Here we will explore a super powerful pattern in the Harmonic arsenal, which is the Butterfly pattern. As is the case with all harmonic patterns, Butterfly requires specific rules
Butterfly pattern elements:
• Precise 78.6% B point retracement of XA leg.
• BC projection must be at least a 1.618.
• Equivalent AB=CD pattern is minimum requirement, but the Alternate 1.27 AB=CD
is the most common.
• 1.27 XA projection most critical number in the Potential Reversal Zone (PRZ).
• No 1.618 XA projection.
• C point within range of 0.382–0.886 retracement.

3 elements define PRZ:

  • 1.27 extension XA ( the most important)
  • BC projection – we choose the projection which gives the most compact PRZ
  • AB=CD or its alternatives

1) Bullish Butterfly pattern

Screenshot 2015-06-12 21.02.00


Figure 1
Figure 1

Figure 1 represents a very common butterfly. Normally a successful butterfly will reject the price immediately on the first test, hence, the reversal is very sharp. CD=1.27AB, 2.0 BC Projection and the most important one 1.272 XA projection define the tight PRZ. Price show an immediate reversal after test the whole area.

Figure 2
Figure 2

Figure 2 is an example of failure in Harmonic pattern. The price just goes through the whole PRZ, comes to retest this area then falls. Although B point is at 0.786 XA and 3 elements neatly define the PRZ, the pattern sill FAILS. There is nothing call certainty in this market, so don’t hallucinate about 100% winning rate 

2) Bearish butterfly pattern

butterfly bearish

Figure 3
Figure 3

Figure 3 shows a perfect Butterfly pattern reversal. We have managed to catch the whole new downtrend and ride the trend by combining harmonic pattern and Elliot wave theory (discussed later). Again B point at 0.786 XA retracement is critical. You can read on other sites which give you different ratio alignment for point B. However, we have tested thousands of Butterfly pattern and 0.786 Retracement comes out to be the most precise and reliable. 1.272 XA , 1.618 BC projection and CD=1.27 AB define a perfect reversal zone for the pattern.

Figure 4
Figure 4

The Butterfly in figure 4 utilizes AB=CD, 2.24 BC projection and1.272 XA to form the PRZ. As usual, price get rejected at the first time testing this area.

Note: as you might have already noticed, the price action in Butterfly pattern sometimes doesn’t test the whole PRZ. That’s why the entry point for trading the butterfly should be at 1.272 XA projection, which is the most important level in the PRZ.

Butterfly works best when price comes to create relative new high and new low.
To see more examples, have a look at our collection here!