pattern drawn on the price chart below.

The rules for drawing a bullish Gartley pattern are as follows:

• AB must retrace 61.8% of the XA leg

• BC can rise between 38.2% – 88.6% of AB

• CD can be an extension of 1.272% – 1.618% of AB

• CD can also be a retracement of up to 78.6% of XA leg

• The point D is known as the PRZ or Potential Reversal Zone

The bearish Gartley pattern has the opposite rules and it is depicted in the chart below.

Here:

• AB must rise 61.8% of the XA leg

• BC can retrace between 38.2% – 88.6% of AB

• CD can be an extension of 1.272% – 1.618% of AB

• CD can also be a rise of up to 78.6% of XA leg

• The point D is known as the PRZ or Potential Reversal Zone

Trading the Gartley Pattern

The Gartley pattern can be interpreted as a trading signal as soon as point D is formed. Point D is known as the Potential Reversal Zone. This means that at that point in time there is an increased chance that the price movement will reverse. Now let’s see in more detail the charts we posted above. The patterns have been obtained using the free cTrader Harmonic Scanning Indicator

In the screenshot below we can see a bullish Gartley pattern. The bullish Gartley pattern has been detected on the EURUSD h3 chart. The free tool detects a set of highs and lows that satisfy the ratios set by the Gartley pattern and draws the pattern on the chart. 

The interesting observation on this chart is the price movement after the formation of the D point, which is our signal in this case. We can see that the price reverses almost immediately and moves towards a bullish direction, exactly like the Gartley pattern predicted.

Moving on, we can take a look at the bearish Gartley pattern. The pattern on the screenshot below is detected on the same symbol and timeframe.

In a similar manner to the bullish pattern, when the D point is formed, we get the Potential Reversal Zone. At this point, we can consider a sell position as there is high probability for a downwards movement.

Summarizing, we can ascertain that Gartley patterns provide a strong indication for a potential price reversal. If used with caution and in context, taking into consideration all other factors that affect the markets, as well as other confirmation signals, they can become a part of a successful trading strategy.

Limitations of the Gartley Pattern

Harmonic patterns like the Gartley pattern can generate a lot of false signals that could lead to substantial losses if used out of context. Therefore, when using strategies based on harmonic patterns, always consider the market fundamentals that currently move the market and combine the signals with other confirmation signals, like oscillators, support/resistance levels and the relevant price action taking place on the chart. 

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