Chart patterns are among the most important tools we can use to guess the next direction of markets, take a position and make some money. So far, I have talked about Triangles, Wedges, Flags, Pennants, Rectangles, Head and Shoulders, and Cup and Handle patterns. In this article, I will talk about some other kinds of patterns that are very important in predicting the market’s direction, specially when there is a possibility that the market changes its direction.
What Are Butterfly and Bat Patterns?
Butterfly and Bat patterns are also known as Harmonic patterns. Butterfly pattern, which is also known as W pattern, is an important reversal pattern that usually forms at the top of an uptrend. Of course, you have to notice that this pattern doesn’t always cause the market to reverse, and sometimes the trend will be continued after that. I will tell you what to do to stay away from taking wrong positions.
Bat pattern is so similar to Butterfly pattern. It is a reversal pattern too. In fact, Butterfly and Bat patterns are almost the same, but just their shape is a little different. Sometimes, it becomes hard to say if the pattern is a bat or butterfly pattern, but this doesn’t matter at all. The only thing we have to learn very well is that we understand that the market is going to go an indecision status for a while and it is possible that it reverses, so that we take a position and make some money.
Experience shows that Bat Pattern usually forms at the bottom of downtrends, but Butterfly pattern forms at the top of uptrends. Bat Pattern looks like a capital M, whereas Butterfly Pattern looks like a capital W.
Please let me show you some examples and then I will tell you how you can trade using these patterns.
This is a beautiful Butterfly Pattern formed at the top of a strong uptrend on GBP/USD daily chart:
And this is another Butterfly Pattern on the same chart:
And this is another Butterfly Pattern formed on EUR/USD four hours chart:
This is a Bat Pattern formed at the bottom of a downtrend on EUR/USD four hours chart. As you see, it really looks like a Bat and also capital M. Also, you can see that the downtrend reverses and goes up very strongly after this Bat Pattern:
How to Trade Butterfly or Bat Patterns?
Like all the other patterns, these patterns also have support and resistance lines. My strategy for trading these patterns is the same as my trading strategy with the other patterns. I consider the rules, but I always wait for a breakout. This is what I have always emphasized on.
For example, although it is said that Butterfly and Bat patterns are reversal patterns, I do not go against the trend when I see that these patterns are formed at the top of an uptrend. I wait for the market to break below a support line and then I go short.
Here below I am showing you an example. As you see, a strong Butterfly Pattern is formed on EUR/USD four hours chart, and finally it worked strongly as a reversal pattern and the price went down. However, in order to go short, we had to wait for the market to go down and break below the Butterfly support. The breakout occurs when a candlestick closes below the support line or above the resistance. The stop loss has to be placed above the candlestick which has broken below the support:
This is another example:
In case of a Bat Pattern that forms at the bottom of a downtrend, we have to wait for a resistance breakout to go long:
The same Bat Pattern resistance breakout in more details:
Like all other patterns, there will be cases that Butterfly and Bat Patterns cannot make the market reverse. So you have to be always careful and have a reasonable stop loss to get out if the trade setup doesn’t work as you expect it to. Also don’t forget to move your stop loss to breakeven if the market moves toward the target at least x1 or x2 of your stop loss size.
How Far Does the Price Move After a Butterfly or Bat Pattern Breakout?
I’ve already showed you some analysis about the size and direction of the market movement, in my Triangles, Head and Shoulders, and specially in my Cup and Handle articles. There are some methods to predict the size of the market movement after Butterfly and Bat Pattern breakouts too. However, I prefer not to talk about them here because experience shows that these techniques are not reliable in case of Butterfly and Bat patterns. I do not want to make your trading too complicated with these techniques.
The truth that you should never forget is that, markets pay no attention to our analysis. They move on their own way. All we can do is that we locate the trade setups, take the positions, set the stop loss and target orders, and then wait to see what will happen.
Therefore, like all the other patterns, in case of Butterfly and Bat Patterns’ breakouts, I recommend you to set a reasonable stop loss as it was instructed above, and set a target order which is at least x3 of your stop loss size. An optimum and proper entry helps you have a reasonable stop loss which is not too wide. So your target will not be too wide too, and can be hit by the price easily. Also, don’t forget to move your stop loss to breakeven when it is the time to.
