Trading is not about the instinct. To make money on the Forex or the stock market, you need knowledge and experience in reading patterns. Most veteran investors take a scientific approach in exploring the market for insights on price movements.
Recently harmonic patterns are gaining in popularity in Forex trading. They are defined by geometric formations focused on producing buy or sell signals for a trader.
There are several harmonic patterns. But in that group, the harmonic butterfly pattern is still the most outstanding. The pattern is instructive for investors to orient themselves in the market.
It is basically a reversal trading pattern used to meet a profit target by an investor.
Butterfly patterns were discovered by Bryce Gilmore and are reversal chart patterns with four noticeable points that characterize them. They are also delineated by specific Fibonacci ratios, which turns their harmonic patterns.
This makes them harder to trade unless you have a predilection for Fib ratios and harmonics.
The pattern embodies price consolidation and is frequently observed at the end of a protracted price move, and the butterfly pattern can be both bullish or bearish.
Also read: Harmonic Patterns: A Complete Guide
Contents
- What are Harmonic Patterns?
- The Most Used Harmonic Patterns
- The Usefulness of Butterfly Patterns
- Fibonacci and the Butterfly Pattern
- Bearish Butterfly Pattern
- Bullish Butterfly Pattern
- Benefits of the Butterfly Patterns
- Limitations of the Butterfly Patterns
- Conclusion
- FAQs
What are Harmonic Patterns
Harmonic patterns are a family of chart patterns, that play a role in most trading strategy enabling investors to identify pricing trends by forecasting market dynamics in the future.
They are characteristic by geometric forms they create on a chart and are used in tandem with Fibonacci numbers to locate opportunistic price changes or trend reversals.
Traders can spot these patterns and utilize them to make decisions about their upcoming investments.
There are several chart patterns in the group known as harmonic patterns, and everyone is implemented to identify a specific type of trend.
Before starting to use any pattern, traders need to trust their capability to do their technical analysis, ensuring that they can maximize it every time they are faced with a trading decision.
The Most Used Harmonic Patterns
The harmonic patterns have a solid success rate in the stock market and are profitable in other markets like Forex, options, and cryptocurrencies. They signal a reversal strategy and some of the most used patterns are:
- The ABCD pattern;
- The butterfly pattern;
- The Gartley pattern;
- The BAT pattern;
- The deep crab patterns;
- The crab pattern;
- The shark pattern;
Also read: The 28 Forex Patterns Complete Guide
The Usefulness of Butterfly Patterns
Butterfly patterns are helpful because they indicate a turnaround in the market. Because these patterns are harmonic, investors can estimate the applicability of the reversal if they are satisfied with using Fib ratios.
The patterns aim to indicate an end of a trend, which opens possibilities for veteran brokers, to enter the market during price reversal.
Traders like to use butterfly patterns because of the accuracy they offer. And are easy to trade because of Fibonacci ratio default stop-loss and price targets.
Fibonacci and the Butterfly Pattern
There are particular Fibonacci levels that are important for the genuine recognition of the Butterfly pattern. Most traders are aware that the Fibonacci relationship is a crucial element in harmonic pattern trading and the same applies to the butterfly.
For a positive identification of a genuine butterfly chart pattern, traders must verify the price swings of the structure follows the distinct Fibonacci levels.
What you have to remember is that the B point is the crucial level for the Butterfly pattern and it needs to retrace 78.6% of the XA leg.
Bearish Butterfly Pattern
The Butterfly Pattern uses the recognition of appraised structures on a chart that has distinct and consecutive Fibonacci ratio adjustments that reveal harmonic patterns.
These patterns estimate the Fibonacci aspects of the price action formation to indicate reversal points with solid chances of gain.
Investors that use harmonic patterns in their trading tactics regard these patterns as cycles that reiterate over time.
Traders can make profitable trades with the butterfly pattern by locating the optional risk to reward ratio, wagering on a reversal, and joining the market guided on the probability that the identical reproducing swings will happen.
The Bearish Butterfly Pattern is a reversal pattern with four recognizable swings in price.
The butterfly pattern attempts to pinpoint when a present price swing is coming to its end. As a reversal chart pattern investor attempt to start a trade on the chart as the price action shifts its present course.
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Example of What a Bearish Butterfly Pattern Resembles
The bearish butterfly chart pattern resembles something like this.
The first swing down is formed when the price goes down from the opening mark X to the ending mark A.
The swing in A to B in the price is backtracking in course and reiterate relatively 78.6% of the price movement of the X to A drop.
