Butterfly and Bat Chart Patterns

Butterfly and Bat Chart Patterns

Chart patterns are among the most important tools we can use to predict the market direction, 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 am talking about some other kinds of patterns that are very important in predicting the market direction, specially when there is a possibility that the market changes its direction.

Butterfly which is also known as W, 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 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 patterns form at the top of uptrend. Bat patterns look like capital M, whereas butterfly patterns look like 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 Using the Butterfly or Bat Patterns?

Like all the other patterns, this pattern also has a support and resistance line. My strategy for trading this pattern is the same as my trading strategy with the other patterns. I consider the rules, but I always wait for breakouts. 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 the 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 candle which has broken below the support: