Attention, Thinkorswim traders! Unveil the secrets of the Broken Wing Butterfly strategy, a formidable technique that can elevate your trading game. This ingenious pattern has the potential to unlock substantial profits, but only for those who master its execution. Step into the realm of professional trading today and discover how to tame this multifaceted strategy.
To initiate a Broken Wing Butterfly trade, you’ll need to initiate a bear put spread by selling a put option one strike price in-the-money and simultaneously buying a put option two strikes price in-the-money. This initial step creates the “wings” of the pattern and establishes a defined risk profile. Subsequently, you’ll want to create the “body” of the butterfly by selling two put options at a strike price that is three strikes price below the strike price of the first put option you sold. This intricate arrangement forms the foundation of the Broken Wing Butterfly strategy.
The Broken Wing Butterfly stands out as a versatile strategy that can be tailored to various market conditions. It excels in scenarios where the underlying security is anticipated to experience a moderate decline, creating an optimal environment for profit generation. Additionally, this strategy can be fine-tuned based on your risk tolerance and desired profit target. Whether you’re an experienced trader seeking to refine your skills or a novice seeking to venture into the world of options trading, the Broken Wing Butterfly strategy offers a compelling opportunity to enhance your trading prowess.
Identifying the Broken Wing Pattern
The Broken Wing Pattern is a candlestick pattern that indicates a potential reversal in the market trend. It is characterized by three candlesticks:
1. A large bearish candle with a long upper shadow and a small lower shadow. This candle represents a strong selling pressure that has driven the price down sharply. The long upper shadow indicates that the sellers were able to push the price down significantly, but the small lower shadow suggests that there was some buying support at the bottom. This combination suggests that the market is indecisive and that the trend may be reversing.
2. A small bullish candle with a long lower shadow and a small upper shadow. This candle represents a weak attempt by the bulls to recover, but the long lower shadow indicates that the selling pressure is still strong. The small upper shadow suggests that there is some buying support at the top, but it is not strong enough to push the price up significantly.
3. A large bullish candle with a long upper shadow and a small lower shadow. This candle represents a strong buying pressure that has driven the price up sharply. The long upper shadow indicates that the bulls were able to push the price up significantly, but the small lower shadow suggests that there is some selling pressure at the top. This combination suggests that the market is indecisive and that the trend may be reversing.
| Candle | Color | Shadow |
|---|---|---|
| 1 | Bearish | Long upper, small lower |
| 2 | Bullish | Long lower, small upper |
| 3 | Bullish | Long upper, small lower |
Setting Up the Thinkorswim Platform
1. Download and Install Thinkorswim: Begin by visiting the Thinkorswim website and downloading the platform for your operating system (Windows, Mac, or Linux). Install the software following the provided instructions.
2. Set Up Your Trading Account: You will need to create a Thinkorswim trading account to access the platform’s full range of capabilities. Follow the account setup process, providing the necessary personal and financial information.
3. Customize Your Workspace: Thinkorswim allows you to tailor the platform to your preferences. Explore the various menus and options to customize the interface, including chart layouts, indicators, and hotkeys.
Secondary Indicators for Broken Wing Butterfly
| Indicator | Parameters | Purpose |
|---|---|---|
| Relative Strength Index (RSI) | Period: 14, Overbought: 70, Oversold: 30 | Measures market momentum and identifies overbought/oversold conditions. |
| MACD (Moving Average Convergence Divergence) | Fast EMA: 12, Slow EMA: 26, Signal Line: 9 | Identifies crossovers and divergences between two exponential moving averages. |
| Bollinger Bands | Period: 20, Standard Deviations: 2 | Plots a range of volatility around a moving average, identifying potential reversal points. |
| Ichimoku Cloud | Tenkan-sen: 9, Kijun-sen: 26, Senkou Span A: 52, Senkou Span B: 26 | A complex indicator that combines multiple moving averages and price action to identify trend reversals and support/resistance levels. |
Applying the Thinkorswim Indicators
Thinkorswim offers a comprehensive suite of technical indicators to enhance your trading analysis. Here’s a step-by-step guide to applying indicators to your charts:
1. Select and Add Indicators
Click on the “Indicators” tab in the top menu bar. This will open a panel displaying a wide range of indicators. Choose the desired indicator and click on the “Add to Chart” button.
