Butterfly pattern

Before reading this lesson, you should have previously read through:

The Butterfly pattern is a reversal pattern composed of four legs, similar to the Gartley and Bat pattern, marked X-A, A-B, B-C and C-D.

The Butterfly is a reversal pattern that allows you to enter the market at extreme highs and lows.

It helps you identify when a current price move is likely approaching its end. This means you can enter the market as the price reverses direction.

There is a bullish version where you place a buy trade and a bearish version where you would place a sell trade.

How to identify the Butterfly pattern

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

Bat pattern example no fibonacci

As shown above, the Butterfly pattern looks very similar to the Gartley or Bat patterns, with four distinct legs labelled X-A, A-B, B-C and C-D. The above example is a bearish version of the pattern, where you would be look to sell after the pattern has completed.

X-A

In its bearish version, the first leg forms when the price falls sharply from point X to point A.

The Butterfly is similar to the Gartley and Bat patterns but the final C-D leg makes a 127% extension of the initial X-A leg, rather than a retracement of it.

A-B

The A-B leg then sees the price change direction and retrace 78.6% of the distance covered by the X-A leg.

B-C

In the B-C leg, the price changes direction again and moves back down, retracing 38.2% to 88.6% of the distance covered by the A-B leg.

C-D

The C-D leg is the final and most important part of the pattern. As with the Gartley and Bat pattern you should also have an AB=CD structure to complete the pattern, however the C-D leg very often extends forming a 127% or 161.8% extension of the A-B leg. As a trader you would be looking to enter at point D of the pattern.

A major difference with the Butterfly pattern over the Gartley or Bat pattern is you look to place your trade entry order at the point where the C-D leg has achieved a 127% Fibonacci extension of the X-A leg. It is the pattern's longest leg. Ideally, point D should also represent a 161.8%-261.8% extension of the B-C leg.

MetaTrader 4 can automatically add Fibonacci extensions

The following shows you how this looks on a chart using the Fibonacci tool on MT4.

If you apply the Fibonacci tool to your MetaTrader 4 platform, it can automatically mark key Fibonacci levels on your chart.

The chart below shows what a bearish Butterfly pattern looks like with the Fibonacci retracement and extension levels marked on the X-A and B-C leg:

Butterfly example 1

If you want to know how you can configure the Fibonacci tool in MT4 in order to get the various levels that you need, you can go to the following tutorial:

Article
How to set up Fibonacci retracement levels in MetaTrader 4.
15

Looking for a mentor?


Matthias from our Tradimo Premium team will design a learning plan tailored to you that gives you access to new courses and live webinars every month as well as priority private email support.


Order our Tradimo Premium Service now

Checklist for the Butterfly pattern

Before you trade the Butterfly pattern, confirm from the following checklist that the pattern is authentic. It should include the following key elements:

  • The AB=CD pattern or an extension of this pattern
  • A 127% Fibonacci extension of the X-A leg
  • A 161.8% -261.8% Fibonacci extension of the B-C leg

How to trade the Butterfly pattern

We will now look at how to trade the Butterfly pattern, first using a bullish pattern as our example.

Enter your trade

Identify where the pattern will complete at point D – this will be at the 127% extension of the X-A leg.

Place a buy order here, as below:

Butterfly long entry

el1 Long entry

Place your stop loss

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

Butterfly stop loss long

el1 Long entry
sl2 Stop loss

Place your profit target

Where you place your profit target with this pattern is highly subjective and depends on your trading objectives as well as market conditions.

If you want an aggressive profit target, however, you can place it at point A of the pattern. For a more conservative profit target, place it at point B.

See the chart below for an example of this, with both the conservative and aggressive options marked:

Butterfly take profit long

el1 Long entry
sl2 Stop loss
tp3 Conservative profit target
tp4 Aggressive profit target

Try the following exercise to practise placing your entry order, stop loss and profit target:

Exercise 1: Place your entry and stop loss Show exercise

How to trade a bearish Butterfly

To trade a bearish Butterfly pattern, place your sell order at point D (the 127% Fibonacci extension of the X-A leg), position your stop loss just above the 161.8% extension of the X-A leg and place your profit target at either point A (aggressive) or point B (conservative).

See the chart below for an example of this:

Butterfly short trade

es1 Short entry
sl2 Stop loss
tp3 Conservative profit target
tp4 Aggressive profit target

Summary

In this lesson, you have learned that …

  • ... the Butterfly is a reversal pattern that allows you to enter the market at extreme highs or lows.
  • ... it is similar to the Gartley and Bat patterns but the final C-D leg makes a 127% extension of the initial X-A leg, rather than a retracement of it.
  • ... to trade the Butterfly, enter the market with a long or short trade at point D of the pattern – the price should reverse direction here.
  • ... place your stop loss just below (bullish trade) or above (bearish trade) the 161.8% Fibonacci extension of the X-A leg.
  • ... for an aggressive profit target, place your take profit order at point A.
  • ... for a more conservative profit target, place your take profit order at point B.

Looking for a Top Broker? Sign up through Tradimo & get extra benefits!

eToro Plus500 Markets.com FXFlat

See all top brokers


Register Now - It's free!

By clicking on the "Get instant access" button, you agree that you have read, understood, and accepted the Terms & Conditions.
Or