How to trade “Butterfly Patterns” with Binary Options

Trading Butterfly Patterns with Binary Options might appear difficult. And for some, it might be so. With the right knowledge and proper guidance, it becomes easier than said.

Binary options are the financial options that are relatively easy to understand, contrary to what it sounds. It can help even the traders with the least skills in trading.

The method in which binary options let traders earn their profit mainly consists of gaining from price fluctuations in global markets. 

Various kinds of patterns can be observed statistically. Like the butterfly pattern, bat pattern, crab patterns, deep crab patterns, and so on. 

The Butterfly pattern is a reversal pattern that indicates a point to enter the market at different highs or lows. Allowing the trader to enter at both the extreme limits is what makes the butterfly pattern unique. But to understand what exactly butterfly patterns are is not such a complex thing as it sounds.

When a trend in the trading chart pattern comes to a pause and then continues, it’s called a continuous pattern. Whereas, a price chart pattern triggering a discourse from the original prevailing pattern is termed a reversal pattern. It’s called so because it induces a change in the preceding pattern that has been followed up till then. 

What do you understand by ‘Harmonic Patterns’? 

In binary options, there is either a fixed amount or nothing at all, which satisfies its name also, and is typically linked to the probable rise or fall in the price of a particular asset underlying the binary option.

The term Harmonic implies that the phenomenon can be further divided into shorter or longer waves to predict the direction of the trade prices. 

For an easy illustration, just like in the Harmonic mean, the average is calculated by dividing the values in a data series. In a Harmonic pattern, the waves are subdivided.

Harmonic price patterns make use of Fibonacci numbers as technical indicators to arrive at the turning point precisely. The use of geometry can be seen abundantly as any type of harmonic trading unites the geometrical patterns with trading methods to predict the outcome more accurately, taking the fact into concern that patterns ought to repeat themselves.

All harmonic patterns are based upon certain turning points in price that are five in number XABCD and differ in the Fibonacci ratio to take various geometrical shapes and labeled after their respective similarities, like The Butterfly, crab, bat, etc. All are named after their resemblance accordingly.

The Butterfly pattern is expected to be just as such a reversal pattern that comes under the broad term of Harmonic pattern even in Binary options.  

What is the Butterfly Pattern in Binary Option?

Butterfly Pattern in Binary options is a type of harmonic reversal pattern. This pattern differs from other forms of harmonic patterns in that point D extends beyond point X, and it’s often found at the end of a trade move.

Based on the market trend, it can be classified into two: Bullish and Bearish. 

The one, which opens the opportunity to buy for a binary trader is termed bullish, and the one in which the binary trader can sell is termed bearish. 

The harmonic patterns are also categorized alternatively as Internal patterns, which include structures like the Gartley patterns and the Bat patterns, or External patterns, which include structures like the Butterfly and the Crab patterns.

It is entangled with certain technical aspects like the Fibonacci numbers. Traders who use harmonic patterns as trading methods believe these patterns or the market cycles to be repeated over time. 

Just as mentioned before, Fibonacci relationships are vital components in harmonic trading patterns, as they provide the data to predict the pattern and its outcomes. So it is in the case of the Butterfly pattern as well. 

There are specific Fibonacci levels that are vital in detecting the Butterfly pattern by the binary traders. To truly identify an actual Butterfly pattern, it is much needed to be sure that the price swings of the pattern formation obey their respective

Fibonacci levels. 

What does Butterfly Pattern indicate? 

Butterfly patterns are used to depict the point when the trend is about to end. They also help at the starting of a new trend phase. 

To define this pattern in literal terms is not very complex at all. It has four price wings, and its appearance on the price chart has a resemblance to the alphabets “W” and “M” and therefore can be visualized as a butterfly spreading wings on the chart, thus giving it a unique name. 

Butterfly patterns can be comparatively identified easily than other types of chart patterns, and therefore makes it popular even among experienced traders in binary options. 

Also, the fact that the pattern represents price consolidation that is often seen at the end of an extended price move, though not always, yet makes it unique, and it is preferred more as it provides an upper hand to the binary options traders.  

