Harmonic patterns in trading: Gartley and Butterfly

Basics of Harmonic Patterns XABCD

The "Harmonic Pattern" tool (XABCD Pattern) is a powerful method of technical analysis developed by Harold McKinley Gartley for identifying five-point graphic formations. The trader can manually mark and analyze five key points (XABCD) on the chart. These points form four distinct price movements: XA, AB, BC, and CD, which together create a characteristic graphic structure. Each of the five points (XABCD) represents a significant extreme (maximum or minimum) on the price chart.

Four segments between these points (XA, AB, BC and CD) reflect different price trends moving in opposite directions. In harmonic analysis, there are four main patterns that are most common: Gartley, Butterfly, Crab, and Bat. Each of them can form in both bullish and bearish configurations, depending on the direction of the trend.

Gartley Pattern

The Gartley pattern forms in situations where the price, following an upward ( or downward ) trend, begins to show signs of correction. This pattern can be bullish or bearish, depending on the structure of ABCD. The "ideal" Gartley pattern is characterized by the following proportions:

• The movement AB represents a correction of 61.8% from the segment XA.
• The BC movement is a correction of AB at the 38.2% or 88.6% level.
• If BC is 38.2% of the correction from AB, then CD should be an extension of BC by 127.2%.
• If BC is 88.6% of the correction from AB, then CD should be an extension of BC by 161.8%.
• The CD movement should reach the correction point of 78.6% from the segment XA.

Butterfly Pattern

The "Butterfly" pattern, developed by Bryce Gilmore, is defined by a special ratio of Fibonacci levels. The ideal "Butterfly" pattern has the following characteristics:

• The segment AB should represent a correction of 78.6% of the movement XA
• Segment BC can reach the level of 38.2% or 88.6% correction from AB
• If BC corrects AB by 38.2%, then CD should be an extension of BC by 161.8%.
• If BC corrects AB by 88.6%, then CD should be an extension of BC by 261.8%.
• The segment CD must correspond to the extension XA by 127% or 161.8%

Practical Application in Trading

When trading using harmonic patterns, it is important to consider that "ideal" proportions are rare. A small deviation from the specified Fibonacci values is acceptable. Point D represents a potential reversal zone where traders may look for opportunities to enter a position in the direction opposite to the CD movement.

Harmonic patterns provide a clear structure for determining entry and exit points, as well as setting stop-loss levels. When working with these formations, it is recommended to additionally use indicators to confirm signals and filter out false triggers.