Butterfly pattern Trading

 

Butterfly pattern

The Butterfly pattern:

1. Is a reversal pattern
2. It has four legs. (X-A, A-B, B-C, and C-D)
3. It shows a trend reversal point.
4. There are bullish and bearish versions.

How to identify the Butterfly pattern

See the price chart below for an example of what a bullish Butterfly pattern looks like:

• Very similar to the Gartley or Bat patterns
• Four distinct legs are labeled X-A, A-B, B-C, and C-D. 

X-A

The first leg forms when the price goes up sharply from point X to point A.

A-B

Change direction and retrace 78.6% of the distance covered by the X-A leg.

Please add Fibonacci to the chart to check!

B-C

Price changes direction again and moves back up, retracing 38.2% to 88.6% of the distance covered by the A-B leg.

C-D

• You would be looking to enter at point D of the pattern.
• Your trade entry order at the point where the C-D leg has achieved a 127% Fibonacci extension of the X-A leg. 

Place your stop loss

Place your stop loss just below the 161.8% Fibonacci extension of the X-A leg, as below:

Place your profit target

I suggest opening a few positions at the same time with small amounts ( Or an equivalent big order if your broker allows partial close)

Take profits as bellow:

1st: Point B

2nd, 3rd, 4th, and 5th TPs at Fibonacci retracements of XA leg ( 61.8%, 50%, 23.6%)

Points C and A also can be selected.

Summary

• The butterfly is a reversal pattern 
• It is similar to Bat pattern
• You should enter at point D
• Set the SL and TP based on Fibonacci numbers.