Among others, one you must learn is the bearish Gartley pattern. It might sound technical, but once you understand the fundamentals, it’s an easy concept. It’s a harmonic chart pattern that identifies reactions to market highs and lows.
Find out more about the bearish Gartley harmonic pattern in this guide. Read on to learn about its importance and uses, especially in forex. You’ll also know how it compares to other harmonic patterns.
What is a Bearish Gartley Pattern?
The bearish Gartley pattern was introduced by a man of the same name, H.M. Gartley in 1935. The first appearance of the concept was in the book Profits in the Stock Market. Another name for this harmonic pattern is the 222 pattern.
It looks like a letter W on the chart. The pattern starts at a high, which is point X. From this, it goes through four consecutive swings, which makes it look like W.
Meanwhile, it’s the inverse of the bullish pattern. In the case of the latter, you’ll find the letter M on the chart.
More so, it’s worth noting that it’s a complex pattern since it relies on Fibonacci ratios. It’s best to use a computer to identify the presence of such a trading indicator. Plus, there are lots of bearish Gartley pattern rules, which makes it quite rare. However, by using our Auto Harmonic Pattern Software which Identifies Gartley Patterns amongst others and take the Short Trade following the D pivot completing in the Automated Completion Zones as on the chart image above.
Ideally, X to A must move towards the overall trend. In this case, A to D movement shows a short-term market correction from the downtrend. As a result, it can provide a favorable risk-to-reward ratio.
Why are Bearish Gartley Patterns Important?
With its technical nature, many people won’t even bother understanding the bearish Gartley pattern. Nonetheless, if you’re serious about trading, it can be insightful. It can provide various insights, including those we’ll talk about below.
Identify Selling Opportunities
Knowing when to sell is crucial in trading. Doing it too early or too late can result in missing opportunities to profit. Bearish Gartley can help you find the perfect time for selling.
In general, the bearish Gartley pattern target is 161.8% of whatever the amount of the AD extension. Once it’s hit, you should prepare to sell.
Indicate the Possibility of a Market Reversal
Price trends change over time. As a smart trader, you must know when such will happen, so you can calculate your next move. This is another instance when the bearish Gartley proves its significance.
An indicator of this situation is when the extension of Point D converges with the Fibonacci retracement. It can indicate a potentially high level of resistance. In turn, it could mean a market reversal.
Determine High and Low Points
By simply looking at the bearish Gartley pattern, you can identify the significant high and significant low prices.
The XA and BC legs are bearish, which shows the lowest price within a specific timeframe. On the other hand, the AB and CD legs are bullish, so you’ll know the highest price within the same period.
How to Trade Forex Using the Gartley Pattern?
You can use this harmonic pattern in trading different assets. For this example, however, we’ll have a quick look at how you can use it in forex trading. Proper execution is necessary to optimize its benefits.
Determining Market Entry
Currency traders must know when exactly they must start. It isn’t a simple guessing game. Instead, it requires technical analysis, using tools like the Gartley pattern.
In most cases, traders will enter the market once there is a 78.6% retracement of the C-D leg from the X-A directional move. Consequently, it can not only improve timing but also increase profitability.
Identifying Stop Loss
Putting a stop loss in your trades is a great opportunity to manage the impacts of a market downfall. It will be a chance to reduce your risks. Such is another instance when you can look at the bearish Gartley pattern.
Knowing an Invalid Trade
One of the most basic things you should know is when the pattern becomes invalid. Such means that it cannot qualify as a bearish Gartley.
It becomes invalid when the price increase from Point X instead of dropping to Point A. Such indicates that the start of the pattern is a bullish trend instead of bearish one.
Gartley Patterns vs Other Harmonic Patterns
While it’s the most popular, Gartley isn’t the only harmonic pattern traders can use. Below are similar patterns and their significant characteristics.
Its biggest difference with the Gartley pattern is that Point D is higher than Point X.
When you look at these two harmonic patterns, they’re almost identical. A bearish butterfly also looks like a letter W, but as noted, the end of the last leg is higher than the point of the start of the first leg.
On the other hand, in the case of the bullish pattern, Point D is lower than Point X. This means that the starting value of the first leg is higher than the value of the last leg.
It also looks like Gartley, but the difference lies in the measurement. The pattern was introduced in the early 2000s.
The similarity with Gartley is that the bat pattern also shows retracement and continuation. It forms when a trend temporarily goes in a different trend and continues upon getting back to the original direction.
Many traders like it because of its high precision. It’s more similar to the butterfly than the Gartley.
Compared to Gartley, the crab pattern allows traders to enter the market with extremely tight stop losses. As a result, it can deliver a high risk-to-reward ratio.
It’s one of the newer harmonic patterns traders are using. The name comes from the steep outside and shallow dip in the center, which mimics a dorsal fin.
This pattern also looks very much like Gartley. However, you’ll find the space between points tighter. The legs also are steeper.