2. Configure Indicator Settings
Once added, the indicator will appear on your chart with its default settings. You can customize these settings by clicking on the “Configure” icon. Adjust the parameters to suit your trading strategy and preferences.
3. Additional Indicators for Broken Wing Butterfly Strategy
To enhance the Broken Wing Butterfly strategy, consider incorporating the following indicators:
| Indicator | Settings | Purpose |
|---|---|---|
| Moving Average Crossover (MACD) | Fast EMA: 12 Slow EMA: 26 Signal EMA: 9 |
Identifies potential trend reversals based on the crossing of moving averages. |
| Bollinger Bands | Period: 20 Standard Deviations: 2 |
Measures volatility and identifies potential overbought or oversold conditions. |
| Relative Strength Index (RSI) | Period: 14 | Gauges the momentum of a trend and identifies possible overbought or oversold territory. |
Remember, these indicators are not exhaustive and can be used in conjunction with other technical analysis tools to refine your trading decisions.
Confirmation Signals for the Broken Wing
1. Volume Confirmation
Observe the volume at the breakout point. A significant surge in volume when the price breaks above the resistance level confirms the bullish momentum. Conversely, low volume during the breakout may indicate a weak move and potential reversal.
2. Moving Average Crossover
Wait for the 50-day moving average (50 MA) to cross above the 200-day moving average (200 MA). This crossover signifies a shift in the market trend from bearish to bullish. The price breaking above the 50 MA after the crossover further confirms the broken wing setup.
3. Support and Resistance Breakouts
Identify a clear resistance level that the price has been struggling to break through. When the price finally breaches this level with conviction, it signals a potential broken wing pattern. Similarly, look for a support level that the price has repeatedly bounced off from. A break below this level indicates a bearish broken wing pattern.
4. False Breakouts and Retests
False breakouts can occur when the price briefly breaks above or below the support/resistance level but fails to sustain the move. A retest of the breakout point is crucial. If the price bounces off the support/resistance level and continues to trend in the intended direction, it strengthens the broken wing pattern.
| True Breakout | False Breakout |
|---|---|
| Price closes above/below S/R level on significant volume | Price briefly touches S/R level but fails to close above/below |
| Price retests S/R level and holds | Price reverses direction after touching S/R level |
| Trend continues in expected direction | Trend stalls or reverses |
Determining Entry and Exit Points
Identifying optimal entry and exit points is crucial for maximizing profits.
Entry Points
Look for oversold or overbought conditions using technical indicators like the Relative Strength Index (RSI) or Stochastic Oscillator. Consider potential support or resistance levels on the chart.
Exit Points
Target a specific profit percentage or point value. Use trailing stop-loss orders to protect profits and limit losses. Consider using technical indicators like Bollinger Bands to identify potential reversal points.
Additional Considerations
The following factors should be taken into account when determining entry and exit points:
| Factor | Consideration |
|---|---|
| Market Volatility | High volatility may require wider stop-loss and target ranges. |
| News and Events | Major news events can disrupt market trends, requiring adjustments to entry and exit points. |
| Position Size | The size of the position should be proportionate to the available capital and risk tolerance. |
Identifying Broken Wing Trades
Broken wing trades are characterized by a sudden and significant drop in a stock’s price, followed by a gradual recovery. Traders exploit this unusual price action by buying the stock at a discount and holding it until it recovers.
Managing Risk in Broken Wing Trades
6. Position Sizing
Position sizing is crucial for managing risk in broken wing trades. As the potential for loss is high, it’s essential to allocate a small portion of your capital to each trade. A conservative approach is to allocate no more than 2% of your account balance per trade. This ensures that even if a trade goes against you, you won’t lose a significant portion of your capital.
Here’s a table summarizing the key risk management considerations for broken wing trades:
| Risk Factor | Management Strategy |
|---|---|
| Entry Price | Enter at a significant discount to the previous closing price. |
| Stop Loss | Place a stop loss order below the entry price to limit potential losses. |
| Time Frame | Trade over a short-to-medium time frame to minimize holding risk. |
| Volume | Ensure adequate volume to allow for timely execution at the desired entry and exit prices. |
| Position Sizing | Allocate a small portion of capital to each trade, not exceeding 2% of account balance. |
Customizing Thinkorswim for Broken Wing Trading
1. Enable the ThinkScript Editor
Open the ThinkScript Editor by clicking “Tools” > “ThinkScript Editor” in the menu bar.
