What is the Butterfly Pattern in Forex?
The Butterfly is a reversal chart pattern that belongs to the Harmonic pattern family. Price consolidation is represented by this pattern. Its frequently observed towards the end of a long price move.
Forex pattern may be used by traders to identify the conclusion of a trending advance. The start of a corrective or new trend phase. This pattern is frequently seen during the last wave (Wave 5) of an impulse sequence in Elliott wave terminology.
The Butterfly Formation’s Structure
The pattern contains four price swings and resembles the letters “M” (in downtrends) and “W” (in uptrends) on the chart (in uptrends). It is frequently confused for a Double Top or Double Bottom design throughout its creation.
The Butterfly, on the other hand, does not always occur following a trend, though it frequently does. To get the finest results, you want to see the Double Top or Bottom emerge only after a sustained motion. The beginning of the pattern is indicated by a “X.” The four price swings of the formation are then identified as XA, AB, BC, and CD.
Chart Pattern of a Bullish Butterfly
Let’s look at the structure once more, this time with the anticipated price reaction at the D point. Take note of how the bullish Butterfly’s structure matches that of a “M” type structure. As demonstrated by the green arrow on the drawing, the bullish Butterfly is likely to lead to bullish price action at the D point.
Chart Pattern of a Bearish Butterfly
The bullish Butterfly’s polar opposite is the bearish Butterfly. The bearish pattern resembles a “W” type structure in this respect. Let’s take a look at a drawing of a bearish Butterfly:
As indicated by the green arrow on the design, the bearish Butterfly is predicted to lead to bearish price action at the D point.
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