What is the butterfly pattern in forex trading?

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jack07
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Joined: Sat Nov 23, 2024 12:40 pm

What is the butterfly pattern in forex trading?

Post by jack07 »

how can I identify bullish and bearish butterfly patterns ?
Rafay
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Joined: Wed Oct 30, 2024 12:34 pm

Re: What is the butterfly pattern in forex trading?

Post by Rafay »

Butterfly Pattern consists of four waves and is used widely in forex trading. It is a reversal pattern meaning that it indicates the possible reversal of the current price trend for example if the price is moving in a bullish direction then after this pattern is formed there is a possibility of the price trend changing into a bearish trend and vice versa. This pattern is very easy to identify once you get all the rules of it and many traders use the Fibonacci retracement and extension levels to identify this pattern. This pattern is based on the shapes found in nature that is why it is being used in technical analysis.

There are two types of butterfly patterns

Bullish Butterfly Pattern
Bearish Butterfly Pattern

Rules for the Butterfly Pattern

Following a few very simple and easy steps you can use to identify the Butterfly Pattern in forex. The Butterfly Pattern is made up of four waves XA, AB, BC and CD.

Wave XA Is the first wave and must be a strong move in the price.|
Wave AB is the retracement wave and must retrace to the fibonacci level of 0.618 – 0.78 of the wave XA
Wave BC must retrace to the fibonacci level of 0.38 -0.88 of the wave AB
Wave CD can either match the length of the wave AB or extend to the extension level of 1.272 of the wave XA.

These are the four very easy steps you can use to identify the butterfly pattern. Fibonacci tools can also be used to identify the better pattern and improve the pattern accuracy.

Bullish Butterfly Pattern

In a bullish butterfly pattern the first wave or the XA wave will be a strong bullish move after that AB and CD both will be the retracement moves. The CD wave will indicate a potential bullish reversal of the price. The Bullish Butterfly Pattern indicates that the bearish trend might change into the bullish trend.
bullish-butterfly.jpg
Bearish Butterfly Pattern

In a Bearish Butterfly Pattern the first wave of the wave XA will be a strong bearish move in the downward direction while the waves AB and CD will be the retracement moves and the wave CD will indicates the bearish reversal in the price, changing the bullish trend into the bearish trend.
bearish-butterfly.jpg
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