The bullish and the bearish harmonic chart pattern is widely used by many trader. Trader used to find trend reversal and continuation pattern by these two harmonic pattern. The main advantage of using these harmonic pattern is its high reliability and perfect trade setup.
Let’s look at an example of the bullish and the bearish butterfly harmonic pattern.
Figure: The bullish and the bearish Butterfly pattern.
Trader can either use a custom indicator or free indicator or can draw these chart pattern easily by calculating the retracement level of is each wave. Most professional traders use high end Harmonic indicator for trading with these pattern. “The best thing about these high-end indicator is, it’s absolutely free!”
Formation of the pattern
The formation these pattern is based on retracement and ratio. The first wave XA can be any length. The second wave AB is the 38.2% retracement of the first wave. The third wave BC is the 88.6% retracement of the second wave. Now come the final and fourth wave which 261.8% retracement of the third wave. After completion of the fourth wave, the pattern is said to be a complete pattern.
Trader takes buy or sell entry at the point D depending on the formation of the chart pattern. Some trader use price action confirmation in order to make the setup more reliable and efficient. The stop loss is generally placed just below the point D for bullish confirmation and for Bearish Butterfly pattern the stop loss is set just above the point D.
Traders can also use previous support and resistance level for determining their stop loss and take profit level. Most professional trader don’t use a fixed take profit area rather they prefer trailing stop loss while trading the bearish and the bullish butterfly harmonic pattern.