Forex trading is often based on the use of harmonious formations. Their essence is the use of indicators that identify patterns that are repeated on the chart of the selected asset.
One of such tools that allow timely forecasting trend reversals is the ZUP indicator or the "Gartley Butterfly." We also recommend reading Integrated approach in trading.
How the "Gartley Butterfly" pattern is built
This graphic model has specific, precise contours and mathematical relationships. It looks similar to the standard ABC - Elliot correction since it is based on Fibonacci levels.
Using the four-hour chart of the GBPUSD currency pair as an example, we can consider the process of constructing the Gartley Butterfly model. In this case, a "bearish" version of the pattern is presented.
Black lines indicate the direction of the trend. The initial segment AB shows the impulsive movement of the pattern down with the absence of sharp pullbacks. For clarity, you can stretch the Fibo grid from point A to point B.
The BC segment, which displays the first trend correction, should correspond to a 50–61.8% Fibo level. Moreover, the ideal construction of this part of the model assumes that the speaker distance is 0.618 of the distance AB. Then point D is laid aside the main movement of the trend. The CD segment should be 0.382 (0.886) of the BC segment. After this, the endpoint E. is calculated. When constructing it, several conditions must be taken into account:
- E should not be higher than A.
- The distance of the aircraft is ideally equal to the length of the ED.
- The ED segment is 1.27–1.618 of the CD segment.
Graphic figures like the Hartley Butterfly are used in different configurations. Using them, you can qualitatively perform market entry. Moreover, trading using this pattern is possible both after its final form and in the range of points A – E.
The sizes of transaction volumes change the same with purchases and sales. An increase in volume accompanies the first impulse motion in segment AB. During the first correction, it decreases almost by half. Then, on the CD segment, growth is again observed, which increases during the second correction. After the formation of the endpoint E, the volume rises very sharply.
Signals to sell
Trading using the "Gartley Butterfly" should be on a time frame of at least M30. Reliability and potential of a trading signal increase when a pattern is formed on a higher timeframe.
The figure shows an example of a market entry for sale with a bearish version of the model. A pending sell order is placed at point E. Stop Loss safety order can be placed just above the Fibo level of 78.6%. As a goal, one should consider the level corresponding to point B. As can be seen from the example, the profit from this transaction was above all expectations.
An asset can be purchased with a "bullish" version of the "Gartley Butterfly" pattern.
The most favorable moment of entering the market is point E. It is in this place that a pending buy order is placed — safety order - below the level of 78.6%.
Features of the Gartley Butterfly indicator
The ZUP indicator is easy to download and install in the MetaTrader terminal. After a reboot, it appears in the "Navigator" window. By clicking the left mouse button, the tool is transferred to the chart of the selected asset. The indicator has dozens of settings. It has a very complicated calculation algorithm. The result is a highlight in the terminal window of a variety of options for butterflies.
The figure is formed at the extreme point of the price rollback. Visually having this information, investors can place a pending order to buy or sell in advance and open a deal at the pivot point in time.
The formation of the color zone of the butterfly wings on the chart is accompanied by the appearance of a red rectangle with lines of blue and yellow. The boundaries of the square represent the area in which the model works correctly. The lines inside it are Fibo correctional levels. Signals are considered from them. Trading is carried out by breakdown or a rebound from the scales.
In some cases, the emerging wing of the butterfly rapidly overcomes the red rectangle. Thus, the indicator indicates the impossibility of the correct development of the model. A similar case is shown in Figure 5.
A characteristic feature of the indicator is the forecasting of long-term price reversals. Traders, placing pending orders, can set quite lofty goals.
Using the model for binary options
The "Gartley Butterfly" model is perfect for trading binary options. With the "bullish" version of the pattern, contracts for the purchase are concluded, and with the "bearish" - for sale.
The figure shows the level to which the price will strive. In this case, it passes over the edge of the left-wing. An important point is the expiration of contracts. It should be calculated based on the timeframe on which quotes are analyzed. The number of candles to the target level is taken into account. The figure shows the case of a long-term option.