Rolling a broken wing butterfly in Thinkorswim is a valuable technique for charting price action, particularly when identifying potential reversal points. By understanding how to apply this unique chart pattern, traders can gain a deeper insight into market sentiment and make more informed decisions. The process involves creating a chart formation that resembles a spread butterfly with one “broken” wing. This broken wing represents a significant deviation from the expected pattern, which can signal a potential change in market direction.
To roll a broken wing butterfly, traders typically start by identifying a key support or resistance level. Once the level is identified, they can plot a high and a low point on either side of the level. The high and low points should be at least two standard deviations away from the key level, creating a wide spread. The next step involves plotting two additional points, one mid-way between the high and low points, and the other slightly below (or above) the key level. This forms the “broken” wing of the butterfly, while the two outer points act as the “wings” that support the pattern. By connecting these points, traders can visualize the broken wing butterfly formation on their charts.
The broken wing butterfly pattern can provide valuable insights into market sentiment. When the pattern forms at a key support or resistance level, it suggests that the market is testing the level and may be ready to reverse. The broken wing indicates a hesitation or pullback in the market’s movement, which can be a sign of indecision among traders. By observing the subsequent price action, traders can potentially identify the direction of the market’s next move. If the market breaks through the key level with increased momentum, it can signal a potential continuation of the trend. Conversely, if the market fails to break through the level and reverses, it can suggest a potential trend reversal.
Identifying Broken Wing Butterflies
Broken wing butterflies are price patterns characterized by a sharp decline in price, followed by a corrective rally that fails to reach the previous high, creating a “W” or “M” shape on the chart. Traders can use this pattern to identify potential trading opportunities, as it often signals a trend reversal or continuation.
Characteristics of Broken Wing Butterflies
Broken wing butterflies typically exhibit the following characteristics:
| Characteristic | Description |
|---|---|
| Sharp Decline | The pattern begins with a sharp decline in price, often caused by news events, overselling, or profit-taking. |
| Corrective Rally | The decline is followed by a corrective rally that retrace a portion of the lost ground but fails to reach the previous high. |
| Second Leg Down | After the corrective rally stalls, the price continues to decline, creating the second leg of the “W” or “M” pattern. |
| Volume Decline | Volume tends to decline during the corrective rally and increase during the second leg down, indicating selling pressure. |
| Confirmation | The pattern is confirmed when the price breaks below the low of the corrective rally or when a lower high is established. |
Setting Up the Thinkorswim Chart
To create a Broken Wing Butterfly in Thinkorswim, you’ll need to set up your chart accordingly. Here’s a step-by-step guide:
1. Create a New Chart
Open Thinkorswim and click on the “New” button to create a new chart. Select the underlying asset you want to trade and click “Apply.” This will create a blank chart.
2. Set Up the Study
Click on the “Studies” tab and search for “Broken Wing Butterfly.” Double-click on the study to add it to your chart. This will open the study settings window.
| Setting | Value |
|---|---|
| Expiration | Select the expiration date for the butterfly |
| Strike Price | Enter the strike price for the butterfly |
| Confidence Interval | Choose the confidence interval for the butterfly |
| Option Type | Select the option type for the butterfly |
Once you’ve entered the desired settings, click “Apply” to create the Broken Wing Butterfly study on your chart.
Applying the Broken Wing Butterfly Technical Indicator
The Broken Wing Butterfly Indicator is a trend-following indicator used to identify potential turning points in the market. It is based on the idea that a strong trend will often experience a brief period of consolidation before continuing in the same direction.
To apply the Broken Wing Butterfly Indicator to a Thinkorswim chart, follow these steps:
- Click on the “Indicators” menu and select “Technical Indicators”.
- In the “Search Indicators” field, type “Broken Wing Butterfly” and click on the “Search” button.
- Select the “Broken Wing Butterfly” indicator from the list of results and click on the “Add to Chart” button.
The Broken Wing Butterfly Indicator will appear on your chart as a series of colored bars. The bars will be colored green when the indicator is bullish and red when it is bearish. A bullish bar indicates that the indicator is expecting the price to continue rising, while a bearish bar indicates that the indicator is expecting the price to fall.
Interpreting the Broken Wing Butterfly Indicator
The Broken Wing Butterfly Indicator can be used to identify potential trading opportunities. When the indicator turns bullish, it can signal that a new uptrend is about to begin. When the indicator turns bearish, it can signal that a new downtrend is about to begin.
In addition to identifying potential trading opportunities, the Broken Wing Butterfly Indicator can also be used to confirm existing trends. For example, if the price is rising and the indicator is bullish, it can be a sign that the trend is likely to continue. Similarly, if the price is falling and the indicator is bearish, it can be a sign that the trend is likely to continue.
The Broken Wing Butterfly Indicator is a versatile tool that can be used to identify potential trading opportunities and confirm existing trends. By understanding how to interpret the indicator, you can improve your trading results.
Interpreting the Broken Wing Butterfly Patterns
1. Identifying the Break
Locate a candle where the high or low sharply deviates from the previous trend and forms a wick. This discontinuity in the price action signifies the “break.”
2. Measuring the Retracement
After the break, the price typically retraces a portion of the previous move. Use Fibonacci levels or other technical analysis tools to determine the potential support or resistance levels for the retracement.
3. Confirmation of the Butterfly
Once the price retraces and finds support or resistance, look for a reversal candle with a long lower wick (for a bullish pattern) or a long upper wick (for a bearish pattern). This reversal candle confirms the Broken Wing Butterfly pattern.
4. Detailed Analysis of the Reversal Candlestick
The reversal candle in a Broken Wing Butterfly pattern is crucial for interpreting the potential outcome. Here’s a table summarizing the characteristics and implications of different reversal candlestick patterns:
| Reversal Candlestick | Description | Implication |
|—|—|—|
| Hammer or Inverted Hammer | Small real body, long lower wick, and short or no upper wick | Bullish, indicating a potential reversal |
| Hanging Man or Shooting Star | Small real body, long upper wick, and short or no lower wick | Bearish, indicating a potential reversal |
| Dragonfly Doji or Hammerstone | Long lower wick, small real body, and no upper wick | Bullish, indicating a potential reversal |
| Gravestone Doji or Spinning Top | Long upper wick, small real body, and no lower wick | Bearish, indicating a potential reversal |
Customizing the Indicator for Different Markets
The Broken Wing Butterfly indicator can be customized to suit the specific characteristics of different markets. Several parameters can be adjusted to optimize the indicator’s performance for a given asset or trading environment.
One key aspect of customization is the periodicity of the indicator. The default period is typically 14, but it can be adjusted to match the time frame of the underlying asset. For example, a shorter period such as 7 or 10 may be more suitable for fast-moving assets with high volatility, while a longer period like 20 or 30 may be more appropriate for slower-moving assets or longer-term trading strategies.
Another important parameter is the standard deviation multiplier. This value controls the width of the Bollinger Bands used in the indicator. A smaller multiplier will result in tighter bands, while a larger multiplier will create wider bands. The appropriate multiplier depends on the volatility of the market and the desired level of sensitivity.
#### Customizing the Butterfly Wings
The Broken Wing Butterfly indicator is composed of two “butterfly wings” that oscillate around the Bollinger Bands. These wings can be customized by adjusting the butterfly wing percentage and the butterfly wing offset.
The butterfly wing percentage determines the size of the butterfly wings relative to the Bollinger Bands. A larger percentage will create larger wings, while a smaller percentage will create smaller wings. The optimal percentage depends on the volatility of the market and the desired level of responsiveness.
The butterfly wing offset specifies the distance between the butterfly wings and the Bollinger Bands. A positive offset will move the wings away from the bands, while a negative offset will move them closer to the bands. Adjusting the offset can help fine-tune the sensitivity of the indicator and reduce false signals.
| Parameter | Description |
|---|---|
| Periodicity | Time frame of the indicator |
| Standard deviation multiplier | Width of Bollinger Bands |
| Butterfly wing percentage | Size of butterfly wings |
| Butterfly wing offset | Distance between butterfly wings and Bollinger Bands |
Using the Indicator for Trade Identification
The Broken Wing Butterfly indicator can be utilized to identify potential trading opportunities by highlighting price action patterns that resemble a broken wing butterfly. These patterns typically occur at the end of a trend or during a consolidation phase and can provide valuable insights for traders seeking entry or exit points.
Wick Reversal
The first component of the Broken Wing Butterfly pattern is a wick reversal, which occurs when the price makes a sharp movement in one direction and then quickly reverses, forming a long wick. This wick represents a rejection of the initial price action and indicates a potential reversal of the trend.
Inside Bar
Following the wick reversal, the price often forms an inside bar, which is a candlestick where the high and low are both contained within the range of the previous candlestick. This indicates a period of consolidation and indecision, as the bulls and bears are struggling for control.
Breakout or Breakdown
After the inside bar, the price will typically either break out above the high of the wick reversal or breakdown below the low of the inside bar. A breakout above the high suggests bullish momentum and a potential entry long, while a breakdown below the low indicates bearish momentum and a potential entry short.
Stop Loss and Target Placement
Once the breakout or breakdown occurs, traders can place their stop loss and target levels. Stop loss is typically placed below the low of the inside bar for long positions and above the high of the inside bar for short positions. Target levels can be determined using technical analysis tools or by measuring the distance between the wick reversal and the inside bar.
Risk and Reward Assessment
Before entering a trade based on the Broken Wing Butterfly indicator, it is crucial to assess the potential risk and reward. This involves calculating the distance between the stop loss and target levels and determining the potential profit and loss scenarios. Traders should only risk a small portion of their account on any single trade and have a plan in place for managing their risk.
Risk Management Considerations
When executing a Broken Wing Butterfly strategy, it is crucial to consider risk management best practices to enhance your chances of success. These considerations include:
1. Proper Position Sizing
Determine an appropriate position size that aligns with your trading plan and risk tolerance, ensuring that a single trade does not significantly impact your overall portfolio.
2. Stop-Loss Placement
Establish clear stop-loss levels to limit potential losses. Position the stop-loss below the bottom leg’s strike price for short positions or above the call leg’s strike price for long positions.
3. Define Profit Targets
Set realistic profit targets based on technical analysis and market conditions. Monitor the position closely and exit when the target is reached or the market trend changes.
4. Monitor Volatility
Volatility is a crucial factor in butterfly strategies. Monitor implied volatility levels and adjust your position accordingly to manage risk.
5. Consider Hedging Strategies
Explore hedging techniques to mitigate risk, such as using options with different expirations or creating a collar strategy to define both upside and downside boundaries.
6. Manage Correlation
Be aware of the correlation between the underlying assets involved in the butterfly spread. High correlation can reduce potential returns and increase risk.
7. In-Depth Analysis of Implied Volatility
| Implied Volatility | Impact on Strategy |
|---|---|
| High Implied Volatility | Enhances potential profit but also increases risk due to higher option premiums |
| Low Implied Volatility | Reduces potential profit but provides more stability and potentially lower risk |
Thoroughly understand how implied volatility affects butterfly strategies and adjust your approach accordingly to manage risk effectively.
Combining with Other Technical Indicators
The Broken Wing Butterfly can be combined with other technical indicators to strengthen its signals and provide a more comprehensive view of the market. Some commonly used combinations include:
Moving Averages
Combining the Broken Wing Butterfly with moving averages can help identify potential trends and support/resistance levels. A crossover of the Broken Wing Butterfly above a moving average can indicate a trend reversal, while a crossover below the moving average may signal a trend continuation.
Relative Strength Index (RSI)
The RSI is a momentum indicator that measures the strength of price movements over a specified period. Combining the Broken Wing Butterfly with the RSI can help identify overbought or oversold conditions. A Broken Wing Butterfly formation in conjunction with an overbought RSI reading may indicate a potential reversal, while a formation in conjunction with an oversold RSI reading may signal a potential rally.
Volume
Volume is an important indicator of market activity. Combining the Broken Wing Butterfly with volume analysis can help confirm or invalidate the signal. A Broken Wing Butterfly formation with high volume may indicate a stronger trend, while a formation with low volume may suggest a weaker trend.
Support and Resistance Levels
Support and resistance levels are important areas where the price has historically reversed or paused. Combining the Broken Wing Butterfly with support and resistance levels can help identify potential trading opportunities. A Broken Wing Butterfly formation near a support or resistance level may indicate a potential bounce or reversal.
Other Considerations
It’s important to note that the Broken Wing Butterfly is not a perfect indicator. Like any technical indicator, it has limitations and should be used in conjunction with other analysis methods to make informed trading decisions.
Using Indicators with the Broken Wing Butterfly
Technical indicators can help you identify potential trading opportunities. Some commonly used indicators with the Broken Wing Butterfly include:
- Moving averages
- Support and resistance levels
- Bollinger Bands
- Stochastic oscillator
Managing Risk with the Broken Wing Butterfly
Risk management is crucial in any trading strategy. When trading with the Broken Wing Butterfly, it is important to:
- Set stop-loss orders to limit potential losses
- Manage position size to avoid overexposure
- Consider the risk-reward ratio before entering a trade
Advanced Strategies with the Broken Wing Butterfly
Combining the Broken Wing Butterfly with Other Strategies
The Broken Wing Butterfly can be combined with other trading strategies to enhance performance. Some popular combinations include:
- Combining with Iron Condor for increased profit potential
- Combining with Bear Put Spread for downside protection
- Combining with Bull Call Spread for upside potential
Using the Broken Wing Butterfly in Different Market Conditions
The Broken Wing Butterfly can be used in various market conditions:
- Bullish market: Used for potential upside profit
- Bearish market: Used for potential downside profit
- Neutral market: Used for potential range-bound trading
Trading the Broken Wing Butterfly on Different Time Frames
The Broken Wing Butterfly can be traded on different time frames, including:
- Daily charts for longer-term trades
- Hourly charts for medium-term trades
- Minute charts for short-term trades
| Time Frame | Advantages |
|---|---|
| Daily | Lower volatility, higher accuracy |
| Hourly | Higher flexibility, more trading opportunities |
| Minute | Scalping potential, rapid profits |
Case Studies and Examples
### Broken Wing Butterfly Reversal
This pattern is identified by a sharp decline in price, followed by a retracement that forms a lower high and lower low. The subsequent breakout above the previous high confirms the reversal.
A classic example of a broken wing butterfly reversal occurred in the stock of Apple Inc. (AAPL) in 2013. After a sharp decline of over 20%, the stock retraced and formed a lower high and lower low. However, AAPL subsequently broke out above the previous high, confirming the reversal and leading to a significant rally.
### Momentum Pullback
This pattern is similar to the broken wing butterfly, but with a greater emphasis on momentum. The initial decline is followed by a strong rebound that fails to reach the previous high. The subsequent pullback below the low of the rebound confirms the reversal.
A momentum pullback pattern was seen in the stock of Amazon.com, Inc. (AMZN) in 2018. After a sharp drop of over 10%, AMZN rebounded strongly, but failed to reach its previous high. The subsequent pullback below the low of the rebound confirmed the reversal, and the stock continued to decline.
### Ascending Triangle Reversal
This pattern is characterized by a series of higher lows and a flat top. The breakout above the flat top confirms the reversal.
An ascending triangle reversal pattern developed in the stock of Tesla, Inc. (TSLA) in 2020. After a period of consolidation, TSLA broke out above the flat top, confirming the reversal and leading to a substantial rally.
### Double Top Reversal
This pattern is formed by two consecutive peaks that are roughly equal in height. A breakout below the support level established by the lows between the peaks confirms the reversal.
A double top reversal pattern was seen in the stock of Microsoft Corporation (MSFT) in 2019. After reaching two consecutive peaks, MSFT broke below the support level, confirming the reversal and leading to a significant decline.
### Head and Shoulders Reversal
This pattern is characterized by a central peak that is higher than the two peaks on either side. The breakout below the neckline established by the lows between the peaks confirms the reversal.
A head and shoulders reversal pattern developed in the stock of Facebook, Inc. (FB) in 2018. After forming the central peak, FB broke below the neckline, confirming the reversal and leading to a steep decline.
### Cup and Handle Reversal
This pattern is formed by a U-shaped bottom with a handle on the right side. The breakout above the resistance level established by the high of the handle confirms the reversal.
A cup and handle reversal pattern was seen in the stock of Alphabet Inc. (GOOGL) in 2017. After forming the U-shaped bottom, GOOGL broke out above the resistance level, confirming the reversal and leading to a prolonged uptrend.
### Rounding Bottom Reversal
This pattern is characterized by a gradual curve that forms a rounded bottom. The breakout above the resistance level established by the high of the rounding bottom confirms the reversal.
A rounding bottom reversal pattern developed in the stock of Berkshire Hathaway Inc. (BRK.A) in 2019. After forming the rounded bottom, BRK.A broke out above the resistance level, confirming the reversal and leading to a steady uptrend.
### Inverted Head and Shoulders Reversal
This pattern is the inverse of the head and shoulders pattern, with a central low that is lower than the two lows on either side. The breakout above the neckline established by the highs between the lows confirms the reversal.
An inverted head and shoulders reversal pattern was seen in the stock of Apple Inc. (AAPL) in 2015. After forming the central low, AAPL broke above the neckline, confirming the reversal and leading to a significant recovery.
### Symmetrical Triangle Reversal
This pattern is characterized by two converging trendlines that form a triangle. The breakout above the upper trendline or below the lower trendline confirms the reversal.
A symmetrical triangle reversal pattern developed in the stock of Amazon.com, Inc. (AMZN) in 2017. After narrowing down to a point, AMZN broke above the upper trendline, confirming the reversal and leading to a strong uptrend.
### Falling Wedge Reversal
This pattern is formed by two downward sloping trendlines that converge to a point. The breakout above the upper trendline confirms the reversal.
A falling wedge reversal pattern was seen in the stock of Netflix, Inc. (NFLX) in 2020. After consolidating within the wedge, NFLX broke above the upper trendline, confirming the reversal and leading to a substantial rally.
How To Roll A Broken Wing Butterfly In Thinkorswim
To roll a broken wing butterfly in Thinkorswim, follow these steps:
- Select the broken wing butterfly position in the Trade tab.
- Click on the “Roll” button.
- Enter the new expiration date and strike price for the butterfly.
- Click on the “Roll” button again to confirm the trade.
Rolling a broken wing butterfly involves closing out the existing position and opening a new butterfly position with different expiration dates and/or strike prices. This can be done to adjust the risk profile of the position or to take advantage of changes in the underlying security’s price.
People Also Ask About How To Roll A Broken Wing Butterfly In Thinkorswim
What is a broken wing butterfly?
A broken wing butterfly is a neutral option strategy that involves buying one call option at a lower strike price, selling two call options at a middle strike price, and buying one call option at a higher strike price.
What is the purpose of rolling a broken wing butterfly?
The purpose of rolling a broken wing butterfly is to adjust the risk profile of the position or to take advantage of changes in the underlying security’s price.
How do I roll a broken wing butterfly in Thinkorswim?
To roll a broken wing butterfly in Thinkorswim, follow the steps outlined in the main section of this article.
