Butterfly forex, also known as the Gartley pattern, is a popular trading strategy used by forex traders to identify potential trend reversal points in the market. The pattern is named after H.M. Gartley, who first introduced it in his book, “Profits in the Stock Market.”
The butterfly pattern is a harmonic pattern that consists of four price swings, which form a geometric shape that resembles a butterfly. The pattern is made up of two legs, the AB and CD legs, and two corrective legs, the BC and XA legs. The AB leg is a bullish move, while the CD leg is a bearish move.
The pattern is formed when the AB and CD legs are equal in length, and the BC leg retraces between 38.2% and 88.6% of the AB leg. The XA leg is used to identify the potential reversal point, and it should be at the 0.618 or 0.786 Fibonacci retracement level of the XA leg.
Here’s how to do butterfly forex:
Step 1: Identify the XA leg
The first step in identifying a butterfly pattern is to identify the XA leg. This leg is used to identify the potential reversal point. The XA leg is a move from the initial point of the pattern to the point where the AB leg begins.
Step 2: Identify the AB leg
The AB leg is the initial bullish move in the pattern. It is a move from the initial point to the top of the pattern. The length of the AB leg should be equal to the length of the CD leg.
Step 3: Identify the BC leg
The BC leg is a corrective move that retraces between 38.2% and 88.6% of the AB leg. It is a move from the top of the AB leg to the bottom of the pattern. The length of the BC leg should be between 0.618 and 0.786 of the AB leg.
Step 4: Identify the CD leg
The CD leg is a bearish move that completes the pattern. It is a move from the bottom of the pattern to the top of the BC leg. The length of the CD leg should be equal to the length of the AB leg.
Step 5: Enter the trade
Once you have identified the butterfly pattern, you can enter the trade. You should enter the trade when the price reaches the potential reversal point, which is at the 0.618 or 0.786 Fibonacci retracement level of the XA leg.
You can place your stop loss below the low of the CD leg and your take profit at the 38.2% retracement of the CD leg. If the price breaks below the low of the CD leg, the pattern is invalidated, and you should exit the trade.
Conclusion
The butterfly forex pattern is a popular trading strategy used by forex traders to identify potential trend reversal points in the market. The pattern is formed when the AB and CD legs are equal in length, and the BC leg retraces between 38.2% and 88.6% of the AB leg. The XA leg is used to identify the potential reversal point, and it should be at the 0.618 or 0.786 Fibonacci retracement level of the XA leg. By following these steps, you can successfully trade the butterfly pattern and potentially profit from the market.
