Butterfly Harmonic Pattern Trading Strategy
The Butterfly Harmonic pattern trading strategy will teach you how to trade butterfly harmonic. You can start profit right away from this new electrifying approach to technical analysis. The butterfly market strategy is part of the Harmonic trading patterns.
Our team at Trading Strategy Guides has developed the most comprehensive step-by-step guide into Harmonic trading. We highly advise you to first start reading the introduction into the harmonic patterns here: Harmonic Pattern Trading Strategy- Easy Step By Step Guide.
It’s necessary to read the introduction article into the harmonic patterns. This will give you a better grasp of how to trade the butterfly pattern. Because it looks quite similar to the Gartley 222 pattern, butterflies are also known as Gartley butterfly patterns or simply Gartley butterfly.
The Gartley 222 is known by this name because it can be found on the book written by Scott Carney, on page 222.
The harmonic butterfly, like all of the harmonic patterns, is a reversal trading pattern that can be traded universally on all time frames. Our team only prefers to trade them on higher time frames. Also, read the simple way of trading multiple time frames in forex.
There are many variations and many different structures that can be considered a Butterfly structure. The Butterfly looks similar to the Gartley 222 harmonic pattern. However, the main advantage is that you can buy and sell at new lows/highs because wave D terminates beyond the starting point of wave XA.
Don’t worry if this doesn’t make sense to you. We’re going to explore the in and outs of the Gartley butterfly patterns in the following sections.
Before we delve deeper into the harmonic pattern success rate, let’s look at what harmonic patterns indicator we need to successfully trade this strategy.
The Fibonacci retracement and ratios are at the core of harmonic trading. Thanks to the rapid advancement in the technical analysis field we can find some useful indicators to help us plot the harmonic patterns and these Fibonacci ratios.
You can find the Harmonic Pattern Indicator on most popular Forex trading platforms (TradingView and MT4) in the indicator section.
Now, let’s move forward, and see how to trade the harmonic butterfly.
How to Trade Butterfly Harmonic
The butterfly market strategy like any other harmonic pattern is a four-leg reversal pattern. The Gartley butterfly needs to follow some specific Fibonacci ratios. A proper harmonic Butterfly needs to fulfill the following three Fibonacci rules:
- AB= an ideal target of 0.786 or 78.6% of XA leg;
- BC= minimum 38.2% and maximum 88.6% Fibonacci retracement of AB leg;
- CD= Poses a target between 1.618% - 2.618 Fibonacci extension of AB leg between 1.272– 1.618 of XA leg. This is almost similar to the Bat Harmonic Pattern.
Bullish Butterfly Patterns
The B point of the Butterfly harmonic pattern is important. Wave B retracement needs to be shallow. The B point will help us calculate the other Fibonacci measurements within the Gartley butterfly. The other retracement point will assist us to define new trading opportunities.
So, the ideal target for the B point must possess a precise 78.6% retracement of the XA swing. Other rules that redefine the structure further include the BC projection that must be at least 1.618 measurements.
How to Trade Bearish Butterfly
The Butterfly pattern must include an equivalent AB=CD leg. This is the minimum requirement, however, the alternate 1.27AB=CD is more common for this structure which is quite different than the Cypher chart pattern.
The 1.27XA projection is the most critical number in the potential reversal zones. And, finally, the C point must be within the range of 0.382-0.886 retracement.
This, essentially, just ensures that this “M” or “W” type extension structure possesses the correct structure alignment to define the trading opportunity.
Let’s take one step forward and see how you can make money applying the Butterfly trading rules.
Butterfly Harmonic Pattern Trading Strategy
The Butterfly Market Strategy has been tested across different asset classes (currencies, commodities, stocks, and cryptocurrencies). We recommend that you take the time and backtest the harmonic butterfly pattern trading strategy. Before you attempt to use this advanced pattern in your trading strategy, follow these steps:
Step #1 How to Draw Butterfly Pattern
To learn how to draw a butterfly chart pattern simply follow step by step guide. Please see the below figure for a better understanding of the process:
- First, click on the harmonic pattern indicator. The harmonic indicator can be located on the right-hand side toolbar of the TradingView platform.
- Identify on the chart the starting point X, which can be any swing high or low point on the chart.
- Once you’ve located your first swing high/low point you simply have to follow the market swing wave movements.
- You need to have 4 points or 4 swings high/low points that bind together and form the harmonic bat pattern strategy. Every swing leg must be validated and abide by the bat pattern forex Fibonacci ratios presented above.
How to draw harmonic patterns:
Now, we’re going to lay down the Butterfly trading rules.
Note* for the purpose of this article we’re going to use the case for a bearish butterfly harmonic.
Step #2: SELL at Point D which should satisfy the requirement CD = 1.618 – 2.1618 of AB leg.
Ideally, any trades taken using the harmonic pattern trading strategy PDF are taken near point D.
Point D of a Butterfly is an extension of the AB swing leg in the magnitude between 1.618 and 2.618. Secondly, it should also give us an extension of the XA swing leg in the magnitude of 1.272 or 1.618.
In the above chart, we can spot a bearish Butterfly structure on the GBP/USD 4h chart, which is a signal to sell. You can sell anywhere between the 1.618 and 2.618 Fibonacci retracement. However, for better timing of your entry, you can also use our price action guide.
The next important thing we need to establish is where to place our protective stop loss.
Note* for a valid butterfly harmonic chart pattern we also need to check if the requirement AB=0.786 of XA leg.
Step #3: Place the Protective Stop Loss at 1.618 of XA
Normally you want to place your protective stop loss above the 1.618 of XA. That’s the logical place to hide your stop loss. Any break above will automatically invalidate the Fibonacci requirements for a Butterfly harmonic.
The next logical thing we need to establish for the harmonic patterns cheat sheet is where to take profits.
Step #4: Multiple take profit strategy: TP1 = Point A; TP2 = Trailing SL below last swing high.
There are many ways to manage your trade and set the butterfly profit target. But, the ideal target for the Butterfly harmonic is to implement a multiple take profit strategy.
For both the bearish butterfly pattern and bullish butterfly pattern, we’re going to take the first partial profit once we hit the starting point A. The remaining half we’re going to use a trailing stop above last swing high. Also, read about the Trail stop-loss in Forex.
This take profit method is largely profitable. We ensure we take some profits in the first trouble area from where the price might reverse and turn against us.
Secondly, the partial profit taking strategy will give us the chance to capture more profits. The bearish butterfly pattern can signal a major trend reversal. In this case, if we trail our stop we have the potential to capture a big portion of the new trend.
*Note: The above image is an example of a SELL trade using the Bearish Butterfly trading strategy. Use the same rules for a BUY trade. In the figure below you can see an actual BUY trade example.
Take a look:
Conclusion - Butterfly Pattern
The main characteristics of the Butterfly pattern forex are that it’s not a rigorous reversal pattern. The butterfly pattern trading is more about a corrective price structure that usually establishes important swing low and high prices. You can also read our winning news trading strategy.
The Butterfly harmonic pattern trading strategy is giving you the opportunity to take part in a trend right from the start. This means that you can have big winners and small losing trades.
We want to make sure our readers are satisfied so if your main thing is trading in the lower time frame don’t miss the chance to read the Best Stochastic Trading Strategy- Easy 6 Step Strategy which lately has drawn a lot of attention from our readers.
Thank you for reading!
Here is a video that shows you how to trade this strategy:
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