Parson
Hi
Arent we supposed to enter short when there is a reversal strong trade set up? eg. dark cloud or engulfing. Why do we have to wait for the price to break down the support line? Or this is a totally different method to candlestick one?
Thanks
Parson
LuckScout Team
This article is talking about trading the Butterfly and Bat patterns.
ssy
More conservative entry? Or, if you missed the entry as you described, a second chance?
These are all different patterns and setups; just like tools in your toolbox, the more you have, the more trades you can find.
reghulal
Hi,
Doing…a ..Fantastic job……kindly discuss about crab pattern also…
Warm regards
Reghulal
Shalewa A
Hi, thanks for the article, nice one! Please what if the butterfly is a wide one, which means the ‘W’ is not big but wide, is this still ok? Thanks.
LuckScout
Shalewa,
You are welcome.
Please show me an example.
Shalewa A
Hi,
Please see below the link,
(1) One wing is wider than the other, does it matter?
(2) Apart from a resistance line breakout, support line breakout, and 100% trade set ups at the ‘M’ and ‘W’ that form at the tops (high) and bottoms (lows) after the high and bottom have been joined by a trendline, we are not suppose to take a trade otherwise it would be termed as ‘trading tops and bottoms’ blindly. Please is this right?
Thanks.
https://www.mql5.com/en/charts/3350439/gbpusdb-d1-hf-markets-ltd
LuckScout
Shalewa,
1) No.
2) Yes, that is right.
Shalewa A
Hi, thanks for your response. I find very interesting.
Shalewa A
Hi, I tried to follow the two steps on how to save a picture but still it saved my account number on the platform, please are you able to block the details before posting? I am grateful. Thanks.
LuckScout
Are you using MT4?
Shalewa A
Yes, I am.
LuckScout
Shalewa,
MT4 doesn’t do it itself. Probably you have an indicator or EA on the chart that prints your account info on the chart, so that it has the account info when you save it.
Shalewa A
OK, thanks.
The AUDUSB has broken the resistance line today. However, we need to wait for the retesting to confirm if the broken line is a valid line, and the breakout is a reliable breakout before we open a trade as advised in your article https://www.luckscout.com/support-and-resistance-breakout-stop-loss-and-take-profit-settings-video/
I am learning more everyday.
Thanks for all you do.
Shalewa A
Sorry, text should be the AUDUSD has broken the resistance line today after forming a Bat Pattern. Thanks
Alex Maweturi
Is it necessary to use butterfly, head and shoulders, triangles, wedges etc to be profitable? I hope strong CS patterns + bollinger are enough. Just to make things more simple.
LuckScout
No. It is good to know them, but it is not necessary.
Nadi brh
Thank you
Very informative article about these patterns.
I have to practice finding them on chart to make my eyes get used to observing them easily.
Ernest Udalla
Hi, thank you for the nice insight on M and W patternes. Please do you have any good indicator that can help us detect these two patterns easily and draw then just like in the xamples you showed us here.
Thanks
Ernest
Charles Booth
Great article man! Love it…never realized how similar the butterfly and bat pattern can look…would take a keen eye to distinguish and that you have my friend! I see like the head and shoulders you need to wait for the neckline to break and retest. Fascinating! I take it these patterns are rare on the higher time frames? Anyway thanks for the article.
LuckScout
Yes. They form very rarely on the longer time frames, because they need a lot of time to form.
Reza Samimi
Thanks for article,
using stochastic for this setup could be a helpful confirmation as well? I mean do you initially recommend Stochastic as confirmation for this pattern?
LuckScout
Hi Reza,
Yes, you can use one or two of the Stochastic, RSI or MACD indicators as confirmation.
Reza Samimi
Thanks
GODWIN
I discovered that butterfly and bat pattern is normally traded day trading
Chin-Jung Chen
I have never traded this pattern
Nolo
It is frustrating to watch a good butterfly reversal setup; with all the right candlestick patterns, Bollinger Bands breakout, and other confirmations in place and telling you to go short but then having to wait for the market to go down and break below the butterfly support line – seeing 600 pips go to waste. But I suppose it is best to wait than risk losing money.
keines
Hi, is there any forming pattern on the currency pairs we follow as of now
rudyarsjad
I prefer bollinger band
Wisdom
It is good to know then cause it might help you someday…but I have never traded it before…
Thank you so much for sharing.
Emmanuel Enya
I just learnt a new trading pattern, thanks luckscout