Butterfly Pattern : Harmonic Pattern
(reading time = 5 minutes)
📊 Butterfly Pattern :
+ The Butterfly pattern is a reversal pattern composed of four legs, similar to the Gartley and Bat pattern, marked X-A, A-B, B-C and C-D.
+ It helps you identify when a current price move is likely approaching its end. This means you can enter the market as the price reverses direction.📊
🔮 How to identify the Butterfly pattern 🔮
(refer Image - Bearish Butterfly Pattern Example)
+ The Butterfly pattern looks very similar to the Gartley or Bat patterns, with four distinct legs labelled X-A, A-B, B-C and C-D. The above example is a bearish version of the pattern, where you would be look to sell after the pattern has completed.
X-A
In its bearish version, the first leg forms when the price falls sharply from point X to point A.
A-B
The A-B leg then sees the price change direction and retrace 78.6% of the distance covered by the X-A leg.
(The Butterfly is similar to the Gartley and Bat patterns but the final C-D leg makes a 127% extension of the initial X-A leg, rather than a retracement of it.)
B-C
In the B-C leg, the price changes direction again and moves back down, retracing 38.2% to 88.6% of the distance covered by the A-B leg.
C-D
The C-D leg is the final and most important part of the pattern. As with the Gartley and Bat pattern you should also have an AB=CD structure to complete the pattern, however the C-D leg very often extends forming a 127% or 161.8% extension of the A-B leg. As a trader you would be looking to enter at point D of the pattern.
🚫 Different from Gartley/Bat Pattern 🚫
+ A major difference with the Butterfly pattern over the Gartley or Bat pattern is you look to place your trade entry order at the point where the C-D leg has achieved a 127% Fibonacci extension of the X-A leg.
+ It is the pattern's longest leg. Ideally, point D should also represent a 161.8%-261.8% extension of the B-C leg.
⚠️ Checklist for the Butterfly pattern ⚠️
+ Before you trade the Butterfly pattern, confirm from the following checklist that the pattern is authentic. It should include the following key elements:
+ The AB=CD pattern or an extension of this pattern
A 127% Fibonacci extension of the X-A leg
A 161.8% -261.8% Fibonacci extension of the B-C leg.
📶 Summary 📶
You have learnt :
+ The Butterfly is a reversal pattern that allows you to enter the market at extreme highs or lows.
+ It is similar to the Gartley and Bat patterns but the final C-D leg makes a 127% extension of the initial X-A leg, rather than a retracement of it.
+ To trade the Butterfly, enter the market with a long or short trade at point D of the pattern – the price should reverse direction here.
+ Place your stop loss just below (bullish trade) or above (bearish trade) the 161.8% Fibonacci extension of the X-A leg.
+ For an aggressive profit target, place your take profit order at point A.
+ For a more conservative profit target, place your take profit order at point B.
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