The B to C swing back down is the following directional change and price goes back down with a retracement of 38.2% to 88.6% of the price swing of the A to B upswing.
The C to D upswing and breakout is the last part of the butterfly pattern and is crucial for acceptance and conclusion.
This harmonic pattern has close to an AB=CD price formation, but the C to D upswing periodically occurs out making a 127%, 161.8%, or even a 224% price extension of the A to B upswing.
Traders prefer to use the point D price level at the end of the pattern to sell short seeing it as a solid risk to reward ratio after the overbought move.
The Bearish Butterfly Pattern is a reversal chart pattern that indicates to investors a high possibility of the price level to sell short at a very overbought reading.
After a long move and extension in price from the mean form’s high anticipation for a retracement and swing back down.
Bullish Butterfly Pattern
Butterfly patterns are similar to Gartley patterns in that they resemble an “M” shape on a price chart. Still, a butterfly pattern concludes at the intersection of two distinct Fibonacci development levels, whereas the Gartley concludes at the intersection of a Fibonacci retracement and extension.
The symmetry between the two connecting triangles at point B is one of the keys to this pattern. As with all geometric patterns, a buy or sell signal occurs as the pattern completes a point D.
Example of What a Bullish Butterfly Resembles
The swing from A to D should be a 127.2% or 161.8% extension of XA but D must be below X. With a valid ABCD must be observed in the extension move (AD), additional confirmation may be attained when the times of the XAB and BCD triangles are in proportion.
Ideally, these two triangles will be nearly equal in time. Otherwise, look for the BCD triangle to complete between 61.8% and 161.8% of XAB. A move beyond 161.8% negates the pattern and may suggest a potentially strong bearish continuation is in progress.
Benefits of the Butterfly Patterns
Taking into account the broad use, it’s not a surprise that butterfly patterns offer noticeable advantages to forex traders. These advantages include:
Butterfly patterns offer strong indications. Chart patterns do not guaranty accurate results, but in most cases, they can lead you in the right direction if implemented correctly and the data is supported by other forms of technical analysis.
The appeal of butterfly patterns is because they offer a persistent source of precise data about the condition in the forex market.
Easy to identify and understand. For beginner’s butterfly patterns are more employable and recognizable than other types of chart patterns, making them an attractive go-to pattern in the initial stage of creating a trading strategy.
Veteran brokers like the rudimentary pattern design that is attractive because it’s easy to use.
Evidence indicates the butterfly pattern is one of the best patterns for locating profit potential. Veteran brokers are convinced of the predictive power of a butterfly pattern if compared with other patterns including the Gartley pattern.
Limitations of the Butterfly Patterns
Forex traders are constantly looking for a reliable chart pattern to give them information that they can use to make profits with every trade they make on the market.
But even tools such as butterfly patterns have disadvantages that most investors should keep in mind.
The austere structure is a cause of grievance for some traders. Because of its rules around Fibonacci retracement levels, butterfly patterns do not form and brokers searching for butterfly patterns are unhappy by the unfulfilled expectation to find the full pattern.
This means a lot of misplaced energy trying to observe potential setups.
Harmonic pattern trading is based on all-encompassing knowledge of forex analysis.
The rigid pattern structure makes it crucial to combine the butterfly pattern with other indicators and chart patterns to verify the setup and results produced by this chart pattern.
The butterfly pattern is less frequently recognized than the Gartley. Because the Gartley pattern is more common to locate and offers similar trading insights based on similar data, investors can use it more easily than butterfly patterns.
Conclusion
If you are a beginner or experienced trader you must not miscalculate the validity of chart patterns as trading tools.
They are important when it comes to revealing reversal or continuation of the current trend and locating entry and exit points for a position.
Butterfly patterns can be an excellent option for finding the end of price movements. Even if you have a more conservative profit target harmonic trading can be a useful tool.
As an extension pattern, it pinpoints the end of a trending move and the best position for the start of the new trend phase.
FAQs
What Is the Butterfly Pattern?
The butterfly pattern is a reversal pattern that enables investors to identify the end of a price movement, signaling when to join the market during the reversal of the price.
How Accurate Is the Butterfly Pattern?
The butterfly pattern is a complex harmonic pattern that produces precise signals.
What Is Butterfly Harmonic Pattern?
The butterfly pattern is a reversal chart pattern that is in the category of harmonic patterns. It displays price consolidation and is found at the end of a prolonged price move.
What Is Fibonacci Butterfly?
The Fibonacci butterfly represents one of two well-defined Fibonacci reversal patterns that include both the Gartley and the butterfly.