2. Create a New ThinkScript
Click the “New” button in the ThinkScript Editor and select “Standard” from the dropdown menu.
3. Add Custom Indicators
Drag and drop the desired custom indicators from the Indicator Library onto the chart. Adjust the settings as needed.
4. Define the Broken Wing Flag
Add a custom study to the chart and define the broken wing flag conditions using ThinkScript code.
5. Set Chart Preferences
Optimize the chart settings for broken wing trading, such as candle size, gridlines, and color schemes.
6. Create Alerts and Triggers
Set up alerts and triggers based on the broken wing flag criteria to notify traders of potential trading opportunities.
7. Detailed Explanation of Custom Study for Broken Wing Flag
The following ThinkScript code defines a custom study that identifies broken wing flags:
| ThinkScript Code | Description |
|---|---|
|
|
Practice and Refinement
Understanding the Butterfly Spread
A butterfly spread involves buying one option at a lower strike price and selling two options at a higher strike price. The spread’s profit zone lies between the two strike prices.
Spotting Broken Wing Butterflies
Broken wing butterflies occur when one of the options in the spread expires worthless while the other option retains some value. This happens when the underlying asset moves sharply in one direction after the spread’s execution.
Rolling a Broken Wing Butterfly
To roll a broken wing butterfly, the investor closes out the expired option and replaces it with a new option with a similar strike price but a later expiration date. This action effectively “rolls” the spread forward in time.
Benefits of Rolling
Rolling a broken wing butterfly can:
- Extend the profit zone and potential lifespan of the spread
- Adjust the risk-reward profile
- Capture any remaining premium in the expired option
Considerations for Rolling
Before rolling a broken wing butterfly, investors should consider:
- The cost of the new option premium
- The remaining time until the new option expiration date
- The expected volatility of the underlying asset
Strategy Table
The following table summarizes the steps involved in rolling a broken wing butterfly:
| Step | Action |
|---|---|
| 1 | Identify the broken wing butterfly spread |
| 2 | Close out the expired option |
| 3 | Sell a new option with a similar strike price and later expiration date |
| 4 | Calculate the updated profit zone, risk, and reward |
Advanced Techniques for Broken Wing Trading
Overbought/Oversold Calculations
To refine Broken Wing signals, consider incorporating overbought/oversold indicators such as the Relative Strength Index (RSI) or Stochastic Oscillator. When the RSI exceeds 70 or the Stochastic Oscillator crosses above 80, it may indicate an overbought condition, increasing the likelihood of a reversal down.
Volume Analysis
Volume plays a crucial role in Broken Wing trading. High volume during a breakout confirms the signal’s strength. Conversely, low volume can indicate a false breakout or a lack of conviction in the price move.
Support and Resistance Levels
Identify support and resistance levels to determine potential breakout targets and reversal points. Broken Wing breakouts that occur near support or resistance levels often lead to stronger trends.
Multiple Time Frame Analysis
Analyze Broken Wing signals across multiple time frames to gain a broader perspective. For example, if a Broken Wing signal occurs on the daily chart but not on the hourly chart, it may indicate a less reliable signal.
Confirmation from Other Indicators
Support Broken Wing signals with additional technical indicators such as moving averages, Bollinger Bands, or Fibonacci levels. If multiple indicators align with the Broken Wing signal, it increases the probability of a successful trade.
Historical Performance Analysis
Review historical data to assess the reliability of Broken Wing signals in different market conditions. Determine the win rate, profit factor, and average trade duration to better understand the strategy’s performance.
Risk Management
Implement sound risk management practices to mitigate potential losses. Determine appropriate stop-loss and take-profit levels, and consider using position sizing techniques to manage risk.
Trading Psychology
Maintain a disciplined trading approach and avoid emotional decision-making. Stick to the trading plan and avoid making trades based on fear or greed.
Patience and Discipline
Broken Wing trading requires patience and discipline. It may take time for the signal to develop and the trade to play out. Avoid making impulsive trades and stick to the strategy’s rules.
