Studying the peculiarities of the formation and use of the popular harmonious trading pattern

For several decades of the existence of harmonious trade, researchers have identified and studied the basic patterns. Their list is wide enough and not limited to the Shark or Bat. Sometimes the attack of one of the opponents is so rapid that the area of ​​convergence at the level of 88.6% is easily overcome. This does not mean that harmonious trading does not work. As with all other technical or fundamental analysis tools, this is a probabilistic process that involves controlling risks with the use of protective stop orders.

The deeper the correction, the greater the chances for a reversal. Opponents of the mainstream trend have shown themselves through a rollback, and are patiently waiting to break the trend. This pattern is clearly visible when the Expanding Wedge pattern based on the Three Little Indians develops. The same can be said about the Butterfly harmonious trade pattern. It is based on the 1-2-3 pattern, and the correction level is estimated at 78.6% of the first XA wave. Some studies mention 61.8% and 88.6%, but the classic version assumes that the truth is in the middle.

Butterfly Pattern

In my opinion, the market is not so harmonious as to look for the ideal ratio of wavelengths. We just need to be guided by the principle: if the first convergence zone is passed, there is a high probability that the instrument will stop at the second one. So in the example with GBP/USD, the level of 88.6% of the XA wave did not become a serious obstacle for the bears. The quotes collapsed to 161.8%, which, with a correction rate of 78.6%, indicates the presence of the Butterfly pattern.

Butterfly pattern in the GBP/USD chart

 

Next, you need to recall the previously described harmonious pattern principles. In itself, the price reaching a convergence zone is not a signal to open a position in the direction opposite to the existing trend. You must receive one or more confirmation signals, including with the help of price action patterns. In case of GBP/USD, we have identified the Anti-Turtles pattern. To identify the target for long positions, the Shark pattern was used. The entry to the long position is at the level of breakdown of short-term diagonal resistance, a protective stop order is set in the area of the low aong the recent price fluctuations. Let me remind you that the use of this pattern suggests the possibility of its use in practice for both aggressive and conservative traders.

Trading strategy based on the Butterfly pattern

In the above example, the upward price movement was far from exhausted; however, the trader always has tools for re-entry. As for additional confirmation signals, indicators can be used in their quality. The divergence and the relative strength index (RSI) leaving the oversold area are sufficiently strong arguments for the formation of long positions in the area of convergence. Especially for those who trust calculated indicators.

Filters for the trading system based on the Butterfly pattern

Thus, the trader should not be confused by the inability of the nearby convergence zone to become a trampoline in a bearish trend and ceiling in the case of a bullish one. Levels of 127.2% and 161.8% with a correction of 78.6% from the first wave (XA) are quite strong support or resistance levels. They may be worked out if there are additional confirming signals that allow entering the trade with greater confidence.


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Price chart of GBPUSD in real time mode

Forex is trying to catch the butterfly

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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