This image shows the typical confirmation of a bullish Butterfly chart pattern. Notice in the sketch, the manner in which price begins to turn once it reacts to the D level. Obviously, it would work the same way with a bearish Butterfly pattern but in the opposite direction. Forex Butterfly Strategy Now let's describe a system for trading the Butterfly pattern. Keep in mind there are different strategies for trading the Butterfly pattern, but we will discuss a variation based mainly on using the BC projection to find the D point. We will walk through each of the three important trade elements – Entry, Stop Loss, and Take Profit. Entry Point If you are trading a bullish Butterfly, you would buy the Forex pair when the price reacts to the D level after: • CD sets a bottom at 161.8% of BC if BC retraces 38.2% of AB • Or after CD sets a bottom at 261.8% of BC if BC retraces 88.6% of AB If you are trading a bearish Butterfly, you would sell the Forex pair when the price reacts to the D level after: • CD sets a top at 161.8% of BC if BC retraces 38.2% of AB • Or after CD sets a top at 261.8% of BC if BC retraces 88.6% of AB Stop Loss If you are trading a bullish Butterfly, you should place a Stop Loss order below the swing of the newly created D bottom. If you are trading a bearish Butterfly, then place a Stop Loss order above the swing of the newly created D top. Make sure you position the Stop at a reasonable distance beyond Point D, taking current volatility into consideration. Take Profit There are numerous ways that you could manage your exit for the Butterfly extension pattern. One effective way is to set the price target at the 161.8% extension of the CD move. You may consider closing a portion of your position prior to this level as price approaches key swing points within the structure. These important levels include the price swings at points B, C, and A. These levels could act as potential turning points. As such, you should carefully watch the way that price interacts at these levels to determine if you should stay in the trade further or exit. If a breakout through the A level occurs, then you can be fairly confident that the projected target at the 161.8% extension of the CD leg should be achieved.
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