Read on and find out what is bearish butterfly pattern, including the fundamentals of its identification.
What Is a Butterfly Pattern?
In a nutshell, the butterfly pattern is a technical analysis tool with a shape similar to a butterfly. It’s a reversal pattern with four legs — X-A, A-B, B-C, and C-D. These are similar to the legs you’ll find in bat and Gartley patterns.
You might be curious — why do butterflies have patterns? Well, the patterns are useful for the identification of a price movement’s end. In turn, you’ll know the right time to get in the market during a price reversal.
What Is a Bearish Butterfly Pattern?
Now that we talked about what is butterfly pattern let’s discuss its common types. It can be bullish or bearish. In this short guide, however, we focus on the bearish butterfly harmonic pattern.
A bearish butterfly pattern target lets users know the right time to enter the market. It’s when the price of an asset is going down. The pattern makes traders confident about how much the price will plummet.
How To Identify a Bearish Butterfly Pattern
If you want to know how to trade butterfly pattern, you must know how to spot it in the charts.
To know if it’s bearish, the most important is for X and D to be above points A and C. This is an inverted pattern compared to what you’ll find in a bullish butterfly. Also we have a special Automated completion zone, where if the D pivot finds support within, the result Bearish trade has a high probability of happening. Check out the example image below taken from the TradingView version of our xBrat Auto Harmonic Pattern Software and check it out on our website HERE
Example of a Bearish Butterfly Pattern
Here are some of the most important bearish butterfly pattern rules, which can give you an example of how the pattern looks like:
- From X, the upper point of the first leg, the price declines to Point A
- The market rebounds, and the line rises to point B, which is lower than point X
- After another downtrend, the price drops to Point C
- The market rallies and reaches Point D, which is higher than point X