Butterfly Pattern: How to Trade This Harmonic Reversal

The Butterfly pattern is a powerful harmonic formation that identifies extreme reversal points in the market. Unlike the Gartley pattern where point D falls within the XA leg, the Butterfly extends beyond point X, creating opportunities at market extremes. In this guide, you will learn how to identify, validate, and trade the Butterfly pattern for consistent profits.

What is the Butterfly Pattern?

The Butterfly pattern is an extension harmonic pattern discovered by Bryce Gilmore and refined by Scott Carney. Its defining characteristic is that point D completes at the 127.2% extension of the XA leg, placing the entry point beyond the pattern's starting point. This makes it ideal for catching reversals at significant price extremes.

Butterfly Pattern Fibonacci Ratios

The exact ratios that define a valid Butterfly:

Point B

• Must retrace exactly 78.6% of the XA leg
• This is the primary qualifying ratio
• The deep B retracement is what sets Butterfly apart from Gartley

Point C

• Must retrace between 38.2% and 88.6% of the AB leg
• Most commonly seen at 50%, 61.8%, or 78.6%
• Point C cannot exceed point A

Point D (The Reversal Zone)

• Must complete at the 127.2% extension of XA
• BC extension should reach 161.8% to 261.8%
• The AB=CD pattern often completes near point D as well

Bullish vs Bearish Butterfly

Bullish Butterfly

Forms after a decline, looks like a W-shape:

• XA leg moves down
• Point D extends below point X (lower low)
• Enter long at point D
• Expect price to rally from the extreme low

Bearish Butterfly

Forms after a rally, looks like an M-shape:

• XA leg moves up
• Point D extends above point X (higher high)
• Enter short at point D
• Expect price to decline from the extreme high

Why the Butterfly Works

The pattern exploits market psychology:

• Stop hunting: Point D often occurs where stops are clustered beyond obvious levels
• Exhaustion: The extension to 127.2% shows final exhaustion of the trend
• Fibonacci confluence: Multiple Fibonacci levels converge at point D
• Trapped traders: Breakout traders who entered at X are now trapped

The Potential Reversal Zone (PRZ)

The PRZ for Butterfly patterns includes:

• 127.2% XA extension: The primary level
• 161.8% - 261.8% BC extension: Should converge with XA extension
• AB=CD completion: The D point of the AB=CD often aligns

The tighter the convergence, the more powerful the potential reversal.

Entry Strategies

Limit Order Entry

Place a limit order at the calculated D point:

• Calculate 127.2% extension of XA
• Place limit buy (bullish) or limit sell (bearish)
• Advantage: Best entry price
• Risk: Price might not reach exact level

Confirmation Entry

Wait for price action confirmation:

• Wait for price to reach the PRZ
• Look for reversal candlesticks (hammer, engulfing, etc.)
• Enter after confirmation candle closes
• Advantage: Higher probability
• Risk: Worse entry price

Stop Loss Strategies

Stop placement differs from retracement patterns:

• Primary method: Place stop beyond the next Fibonacci extension (141.4% or 161.8% of XA)
• ATR-based: Use 1.5-2x ATR below point D
• Structure-based: Below the next visible support or resistance level

Note: Unlike Gartley or Bat, you cannot use point X as your stop since D already exceeds X.

Profit Targets

Use Fibonacci retracements of the AD leg:

• Target 1: 38.2% retracement of AD
• Target 2: 61.8% retracement of AD
• Target 3: Point B (common strong target)
• Target 4: Point A (full retracement)
• Extended: 127.2% AD extension in strong trends

Pattern Validation Rules

Confirm these before trading:

• B is at 78.6% retracement of XA (critical ratio)
• C is between 38.2% and 88.6% of AB
• C does not exceed point A
• D reaches 127.2% extension of XA
• BC extension is between 161.8% and 261.8%
• Pattern proportions look balanced visually

Common Mistakes

Avoid these Butterfly trading errors:

• Wrong B ratio: If B is not at 78.6%, it might be a Crab or other pattern
• Expecting Gartley stop: You cannot use X as stop since D extends beyond
• Ignoring BC extension: The BC leg must also hit its required extension
• No confirmation: Blindly entering at calculated D without reversal signs
• Fighting strong trends: Extension patterns against strong trends often fail

Butterfly vs Other Extension Patterns

Butterfly vs Crab

• Butterfly: B at 78.6%, D at 127.2% extension
• Crab: B at 38.2-61.8%, D at 161.8% extension
• Crab has more extreme D point

Butterfly vs Deep Crab

• Butterfly: B at 78.6%
• Deep Crab: B at 88.6%, D at 161.8%
• Deep Crab is even more extreme

Timeframe Considerations

The Butterfly pattern effectiveness by timeframe:

• Weekly: Most reliable, catches major reversals
• Daily: Very reliable, good for swing trades
• 4-Hour: Good balance of frequency and reliability
• 1-Hour: More patterns, slightly lower success rate
• Lower timeframes: Higher noise, requires faster execution

Summary

The Butterfly pattern is an extension harmonic that identifies reversal opportunities at market extremes. Its defining features are the 78.6% B point retracement and 127.2% D point extension beyond X. Success requires validating all Fibonacci ratios, understanding that stops must be placed beyond additional extension levels (not at X), and waiting for confirmation at point D. The pattern works best at significant support and resistance levels where the extension creates a stop-hunting opportunity before reversal.

Expand your harmonic knowledge with our guides on the Gartley pattern, Crab pattern, and our complete harmonic patterns overview.