What is Butterfly Harmonic Pattern?

Last Updated on Friday, 13 January 2012 12:49 Written by FxTT Content Department Friday, 13 January 2012 12:48

Butterfly is one of the reversal harmonic patterns. It is a very strong reversal signal. This pattern was discovered by Bryce Gilmore and Larry Pesavento. According to these guys, this pattern is nearly 80% accurate.

Figure 1 shows the two variants of Butterfly pattern. This pattern may look like Gartley pattern but it is not the same, there is a difference. In Butterfly pattern the final leg (CD) is the longest and the strongest.

 Fibonacci Ratios for Butterfly Pattern: the point B should be formed at 78.6% retracement of the leg XA, point C should either 61.8% or 78.6% retracement of leg AB. Point D should be 161.8% retracement of leg BC and 127.2% or 161.8% retracement of leg XA.

Figure 1. Butterfly Pattern

Bullish Butterfly Pattern

Figure 2 shows, the Bullish Butterfly pattern. It begins at point X with an initial move up to point A, the highest point in the pattern. Then the price makes point B at 78.6% of leg XA then point C is formed at 61.8% or 78.6% of the leg AB, the point C should not exceed point A. the most critical aspect of a bullish Butterfly is the completion of point D. This point should be the lowest point (below all the other points). This is one of the most distinguishing elements of a Butterfly versus a Gartley.

Figure 2. Bullish Butterfly Pattern

Trading Bullish Butterfly Pattern:

Just like Gartley pattern this pattern is also an reversal pattern so upon completion of point D, we can open up a long position and stop-loss can be put one or two ticks below point D. we are not putting the stop below X this time as point D is lower than point X, this will ensure a proper stop-loss placement.

Bearish Butterfly Pattern

Figure 3 shows, Bearish Butterfly pattern, similar to bullish butterfly pattern the points must be aligned properly to define a valid Butterfly pattern. Point D in this case is above all of the other points.

As figure shows the XA is a rising leg. Again in this case too point C should not exceed below point A. the leg CD will be longest leg in the pattern and point D will be the highest point in the pattern.

Figure 3. Bearish Butterfly Patten

Trading Bearish Butterfly Pattern

In bearish butterfly pattern, a short trade can be opened after formation of point D, make sure the pattern is valid by checking all the ratios properly. Stop loss should be put above point D, since point D is the highest point in the pattern.