Gartley butterfly and ZUP indicator
In the classical sense, a technical analysis indicator is a tool based on a mathematical (statistical) formula that estimates the patterns of past periods. Many indicators are based on the averaging method. This is when there is a comparison of data for past periods and based on them, an average result is displayed. Or there is a comparison of a certain category of prices (open / close prices, highs or lows) in relation to some common denominator. There are many ideas for constructing formulas, but there is a separate category of technical tools – pattern indicators.
A chart pattern is a formed candlestick pattern (a figure consisting of a number of candles) that has a clear pattern, often based on the general psychology of traders. In the real market, the formation of an ideal pattern practically does not happen, or the trader sees the finished pattern too late. Pattern indicators use the same mathematical methods to track the formation of a pattern and give a signal to the trader. We will show how this happens using the example of Gartley Butterflies and the ZUP indicator based on it.
Building ZUP and ZigZag in technical analysis
The Gartley Butterfly is based on the search for a harmonious formation that has a complete visual image while maintaining mathematical proportions. In other words, the pattern has clear outlines and mathematical relationships.
The Gartley Butterfly is somewhat similar to the classic ABC Elliott retracement, also based on Fibonacci levels. The above figure shows the formation of a bearish trend: the black lines are the direction of the trend (clearly visible ups and downs). It is formed as follows:
- The first segment AB is a strong impulse decline that does not have visible, equally strong corrections. The trend has a clear directionality with little volatility.
- The BC segment is a correction. It differs from the main change of direction in that it must correspond to the 50-61.8% Fibonacci level. The ideal construction assumes that the segment AC is equal to 0.618 of the segment AB. If BC turns out to be longer and the ratio of AC to AB is violated, then we can talk about an opposite trend change, and not about a correction.
- The continuation of the downtrend after the correction draws the CD segment, which should be 0.382 (0.886) of the BC segment.
- Point E is constructed according to the following principle: it must be below point A, BC is approximately equal to ED, ED is approximately equal to 1.27-1.618 CD.
Only after a pattern has been formed between points A and E, you can open a sell deal. The higher the timeframe, the more reliable the signal. On short timeframes, there is price noise and short-term volatility, which does not allow us to accurately establish the required proportions. In turn, on long timeframes, it is clearly visible: if the proportions approximately coincide, the Gartley butterfly is formed. The recommended interval is from M30.
The ZUP indicator is a tool that draws zones of the “wings” of the Gartley butterfly on the chart, provided that the above conditions are met. In practice, he would draw the filled triangles ABC and CDE, thus showing that after point E, you can safely open a short position.
Features of working with the indicator:
- The pattern is formed at the most extreme point of the price rollback (in this case, point A).
- It is recommended to place pending orders, as errors are possible. If, nevertheless, there was no pattern formation, then pending orders are deleted.
A similar principle of opening deals occurs with another interesting indicator – ZigZag. According to one of the versions, the Gartley Butterfly and the ZUP indicator are one of the ZigZag varieties, of which there are more than 10. Their difference is the construction formula. If you have any problems finding and downloading these tools, write about it in the comments and we will send them to you for free by email.