The “Butterfly” pattern was discovered by Bryce Gilmore and Larry Pesavento. It is one of the powerful patterns like the Gartley pattern. The “Butterfly” pattern has a distinct retracement level (0.786) of XA swing. In bullish and bearish 5-point swings, the pattern must have 0.786 to 0.886 of XA swing to be valid. In perfect “Butterfly” patterns, the AB swing will be equal to CD (AB=CD).
“Butterfly” patterns usually occurs at market tops and market bottoms. The pattern’s success rate is much higher when the retracement and time ratios are harmonically aligned.
Two primary differences between the “Butterfly” and “Crab” patterns are:
1). The AB retracement must be 0.786 in the “Butterfly” pattern; where as in the “Crab” pattern, it lies between 0.382 and 0.618.2 levels
2). In both patterns the D point extends beyond the X and the C level can be inside or outside of the XA range. The retracement of AB defines level D. In Butterfly patterns, if B is formed at 0.786, the usual retracement of D could be near 1.27 of XA range.
Trade: Once the Butterfly pattern is completed in PRZ level, wait for a confirmation bar, wide range bar or “higher high” close bar to suggest a potential reversal from “D” level. Enter one tick above the high of the confirmation bar.
Stop: Place a “stop” order below (bullish) the low of the “Butterfly” pattern. For bearish Butterfly patterns, place a “stop” order above the high of the “Butterfly” pattern.
Target: Targets are set at 100% of AD and 162% of XA from D levels. In bullish butterfly patterns, beyond the A level, targets need to be protected with trailing stops.
Trading Bullish Butterfly
Trading Bullish Butterfly Pattern
The example above illustrates a bullish “Butterfly” pattern from Amazon’s daily chart. From the “swing low” of X to the “swing high of A, the center of Butterfly level B is formed when prices retrace to 0.786 of XA was made. A retracement of 0.618 of AB retracement is made at C. D is formed with in the Potential Reversal Zone at 1.27 of AB. A “long” trade is triggered from D level as a wide-range bar traded above the previous bar’s high.
- Enter a “long” trade one tick above the previous bar’s high.
- Place a “stop” order below the low of D level.
- The first target is set at “A” level and second target is set at 162% of XA swing.
Trading Bearish Butterfly
Trading Bearish Butterfly Pattern
The example above illustrates a bearish “Butterfly” pattern from the Dow Emini futures (YM) 30 minute chart. YM formed a bearish “Butterfly” pattern from January 16,2007 to January 17,2007 between the 12500 to 12660 levels. After completion of D level at 12260, a reversal bar (wide range bar or lower-low bar) is anticipated to signal a “short” trade.
- Enter a “short” trade below the low of the reversal bar at 12630.
- Place a “stop” order above the high of the D level at 12665.
- Place “targets” at “A” level (12590) and another at 1.62 of XA swing (at 12550).