What is meant by the bullish Butterfly Pattern?

As stated shortly before, Butterfly patterns can give rise to two types based on the market, a Bullish pattern and a Bearish one. 

To understand both the terms broadly, they can be simply defined, as when the harmonic patterns indicate a possible downturn or decline in the market, it’s called Bearish. And the opposite stands true for Bullish.

Bullish harmonic patterns such as a bullish Butterfly pattern give a heads up for a possible upturn or rise in the market. A sequence of harmonic patterns that indicate the up swinging off the market is what the bullish butterfly pattern is all about. 

Such insight can be used by the traders to get hold of a huge and long position in their chosen market and profit from any upturn. 

The bearish Butterfly Pattern

The catch of using the butterfly patterns profitably is to recognize the suitable rewards and risk setup. The bearish butterfly pattern shows the trader a high possibility of the price level to sell short.

It utilizes just the opposite of what is taken into concern in the bullish Butterfly. The trader operates on the strong belief that there will be a possible decline in the market trend and therefore enabling the trader to sell the stocks acquired. 

This method can be useful for those not looking to hold a long position in the market.

What is short-selling?

Short selling is primarily utilized by the Bearish butterfly traders, unlike the Bullish butterfly traders. In other terms, it’s also called shorting a stock. 

In this type of trading method, the traders look to benefit from a decline in the price of shares. This type of method is applied to gain benefit from declining price shares in the market. 

It is the opposite of what a conventional trader would do. A conventional trader is expected to look forward to a share to potentially grow forward by going long or taking hold of a long position, assuming that the price will increase later on and it could be sold for more profit.

But for traders utilizing the short selling method for trading anticipates the opposite of that to happen. Instead of identifying shares or markets that could grow potentially, they focus on identifying those shares that are sure to experience a downswing in the price pattern. 

It can be beneficial in many ways. It helps the traders to evade the likely downfalls in the market movements which others have taken a long position in and benefits from bear markets to the traders looking for this approach.

Shorting of stock or short selling can be used both in the traditional sense and in options trading, as visible from the bearish butterfly traders utilizing the short selling method of trading into the butterfly patterns.

How do you trade bullish butterflies in Binary Options?

The Harmonic trading patterns are undoubtedly among the powerful techniques for a progressive price action that can be used to detect reactions by the traders. Trading in bullish Butterflies becomes easy and maintainable once its aspects are understood clearly.

When it comes to bullish trading butterflies, the bullish traders are the ones who believe the market is going to experience a rise in the price movement and work with it accordingly as opposed to the bearish traders who work under the notion of believing that the market is going downwards. You can use either approach as per the market situation. 

In the case of the bullish trading Butterfly, if this pattern is observed by the trader, then it’s expected from them to want to increase their market by purchasing assets, assuming that the price will increase only. This happens to be true if the bullish Butterfly is interpreted properly.

Before trading in a bullish butterfly, it should be known by the trader that this approach is best applied only when the trader predicts that the security will increase to a specific price within a set period. Successful traders might earn a decent return and profit from it provided the risk. 

It may not be the best-suited one if the trader anticipates that there is only a chance or of the asset to increase its price dramatically, as the future profits get limited in that case. But it can be a beneficial approach when the investment is not much enough as the upfront costs, in this case, become low. 

One can choose to trade in it accordingly.

The butterfly spreads

For trading bullish butterflies, unlike other options strategies, the butterfly spread should also be understood. Butterfly spread consists of three different option strike prices, all of which are inside the same ending or expiry date that are created by making use of a call or put.

A butterfly spread is a neutral and income-oriented strategy that has limited risks and limited profit trade, but generally, the potential of profit is higher than that of loss. 

Calls or puts are two options that you can use to trade the pattern. It’s up to the trader’s choice, and it can also be traded as an iron butterfly. 

Traders are expected to choose between calls or a put. Depending on which is more expensive. However, the payoff may not differ much in either case and sometimes even end up being similar. 

