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Written by and copyright © 2005-2018 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions.
See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.
Tweaked on 6/29/2018
Identification guidelines for the bullish butterfly use Fibonacci ratios to locate the turning points. In the tests performed and discussed below, I used publicly available information
to identify the Fibonacci ratios and applied them in a manner that I believe is correct. Additional guidelines may allow you to tune the performance of the chart pattern
so that it makes for a better trading vehicle.
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Bullish Butterfly
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Important Results for Bullish Butterfly
Overall performance rank (1 is best): Not ranked
Break even failure rate: *14%
Average rise: *36%
Throwback rate: 68%
Percentage meeting price target: 54%
* This is measured from the low at point D, bull market only.
The above numbers are based on a list of 251 or fewer samples (93 for the average rise) from bull markets only. See the glossary for definitions.
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Bullish Butterfly Identification Guidelines
See the below table and associated figure.
| Characteristic | Discussion |
| XAB | Price rises from X (see figure on the right, not drawn to scale) to peak at A and retraces 78.6% to B. |
| ABC | Another retrace occurs as price rises from B to C. The Fibonacci ratios which apply are shown in the figure as CB/AB. |
| BCD | The extension CD as a percentage of CB covers the ratios shown (see CD/CB). |
| AD/AX | The final leg of the pattern sees price drop from peak C to valley D. The AD move measures 127% of AX. |
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 The Bullish Butterfly Retraces
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Bullish Butterfly Trading Tips
| Trading Tactic | Explanation |
| Fibonacci | Use the length of AX to help predict the price at which the stock will turn at D. AD should be 1.27 times as long as AX. |
| Go long | Once price turns at D, buy the stock. Because this pattern has such a high failure rate (14% as measured from the low at D), take care trading this pattern.
Price may continue dropping below D.
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| Stop | If price closes below D, then exit the trade. |
| Measure Rule | For an upward breakout (a close above the top of the pattern), I used the height of the pattern to set a target. Price reached the target 54% of the time. |
Bullish Butterfly Trading Example
Let's take a look at a trading example.
I show the Butterfly on the daily chart of LSB Industries. X has a low of 7.64, A peaks at 9.93, B has a range of 8.49 to 8.08, C has a range of 9.70 to 9.05 and D has a range of 7.80 to 7.03.
Using these numbers, the AB/AX retrace ranges from 63% to 81%, depending if you use the high or low at B. The 78.6% Fibonacci ratio rests near the high end of that range, so I consider it a
valid turning point.
Similarly, the CB/AB retrace ranges between 52% and 88%, depending on the high/low value of C. Three of the Fibonacci ratios (61.8%, 70.7%, and 78.6%) are within the high/low range.
The CD/CB extension ranges between 117% and 165% (using high/low values of D), comfortably snuggling in the Fibonacci ratio of 161.8%
Lastly, the AD/AX extension measures between 93% and 127%, depending on the high/low choice of D. However, I use a 3 percentage point window (3% above or below) for this last ratio (because it's an exact match), so a Fibonacci ratio of 127% works anyway.
The stock peaks at H (the ultimate high after which price drops at least 20% or closes below the bottom of the pattern), at a price of 11.70 for a rise above D of 66%. However,
the gain above the top of the butterfly (A) is only 18%.
-- Thomas Bulkowski
Butterfly is a registered trademark of Scott Carney.
Written by and copyright © 2005-2018 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions.
See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.
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