HARMONIC PATTERN BUTTERFLY ✴️ Harmonic patterns are prevalent in consolidation markets. These patterns can be used as additional confirmation to enter a trade. Today let's study the Butterfly Pattern. The Butterfly Pattern in trading is a 5-point trend reversal pattern, which consists of two corrections that form the shape of a butterfly. The pattern can be formed on any timeframe, but most often occurs on daily and hourly charts. It has high accuracy, but like any other indicator, it does not guarantee profit. To increase the probability of success, it is necessary to use the pattern in combination with other indicators and methods of market analysis.
✴️ WHAT IS A BUTTERFLY PATTERN?
Butterfly pattern in trading is a reversal trend pattern, which is formed from two corrections with the formation of a corresponding shape. It is used to determine a possible market reversal. The formation was first described by Harold Gartley in his book New Wave Theory (1932). He is an American trader and analyst who developed several harmonic patterns, including the Butterfly, Delta and Harmonic Triangle. The Butterfly pattern in trading can appear on any timeframe, but is often caught on daily and hourly charts. For the formation of the pattern, it is necessary that the following point conditions are met:
X - the start of an bullish or bearish movement;
A - the end of a bullish or bearish movement and it's a start of correction;
B - maximum decrease or increase of the price during the market change; 61.8 - 0.786 retracement.
C - end of correction (retest of the A point area) and start of a new movement; as long as it does not exceed the A point.
D - 127% - 161.8% fibo extension of the XA distance.
Gartley's butterfly in trading can have two directions. To determine the Butterfly pattern, you need to find all five points of the formation. X and C are the beginning and the end of the basic movement, and A and B are the top and the lowest point of the correction. Point D is at 127% of the XA distance. If all five elements are present and meet the specified conditions, we can talk about a probable trend reversal. At the same time, it is desirable to use an indicator that would confirm the entry.
The butterfly shape does not always have to be perfect. Sometimes the AB correction can be steeper than the BC. The formation conditions are not always perfectly met. Often the XA distance can be slightly more or less than 127%. Stop-loss can be placed not only below point D. The Butterfly pattern is considered a powerful tool that helps traders improve results. But it is important to use it in combination with other market analysis techniques to increase the probability of success.
✴️ HOW TO TRADE A BULLISH BUTTERFLY
This is a 5-wave trend reversal pattern that represents two corrections that form a butterfly shape. Features of the design by points:
X - start of a rising movement;
A - end of growth and correction;
B - fall of the price during the correction;
C - the end of the process and the start of a new movement;
D - 127% - distance of the XA.
Entry into the trade is made at the level of point D, and stop-loss is set below point D. The target price is within A-D distance.
✴️ HOW TO TRADE THE BEARISH BUTTERFLY
Exit is made after reaching the target price or when trend reversal signals appear. This is a 5-wave market reversal pattern that represents two corrections in the shape of a butterfly. To create it, the following requirements must be met:
X - start of a falling movement;
A - end of growth and correction;
B - increase of the price during the correction;
C - the end of the process and the start of a new movement;
D - 127% - XA distance.
The entry in the bearish butterfly is made at the level of point D, and stop-loss is set above point D. The target price for the pattern is within the Fibonacci levels 38.2% and 61.8% of the A-D distance. Exit is performed after reaching the target price or when there are signals of trend reversal.
In both cases discussed above, it is important to combine the pattern with other methods of market analysis, such support and resistance levels, to increase success. You should not enter a trade if the pattern does not meet all conditions. Set a stop loss at a level that will limit losses in case of a failed trade. Also, you can move stop loss to break even once the price hits 38.2% Fibonacci level.
✴️ CONCLUSION
The experience of using the Butterfly Pattern has shown that it is quite accurate when trading in a sideways movement or opening trades with a trend. It can be used on any timeframe, but it is more effective in combination with other methods of market analysis. At the same time, the pattern does not always correspond to the conditions and can give false signals. For this reason, it is recommended to check it with the help of indicators. Harmonic patterns should follow the basics of technical analysis. In the first place, of course, is the market structure.