For trading a bullish pattern, the butterfly spread has to be established, which takes place using coinciding transactions, in which the trader writes down the calls with a strike which is equal to what the trader believes the price of the underlying security would be at the point of ending.

The returns from the bullish Butterfly up to the maximum profit become a reality only if the price of the underlying security becomes equal to the strike of the calls written by the trader. 

Types of butterfly spread 

Butterfly spreads are those strategies that are used by options traders. It is noteworthy to mention here that you can use puts and calls for a butterfly spread. Various kinds of butterfly spread arise through their different combination.

  • Long Call Butterfly Spread

This is used when the trader purchases one in the money call option with a little strike charge and inscribing two at the money call options along with purchasing one out of the money call option with a higher strike cost. 

The maximum yield is attained through this strategy when the worth at the termination and in written calls are equal.

  • Short Call Butterfly Spread

The trader uses this strategy by trading one in the money call option with a lower strike cost, besides purchasing two at the money call options and also selling an out-of-the-money call option at a high rate.

Inside this one, the peak of profitability is visible when the price of the principal goes overhead the upper strike or underneath the lower strike at the time of the expiry.

  • Long Put Butterfly Spread

This type is put into use by purchasing one put with a lower strike cost, along with trading two at the money puts, and finally purchasing a put with a strike price that is higher. 

It is similar to the long call butterfly spread, and the maximum profit through this one is when the principal one is at the strike price level. Which is equal to the higher strike cost minus the strike of the sold put and minus the premium paid.

  • Short Put Butterfly Spread

This is done by an inscription of one out of the money put option with a low strike charge, purchasing two at the money puts, and finally writing an ‘in the money put option at a higher strike charge. 

This strategy gives away the maximum revenue when the price of principal is above the upper strike price during the time of expiration.

  • Iron Butterfly Spread

The Iron Butterfly spread, as stated once before, is a type involving the use of both calls and puts. This results when buying an out-of-the-money put option with a lower strike price, inscribing an ’at – the money put option’, writing an ‘at-the-money call option’ as well as buying an ‘out the money call option with a higher strike price. 

It results in maximum profit when the underlying stays around the middle of the strike price.

  • Reverse Iron Butterfly

This type, as the name hints out, is the opposite spread of the Iron Butterfly, that involves the inscribing of an “out of the money” put at a lower strike charge, purchasing an “at the money” put, purchasing an “at the money” call, and inscribing an out of the money call at higher strike charge. 

So, when the principal moves overhead or underneath the upper or lower strike charges, the maximum profit is set to happen.

These types of butterfly spreads or strategies help to trade bullish butterflies in binary options. 

Strategies to trade Butterfly Patterns

  • Scalping 

As one of the speediest strategies employed by traders, it is a popular strategy combined by a trader while trading. In this strategy, what is essentially done is to identify and then exploit the spreads that are wider or narrower than usual, which are caused by momentary differences in the supply and demand-related aspects of the market.

A trader utilizing this strategy does not prefer to exploit large moves rather tries to profit from short moves.

  • Swing Trading

Swing traders get their opportunity when a particular trend breaks. There is usually some price instability while the new trend tries to get established. Swing trading strategy involves purchasing and selling as the stability is setting in and are held by the traders for more than a day normally.

  • Position Trading

Position trading strategy involves the use of long-term charts ranging from daily to monthly. It could last for days or weeks or maybe even longer, depending on the requirements. The trend-traders jump on the trend, and when it breaks, they exit their position in this type of active trading strategy.

Conclusion 

Binary options may sound very strange in the present context, provided that it is a type of options contract that makes the payout to be dependent wholly on the outcome of yes or no but, it is relatively straightforward. By learning different aspects of it, you can excel in trading.

Also, the butterfly patterns in binary trading might seem to vary procedural at first glance. But with the careful understanding and relevant application of these strategies, you can earn profits without bearing much loss or sometimes even none.

Keep in mind that the trading patterns are subject to trading certainties. It becomes more important to acquire the basic knowledge for the traders who are trading butterfly patterns in binary options.

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