Forex price models are always a great assistant to support the technical analysis process for traders. Among them, the Butterfly Pattern must definitely be mentioned because it is widely used and gives accurate forecasts. If you want to know in more detail what the butterfly wing pattern is? and how to trade. Refer to the article below on Forex Trading immediately!
Some Butterfly Pattern knowledge that traders need to know
Butterfly Pattern is one of the modified Harmonic Forex price patterns. Learn more about this model in detail below:
What is the Forex Butterfly Pattern?
Butterfly Pattern is also known as Butterfly Pattern. This is a form of Harmonic price pattern that often appears at the end of extended price action. However, like the Gartley price patterns, the Butterfly Pattern also includes 5 denoted points. Including, the characters X, A, B, C, and D and the starting point from X, go through 4 waves XA, AB, BC, and CD.
The Butterfly model is considered the most harmonious model. It gives traders the ability to identify the end of a trend and find potential entry points.
Characteristics of the butterfly wing model
The Butterfly Pattern is similar to price patterns Forex Japanese candlestick patterns. However, this type of model has some distinctive features. The model includes 5 character points: X, A, B, C, and D. It starts from point X and goes through 4 waves XA, AB, BC, and CD.
- XA: There aren’t any specific rules for this wave.
- AB: This is the section where a retracement adjustment is made to 0.786 compared to the XA section. The correction level is 0.786 at point B. The XA trend is an important condition to distinguish the butterfly model from the other remaining Harmonic price models.
- BC: This is the segment where the retracement adjustment is made from 0.382 to 0.886 of segment AB.
- CD: If BC makes a retracement correction to 0.382 of segment AB. Then CD is the 1,618 extension of BC. If CD retraces to 0.886, the CD will proceed to expand to 2.618 BC.
- XD: A general trend type including AB, BC, and CD. In addition, there is an extension from 1.27 to 1.618 of the XA trend type.
Meaning of Butterfly Pattern price models
If you want to trade with the butterfly forex price model, you need to understand some of the following meanings:
- When the Butterfly Pattern is completed at point D, it proves that the market will move according to the trend of the initial XA wave. This means that if XA is an increasing wave, the market will increase and vice versa. If XA is a bearish wave, the market will tend to turn down. Therefore, the important meaning of the Butterfly Pattern is to signal a trend reversal.
- The Butterfly Pattern helps investors see important high and low-price areas within a trend. From there, investors can easily buy at low prices and sell at high prices. This is the second important meaning of the Butterfly Pattern.
See more: Read candlestick charts: Basic & advanced material
How many popular types of Butterfly Pattern are there?
Currently, there are two types of butterfly models: the rising butterfly forex price model and the Bearish Butterfly model.
Bullish butterfly price patterns
The Bullish Butterfly model is also known as the Bullish Butterfly Model. Observe on the chart that this pattern often has an M shape. It looks quite similar to the pattern candle bullish engulfing. Specifically, this model will:
- Start with the bullish XA segment
- Then reduce the adjustment to point B
- From B the price will begin to increase and adjust to point C
- Finally, the price will decrease from point C to D, which point D will pass to start at point X
- After point D ends, the price will tend to increase. This is an opportunity for traders to execute a reverse Buy order.
Price patterns in forex Bearish Butterfly
The Bearish Butterfly Pattern is also known as the bearish Butterfly Pattern. This type is shaped like an inverted M or W similar to the double bottom pattern. The direction of the waves in this model is often opposite to the Bullish Butterfly model above. Specifically:
- This pattern will start at the XA discount segment
- Next, from point A, the price will increase and adjust to B
- From B, the price tends to decrease and adjust to C
- Finally, the price will increase from point C to D. At point D will cross higher to start at point X.
- After ending point D, the price tends to decrease. This is an opportunity for traders to take the lead with a reverse Sell order.
How to trade with the Butterfly Pattern
Below are the detailed trading steps with the Butterfly Pattern model for readers’ reference:
Step 1: Identify the Butterfly Pattern
First, you will identify price patterns in forex with the naked eye when observing the chart. We recommend using tradingview charts for observations. Since this tool has a built-in Harmonic pattern, it will be easier to confirm the pattern.
Step 2: Identify the Butterfly Pattern
Make sure that the model meets all the criteria such as:
- 5 clear touch points: P, X, C, D, E.
- Fibonacci ratio: Point C is usually located at 61.8% or 38.2% of wave A. Point D is usually located at 1,618 or 2,618 of wave CD. Point E is approximately equal to point P.
- Trading volume: Trading volume should gradually increase in wave A and gradually decrease in waves B and C.
Step 3: Enter an order
When the price moves to point D, the pattern is considered successful. At this time, the price will tend to reverse up or down depending on the type. Enter a Buy order for Bullish Butterfly and a Sell order for Bearish Butterfly.
Step 4: Cut losses and take profits
Place a stop-loss order a few pips below point D with a bullish Butterfly pattern. Also, place a few pips above point D for the bearish Butterfly Pattern.
Set take profit at point A of the butterfly pattern. Or consider taking profits at the 1.618 Fibonacci retracement level of the CD segment.
See more: Discover Exness – The world’s leading Broker
Some notes when trading the butterfly price model
To trade the Butterfly Pattern effectively, there are a few things to keep in mind:
Set a reasonable stop loss: The stop loss should be placed below point X (for buy orders) or above point P (for sell orders).
Use stop loss orders: Stop loss orders will help you limit losses if the trade does not go as expected.
Trade with the right amount of capital: Never bet it all on one trade. Only trade with capital that you can afford to lose.
Trading the Butterfly Pattern requires extreme patience and discipline. Do not rush to enter/issue orders without a clear confirmation signal.
Follow your programmed trading strategy and do not trade based on emotions.
Before trading with real money, practice trading the butterfly price pattern on a demo account.
If you do not have much trading experience, please consult an expert before trading.
Conclude
In the above article, Forex Trading has given you information about the butterfly pattern. Including identifying characteristics, meaning, and how to perform transactions. In fact, the Butterfly Pattern is quite complex and difficult to understand. It is necessary to study and analyze this pattern regularly on forex charts to get familiar with it. Hopefully, this information will help you gain more knowledge to execute trading orders.
FAQS
How to manage risks when trading with the Butterfly Pattern price model?
Use stop losses, trade with the right amount of capital, and follow trading discipline.
What are the outstanding advantages of the Butterfly Pattern model?
The forex price model has a number of advantages such as profit potential, use for many markets, combined with many indicator tools.
What are the disadvantages of the Butterfly Pattern?
This model is considered complex to determine, the signal is not too accurate, and the risk is high.
