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Beautiful Signals of the Butterfly Pattern


The butterfly pattern… It sounds nice, doesn’t it? However, the real hides many difficulties for traders, especially for newbies. It’s not a common trading tool that appears on charts daily. To find the butterfly pattern, you need to practice a lot and put in some effort.  In this article, we will try to uncover all pitfalls you can meet when trading the butterfly pattern.

What the Butterfly Patterns in Trading, and How It Works

Before we talk about the butterfly pattern, let’s start with the basics - harmonic patterns. The butterfly pattern is one of many harmonic patterns. Harmonic patterns are chart patterns that are formed in a specific shape. In their idea, they are similar to chart patterns such as head and shoulders or double top. 

However, they are not as easy as basic chart patterns. Harmonic ones are built with Fibonacci retracements and expansions. The aim of any harmonic pattern is to define levels where the prevailing trend will resume after consolidation and the targets of this trend. 

Why should you learn harmonic patterns if they are more complicated than standard chart patterns? Harmonic combinations provide more reliable trading signals. 

Now let’s return to our topic - the butterfly pattern. It is a form of Gartley pattern. Bryce Gilmore and Larry Pesavento developed it. The butterfly is a reversal pattern that occurs near the extreme lows and highs of the price. Traders use the butterfly to indicate the end of a current trend and an entry point during a correction or new trend phase. There are two types of butterfly patterns: bullish and bearish. 

The butterfly is a reversal pattern that occurs near the extreme lows and highs of the price. It’s applied to the chart to identify the end of a current trend and an entry point during a correction or new trend phase. 

The butterfly pattern is one of the harmonic patterns, which consists of four legs: XA, AB, BC, and CD and five points: X, A, B, C, and D. Also, the butterfly resembles the letters M (bullish) and W (bearish), Gartley, and Bat harmonic patterns. 

Inexperienced traders mistake the butterfly for double top/bottom patterns. The whole shape of the butterfly pattern depends on the B point. It determines the butterfly’s structure. Also, it’s a start point for other measurements. The structure of the pattern defines trade opportunities within the pattern.

Butterfly Pattern: Forex Market Example 

The butterfly pattern is hardly drawn in MetaTrader. To identify the pattern, you should use Fibonacci levels and trend lines. 

Benefits and Drawbacks of Butterfly Pattern

As we have already mentioned, the butterfly is complicated. Still, there are other things you should know about this pattern that will prevent you from loss. 

Although the butterfly pattern is complicated, it produces highly reliable signals. 

Benefits

Limitations

It differs with the precision of signals. 

It’s hardly drawn on the MetaTrader platform. There is no specific tool for pattern’s drawing. 

It can be found on any timeframe.

It’s complicated, especially for beginner traders.

Although you should have knowledge of the Fibo tools when applying the pattern, the butterfly shape is easily recognized. 

It can be mistaken for double top/bottom chart patterns and Gartley/ Bat harmonic patterns.

 

Although the butterfly pattern can be used as a core signal provider. You should always remember the signal’s confirmation. 

 

Requires knowledge of the Fibonacci tools.

It seems the butterfly pattern has more limitations than advantages. Still, its benefits are more vital for traders than disadvantages. 

Identifying the Butterfly Pattern

It’s not that easy to find the butterfly pattern on the price chart. Here are the parameters of it that will help you distinguish the butterfly from other harmonic patterns. 

The butterfly resembles the Gartley pattern. The main difference is that point D is not set at the retracement of the XA line but at its extension.

The butterfly and Gartley patterns look similar: they have four legs and five points. The main difference is that point D is not set at the retracement of the XA line but at its extension, so point D surpasses starting point X. 

Trading Butterfly Pattern

Any harmonic pattern provides accurate entry, take profit, and stop-loss levels. We gathered the key rules of the butterfly’s trading. 

Bearish and Bullish Butterfly Pattern

There are specific rules for bullish and bearish types. 

Best Butterfly Pattern Strategies

Let’s consider some effective butterfly strategies that will help you in trading. 

Strategy 1: Bullish Butterfly

Strategy 2: Bearish Butterfly

Key Tips About Butterfly Chart Pattern

Check the key tips about the butterfly pattern that you should remember when implementing the pattern on the price chart. 

Here are key parameters of the butterfly pattern:

Conclusion

Let’s sum up. The butterfly pattern is not an easy trading tool. However, if you know how to draw it, it will reward you with accurate signals. 

Before you start applying the butterfly pattern in real trades, make sure to register a demo account. A Libertex demo account provides investors with a wide range of instruments such as currencies and CFDs along with real financial market conditions. 

Why to trade with Libertex?

FAQ 

Check the answers to the following questions to structure the information you got in this article. 

What Is the Pattern of Butterfly?

The butterfly pattern is one of the harmonic patterns, which incorporates four legs: XA, AB, BC, and CD and five points: X, A, B, C, and D. It signals a trend reversal and occurs near the extreme lows and highs of the price.

Which Harmonic Pattern Is the Best?

There is no best harmonic pattern. Each pattern is suitable for a certain market condition. However, statistics say the butterfly pattern provides a higher probability of a successful trade than Gartley. 

How to Trade the Butterfly Chart Pattern?

There are specific rules of butterfly trading. Check the “Trading the Butterfly Pattern” section. 

How Do You Identify the Butterfly Pattern?

Here are the most vital requirements for identifying the butterfly pattern. Point B should locate at up to 78.6% retracement of the XA line. Point C can be found at the 38.2%-88.6% retracement of the AB line. Point D should be at the 161.8%-261.8% extension of the AB line or the 127.2%-161.8% extension of the XA line.

Does Harmonic Trading Really Work?

The harmonic patterns provide accurate and reliable signals, which are even stronger than those of usual chart patterns. 

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