Butterfly Harmonic Pattern Explained
The Butterfly pattern is a reversal pattern within the harmonic patterns family. It is usually seen at the end of an extended price move, and it helps identify the end of a trend and anticipate the start of a correction or a new trend phase.
The Butterfly pattern is made up of four price swings, and on the chart it looks like the letter “M” (bullish Butterfly pattern) or “W” (bearish Butterfly pattern).
Harmonic patterns are worth reading up on first — they give a better sense of how the Butterfly pattern forms, since it closely resembles the Gartley pattern.
Like any other harmonic pattern, the Butterfly is a reversal pattern, and recognizing it requires following a specific set of Fibonacci ratios.
Note that the start of the pattern is marked “X.” After that, the four price swings of the formation are labeled XA, AB, BC, and CD, as shown in the images below.
Bullish Butterfly Pattern
- AB = ideal target at 78.6% of the XA leg.
- BC = a Fibonacci retracement of the AB leg, between a minimum of 38.2% and a maximum of 88.6%.
- CD = a Fibonacci extension of the BC leg between 1.618 and 2.618, and between 1.272 and 1.618 of the XA leg.
- Note on CD: if BC represents 38.2% of AB, CD is likely to reach a 161% extension of BC. On the other hand, if BC represents 88.6% of AB, CD is likely to reach a 261.8% extension of BC.
Bearish Butterfly Pattern
- AB = ideal target at 78.6% of the XA leg.
- BC = a Fibonacci retracement of the AB leg, between a minimum of 38.2% and a maximum of 88.6%.
- CD = a Fibonacci extension of the BC leg between 1.618 and 2.618, and between 1.272 and 1.618 of the XA leg.
- Note on CD: if BC represents 38.2% of AB, CD is likely to reach a 161% extension of BC. On the other hand, if BC represents 88.6% of AB, CD is likely to reach a 261.8% extension of BC.
Trading Strategy for the Butterfly Pattern
Keep in mind that there are different strategies for trading the Butterfly pattern, but here we’ll cover an approach that relies mainly on using the BC and XA legs to find point D.
- Entry Point
If you’re trading the bullish Butterfly pattern, you buy when price reacts at level D. If you’re trading the bearish Butterfly pattern, you sell when price reacts at level D, provided the conditions described above are met.
- Take Profit
There are several ways to manage your profit exit. One effective method is to set the target price at the 161.8% extension of the CD move.
You can also consider closing part of your position before this level, at points B, C, and A — these are important levels that reflect the pattern’s price swings.
- Stop Loss
Place your stop-loss order below the low at D for a buy, and above D for a sell. Make sure to set the stop loss a reasonable distance from point D, taking price volatility into account or according to your own risk management.
Finally, with the Butterfly pattern you should wait for some confirmation that price is starting to reverse from the identified zone, so place your stop-loss order a few points outside the reversal zone.
With the Butterfly pattern, some traders look for any Fibonacci ratio confluence within the reversal zone, while others look for confirmation from another indicator, such as a momentum indicator, to confirm the reversal. Some traders only look at Fibonacci retracement ratios inside the reversal zone and ignore the other levels unless they sit very close to key support/resistance numbers or swing highs and lows.
https://www.youtube.com/watch?v=MnPShrBo_xI&list=PLXpQTHBjB6Yytep_lPEpxO-WXmSZyN08x&index=9
Further reading:
- Fibonacci ratios: an explanation of Fibonacci price retracement ratios
- Divergence explained step by step
- Advantages and disadvantages of harmonic patterns
Frequently Asked Questions
How many harmonic patterns are there?
The core harmonic patterns are 5-point patterns (Gartley, Butterfly, Crab, Bat, Shark, and Cypher). These patterns contain smaller 3-point (ABC) or 4-point (ABCD) structures. All the price swings between these points are connected and follow harmonic ratios based on Fibonacci.
What is classical technical analysis?
Technical analysis is a method for forecasting the direction of financial market prices by evaluating historical price and volume data where available. The core assumption of the technical approach is that the market discounts everything: whatever is known, or can be known, is already “in the price.”
What are harmonic patterns in analysis?
Harmonic analysis methods can be split into three categories: the time domain, the direct frequency domain, and iterative techniques. Time-domain modeling consists of various differential equations for an interconnected energy system that are then solved through numerical integration. Harmonic patterns are one of the analysis methods traders use to gauge when a trend is likely to reverse.
What is the Butterfly pattern?
The Butterfly pattern is a reversal pattern that occurs near price lows and highs. Traders use the Butterfly pattern to signal the end of the current trend and an entry point during the correction or the new trend phase. There are two types of Butterfly patterns: bullish and bearish.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. Harmonic patterns like the Butterfly are analysis tools, not guarantees — signals can fail, and past price behavior does not predict future results. CFDs and leveraged trading carry a high risk of losing money rapidly due to leverage; most retail investor accounts lose money when trading CFDs. Make sure you understand how these instruments work and whether you can afford to take the high risk of losing your money. This article may contain affiliate links; we may earn a commission if you sign up through them, at no extra cost to you.
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