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, which is frequently observed towards the end of a long price move.
The Forex Butterfly pattern may be used by traders to identify the conclusion of a trending advance and 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 Butterfly 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 Butterfly 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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