Page 1 of 7

Butterfly Harmonic Pattern Trading

Strategy
by TradingStrategyguides | Jan 17, 2018 | All Strategies, Chart Pattern Strategies |
1 comment

Butterfly Harmonic Pattern Trading

Strategy
The Butterfly Harmonic pattern trading strategy will teach you how to trade butterfly
harmonic and start profiting with a new electrifying approach to technical analysis. The
butterfly market strategy is part of the Harmonic trading patterns.

Our team at Trading Strategy Guides is building up the most comprehensive step-by-
step guide into Harmonic trading and 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 introductory article into the harmonic patterns as this will give
you a better understanding of how to trade the butterfly pattern.

The harmonic butterfly like all of the harmonic patterns is a reversal trading pattern that
can be traded universally on all time frames but we prefer only trading them on higher
time frames. Also read the simple way of trading multiple time frames in forex.
 Page 2 of 7
There are many variations and many different structures that can be considered a
Butterfly structure. The Butterfly looks similar to Gartley harmonic but 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 butterfly structure in the following sections.

Now…

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 very useful indicators
to actually 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 that follows 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.
 Page 3 of 7

The B point of the Butterfly harmonic pattern is important because it’s determining
other Fibonacci measurements within the pattern to define the trade opportunities.

So, the ideal target for the B point must possess 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.
 Page 4 of 7
Also, the Butterfly pattern must include an equivalent AB=CD pattern, it’s a 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 attempting to use this
advanced pattern in your trading strategy.

Step #1 How to Draw Butterfly Pattern

To learn how to draw butterfly chart pattern simply follow step by step guide – see
figure below for a better understanding of the process:

• First, click on the harmonic pattern indicator which 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:

 Page 5 of 7
Now, we’re going to lay down the Butterfly trading rules.

See below…

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
the point D.

Point D of a Butterfly is an extension of the AB swing leg in the magnitude between

1.618 and 2.618 and 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 but for better timing 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.

See below…

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 because any break above will automatically invalidate
the Fibonacci requirements for a Butterfly harmonic.
 Page 6 of 7

The next logical thing we need to establish for the harmonic patterns cheat sheet is
where to take profits.

See below…

Step #4: Multiple take profit strategy: TP1 = Point A; TP2 = Trailing SL below last
swing high.

There can be many ways to manage your trades, but the ideal target for the Butterfly
harmonic is to implement a multiple take profit strategy.

For the Harmonic Butterfly strategy, we’re going to take the first partial profit once we hit
the starting point A and 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 because we ensure we take some profits at
the first trouble area from where the price might reverse and turn against us.

Secondly, by only taking partial profits and trailing our stop loss we ensure that we’re still
making more money if we have a full trade reversal emerging from the Butterfly
harmonic pattern.

Note** the above was 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.
 Page 7 of 7
Take a look:

Conclusion – Butterfly Pattern

The personality of the Butterfly price structure is that it’s not a rigorous reversal
pattern; it’s 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 like is giving you the opportunity to
take part in a move right from the start; therefore, it 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 now to trade this strategy: