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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bullish Butterfly®

Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 09/24/2018
26,562 -181.45 -0.7%
11,370 -162.35 -1.4%
721 -6.64 -0.9%
7,993 6.29 0.1%
2,919 -10.30 -0.4%
YTD
7.5%
7.1%
-0.4%
15.8%
9.2%
Tom's Targets    Overview: 09/14/2018
27,000 or 26,100 by 10/01/2018
11,750 or 11,250 by 10/01/2018
755 or 720 by 10/01/2018
8,300 or 7,800 by 10/01/2018
2,975 or 2,890 by 10/15/2018

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.

The bullish Butterfly
Bullish Butterfly

 

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.

Bullish Butterfly Identification Guidelines

See the below table and associated figure.

CharacteristicDiscussion
XABPrice rises from X (see figure on the right, not drawn to scale) to peak at A and retraces 78.6% to B.
ABCAnother retrace occurs as price rises from B to C. The Fibonacci ratios which apply are shown in the figure as CB/AB.
BCDThe extension CD as a percentage of CB covers the ratios shown (see CD/CB).
AD/AXThe final leg of the pattern sees price drop from peak C to valley D. The AD move measures 127% of AX.
Butterfly chart pattern retraces
The Bullish Butterfly Retraces

 

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Bullish Butterfly Trading Tips

Trading TacticExplanation
FibonacciUse 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 longOnce 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.
StopIf price closes below D, then exit the trade.
Measure RuleFor 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

Butterfly chart pattern 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

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See Also

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. Disk space: The final frontier!