Combining Broken Wing with Other Strategies
The Broken Wing Butterfly strategy can be combined with other trading strategies to enhance its effectiveness. Here are some common combinations:
Broken Wing Butterfly and Iron Condor
Combining the Broken Wing Butterfly with an Iron Condor creates a neutral-to-slightly-bullish strategy. The Iron Condor involves selling a call option above the strike price and buying a call option further above the strike price, while also selling a put option below the strike price and buying a put option further below the strike price. This strategy profits from a narrow trading range while limiting the potential profit and loss.
Broken Wing Butterfly and Vertical Spread
Combining the Broken Wing Butterfly with a vertical spread creates a more directional strategy. A vertical spread involves buying a call or put option at one strike price and selling a call or put option at a different strike price. By combining the Broken Wing Butterfly with a vertical spread, traders can position themselves for a specific market direction while reducing the overall risk of the trade.
Broken Wing Butterfly and Ratio Spread
Combining the Broken Wing Butterfly with a ratio spread creates a more complex strategy that offers a wider range of profit and loss potential. A ratio spread involves buying or selling multiple options contracts with different strike prices and expiration dates. By combining the Broken Wing Butterfly with a ratio spread, traders can create a customized strategy that meets their specific risk and reward objectives.
Broken Wing Butterfly and Calendar Spread
Combining the Broken Wing Butterfly with a calendar spread creates a time-based strategy that profits from a change in the implied volatility of the underlying asset. A calendar spread involves buying an option with a shorter expiration and selling an option with a longer expiration. By combining the Broken Wing Butterfly with a calendar spread, traders can position themselves for a specific change in implied volatility while limiting the overall risk of the trade.
Broken Wing Butterfly and Covered Call
Combining the Broken Wing Butterfly with a covered call creates a more conservative strategy that generates income while reducing the overall risk of the trade. A covered call involves selling a call option against a stock that you own. By combining the Broken Wing Butterfly with a covered call, traders can generate income from the premium received from selling the call option while limiting the potential upside of the stock.
Additional Considerations
When combining the Broken Wing Butterfly strategy with other strategies, it is important to consider the following factors:
- Correlation: Consider the correlation between the underlying assets in the different strategies to ensure that they are not highly correlated, which could increase the overall risk of the trade.
- Risk Management: Carefully manage the risk of the overall trade by setting appropriate stop-loss orders and position sizing.
- Volatility: Understand the impact of implied volatility on the different strategies and adjust the trade accordingly.
| Strategy | Position |
|---|---|
| Broken Wing Butterfly | Buy 1 ATM call, sell 2 OTM calls, buy 1 OTM put |
| Iron Condor | Sell 1 OTM call, buy 1 further OTM call, sell 1 OTM put, buy 1 further OTM put |
| Vertical Spread | Buy 1 call/put at one strike price, sell 1 call/put at another strike price |
| Ratio Spread | Buy/sell multiple options contracts with different strike prices and expiration dates |
| Calendar Spread | Buy an option with a shorter expiration, sell an option with a longer expiration |
| Covered Call | Sell a call option against a stock that you own |
How To Roll A Broken Wing Butterfly In Thinkorswim
To roll a broken wing butterfly in Thinkorswim, follow these steps:
- Select the butterfly spread you want to roll.
- Right-click on the spread and select “Roll.”
- In the “Roll” window, select the new expiration date for the spread.
- Select the new strike prices for the spread.
- Click “OK” to roll the spread.
People Also Ask
What is a broken wing butterfly?
A broken wing butterfly is a type of butterfly spread in which one of the legs has a different expiration date than the other two legs.
Why would I want to roll a broken wing butterfly?
There are several reasons why you might want to roll a broken wing butterfly.
- To adjust the risk profile of the spread.
- To take advantage of changes in the underlying security’s price.
- To lock in a profit or loss.
What are the risks involved in rolling a broken wing butterfly?
There are several risks involved in rolling a broken wing butterfly.
- The spread may not perform as expected.
- The underlying security’s price may move against you.
- You may lose money on the roll.
Is it a good idea to roll a broken wing butterfly?
Whether or not it is a good idea to roll a broken wing butterfly depends on your individual circumstances. You should carefully consider the risks and rewards involved before making a decision.
