HOW TO TRADE BEARISH BUTTERFLY HARMONIC CHART PATTERN

Bearish butterfly harmonic chart pattern suggests a short entry upon completion of the pattern. It is an XABCD harmonic chart pattern. This post is to explain the way to find or draw a bearish butterfly harmonic chart pattern with and without the fibonacci retracement tool, and the way to trade a bearish butterfly harmonic chart pattern.

How to draw/find a bearish butterfly harmonic chart pattern on price chart?
To draw a bearish butterfly harmonic chart pattern, first of all we need to find the X and A points of the pattern. X and A points of the pattern is found at the top and bottom of a bearish trend respectively. In the second step, we will draw a fibonacci retracement tool from X to A to find the B point of the pattern. The B point should be at the 78.6% fibonacci retracement of XA.

To find the B point without fibonacci retracement tool, we will use the following formulas-

(IA) AB= (price at X point-price at A point) X 0.786
(IB) Price level at 78.6% of XA= (result found from formula (IA) + price at point A)

The B point of this pattern should lie on the price levels found from formula (IB). This satisfies the AB/XA=0.786 condition of the pattern. Look at the following illustration.

In the above image, we can see a little failure in confirming the B point of the pattern. B point is confirmed little lower than the 78.6% fibonacci retrcement level of XA, but still we will accept it as the B point of bearish butterfly harmonic chart pattern. We will find so many cases similar to this while analyzing the price chart.

In the next step, we are going to find the C point of the pattern. To find the C point of the pattern, we will draw a fibonacci retracement tool from A to B. The C point should be between the 38.2% and 88.6% fibonacci retracement of AB.

To find the C point without fibonacci retracement tool, we will use the following formulas-

(IA) BC= (price at B point-price at A point) X 0.382
(IB) Price level at 38.2% of AB= (price at point B-result found from formula (IA))
(IIA) BC= (price at B point-price at A point) X 0.886
(IIB) Price level at 88.6% of AB= (price at point B-result found from formula (IIA))

The C point of this pattern should lie between the price levels found from formula (IB) and (IIB). This satisfies the BC/AB=0.382-0.886 condition of the pattern. Look at the following illustration.

In this step we are going to find the D point of the pattern, to find the D point, we need to draw a fibonacci retracement tool from B to C. The D point should be between the 161.8% and 2.24% fibonacci retracement of BC.

To find the D point without fibonacci retracement tool, we will use the formulas-

(IA) CD= (price at B point-price at C point) X 1.618 
(IB) Price level at 161.8% of AB= (price at point C+result found from formula (IA))
(IIA) CD= (price at B point-price at C point) X 2.24
(IIB) Price level at 224% of AB= (price at point C+result found from formula (IIA))

The D point of this pattern should lie between the price levels found from formula (IB) and (IIB). This satisfies the CD/BC=1.618-2.24 condition of the pattern. Look at the following illustration.

Now we need to reconfirm the D point of the pattern. To reconfirm the D point, we will draw a fibonacci retracement tool from X to A. The D point should be between the 127% and 141% fibonacci retracement of XA.

To find the D point without fibonacci retracement tool, we will use the formulas-

(IA) AD= (price at X point-price at A point) X 1.27
(IB) Price level at 127% of XA= (price at point A+result found from formula (IA))
(IIA) CD= (price at B point-price at C point) X 1.41
(IIB) Price level at 141% of AB= (price at point C+result found from formula (IIA))

In this case we can see, the D point failed to satisfy the CD/BC=1.618-2.24 condition of the pattern, but it accurately satisfied the AD/XA= 1.27-1.41 condition of the pattern.

Remember, the D point is the entry point of the pattern, and it is confirmed by two conditions. A reliable D point should satisfy the both conditions, but it is also accepted, if the one condition is satisfied.

How to trade bearish butterfly harmonic chart pattern?
A short entry is suggested when the D point of the pattern in confirmed. The stop loss for the order should be placed at the upper resistance level. The take profit for the order should be placed at the 38.2-88.6% fibonacci retracement of CD, depending on the fundamental analysis.

B and C points can also be traded, if the entries are confirmed by other technical analysis tool(s).

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