Now to start trading this pattern you will need an indicator. For MT4 there use to be an indicator that would display these patterns directly onto the chart but I am having issues finding one that is compatible with the latest version. In the below example I have used the standard ZigZag indicator to help pinpoint the highs and lows and measure their size. I have then used a drawing tool to add in the extra parts to the pattern.
This chart above shows a bullish pattern currently taking place in the GBPUSD which is indicating a low already hit on D and now ready for the retracement of the CD line. As the CD line in this setup is of a decent size it could mean a good move upwards.
The distance from the C to D level is around 532 pips. So for the Take Profit 1 you want to times by 0.382 to get the first TP level of roughly 203.2 pips and the second take profit, you times by 0.618, so the TP would be at 328.7 pips.
The Butterfly pattern is an extension pattern that uses specific Fibonacci ratios to validate the structure. Within the pattern, you are looking for an AB=CD but sometimes the pattern will possess an extended CD leg that is 1.27 or 1.618 times the XA Leg. Although all these things are important to validate the signal, the most critical number in the pattern is the XA leg which must be 1.27.
Setup – When trading this pattern, you will need to wait until you have the first 4 points have been created X, A, B and C. Once these are in place you can predict where the price will go for the last point D. The ratios of what you are looking for is shown above but take into account that the final D point can be extended slightly, but generally picks a good level. This is a bearish pattern.
Trade Opening – When you have the final point D, you have a level which you can enter in the trade. Many will do this with a sell limit and you can then also attach a stop loss slightly above the formation above the X leg structure.
Take Profit 1 – The take profit levels are calculated by using the .382% and .618% retracement of the C to D move. The first take profit is at the 0.382% level.
Take Profit 2 – This would be set at 0.618% level. As we are running Fibonacci sequences it can also provide you a probability of which target it is more likely to reach.