Harmonic Patterns: Gartley and Butterfly Patterns
1. Gartley Pattern
Overview
- Pattern Formation: The Gartley pattern is a bullish or bearish reversal pattern that consists of four legs forming an “M” or “W” shape. It identifies potential reversal points based on Fibonacci ratios.
Identification
Legs of the Pattern:
- XA: Initial leg that represents the start of the pattern.
- AB: Retracement of XA, typically retracing 61.8% of XA.
- BC: Extension from B, generally extending 38.2% to 78.6% of AB.
- CD: Final leg that completes the pattern, often extending 78.6% of XA.
Fibonacci Ratios:
- AB: Retraces between 61.8% and 78.6% of XA.
- BC: Extends between 38.2% and 88.6% of AB.
- CD: Extends to 78.6% of XA (ideal), but can vary.
Trading Strategy
Entry Signal:
- Buy Signal: In a bullish Gartley, enter a long position when the price completes the CD leg and shows signs of reversal.
- Sell Signal: In a bearish Gartley, enter a short position upon completion of the CD leg and evidence of a downtrend.
Target Price:
- Profit Targets: Aim for Fibonacci extension levels from the CD leg, such as 61.8% or 100% extensions of the CD leg.
Stop-Loss:
- Placement: Set a stop-loss below the low of the D leg (for a bullish Gartley) or above the high of the D leg (for a bearish Gartley) to protect against adverse moves.
Example
- Visualization: In a bullish Gartley, the price forms a pattern with the XA leg followed by a retracement to B, an extension to C, and finally a reversal at D. The completion of the pattern near the 78.6% retracement of XA signals a potential buying opportunity.
2. Butterfly Pattern
Overview
- Pattern Formation: The Butterfly pattern is a bearish or bullish reversal pattern characterized by its distinct shape and Fibonacci relationships. It identifies potential price reversals by looking at the extension of legs.
Identification
Legs of the Pattern:
- XA: Initial leg of the pattern.
- AB: Retracement of XA, typically retracing 78.6% of XA.
- BC: Extension from B, generally extending between 38.2% and 88.6% of AB.
- CD: Final leg that completes the pattern, extending 161.8% to 261.8% of XA.
Fibonacci Ratios:
- AB: Retraces 78.6% of XA.
- BC: Extends between 38.2% and 88.6% of AB.
- CD: Extends to 161.8% to 261.8% of XA.
Trading Strategy
Entry Signal:
- Buy Signal: For a bullish Butterfly, enter a long position when the price completes the CD leg and shows signs of reversal.
- Sell Signal: For a bearish Butterfly, enter a short position upon completion of the CD leg and signs of downtrend.
Target Price:
- Profit Targets: Utilize Fibonacci extensions from the CD leg, such as 61.8% or 100% extensions of the CD leg.
Stop-Loss:
- Placement: Place a stop-loss beyond the high of the D leg (for a bearish Butterfly) or below the low of the D leg (for a bullish Butterfly) to manage risk.
Example
- Visualization: In a bearish Butterfly, the pattern forms with the XA leg, followed by a retracement to B, an extension to C, and finally a completion of the pattern at D. The completion of the pattern near the 161.8% extension of XA indicates a potential selling opportunity.
Conclusion
Mastering the Gartley and Butterfly harmonic patterns enhances your technical analysis toolkit, providing valuable insights into potential market reversals. By identifying these patterns and understanding their Fibonacci relationships, traders can better predict market movements and make informed trading decisions.
