Butterfly patternHow to trade when you see the Butterfly harmonic pattern?
Before trading the butterfly harmonic pattern, confirm from the following checklist that the pattern is real. It should have the following vital elements:
AB= an ideal target of 78.6 percent of XA leg
BC= minimum 38.2 percent and maximum 88.6 percent Fibonacci retracement of AB leg
CD= Is a target between 1.618 to 2.618 percent Fibonacci extension of AB leg between 1.272 to 1.618 of XA leg
Entry point
Determine the place where the pattern will complete at point D – this will be at the 127 percent extension of the X-A leg.
Stop-loss
Put a stop-loss just below the 161.8 percent Fibonacci extension of the X-A leg.
Take profit target
The location for placing a take-profit target with this pattern is very subjective and depends on your trading goals as well as the conditions of the market. To have an aggressive profit target, put it at point A of the pattern. For a more conservative profit target, put it at point B.
Trading a bearish butterfly harmonic pattern
Place the sell order at point D (a 127 percent extension of the XA leg). Position the stop-loss right above an extension of 161.8 percent of the XA leg. And place the profit target at A for an aggressive move at B for a defensive move.
Trading a bullish butterfly harmonic pattern
Determine the end of the pattern at point D, which is an extension of 127 percent of the XA leg. You need to put a buy order at this point. Now, below a Fibonacci extension of 161.8 percent of the XA leg, a stop-loss can be placed. Placing a profit target depends on both market conditions and your trading goals.
