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60 ButterHv The Butterfly pattem is potentially a very strong reversal signal. The pattem was discovered by Bryce Gilmore and Larry Pesavento. According to Larry in his book, Fibonacci Ratios with Pattem Recognition, the pattem is nearly 80% accurate. Therefore, stocks that reverse following this set-up usually experience strong price moves. In fact, it is probably the most powerful of all the pattems. There are several important elements that comprise an ideal Butterfly pattem. One of the most important conditions to identify an ideal Butterfly pattem is that it usually occurs near price extremes - either all-time highs or lows. This is important because reversals in these extreme areas are often reactions to a strong prior trend that has dominated the previous price action. Although all-time price extremes are ideal set-ups, valid pattems often develop within established trading ranges. Another condition for a Butterfly to exist is that the completion point of the AB=CD can be frequently extended. In a Butterfly, the final leg will be the strongest and the longest. Although an equivalent AB=CD is a harmonic element ofan ideal Butterfly, the altemate projections of either 1.27 or 1.618 can exist in the potential reversal zone. Therefore, it is important to be aware ofthese altemate calculations to more clearly define the potential reversal zone. The Butterfly pattem inco orates several Fibonacci numbers that define the execution point. The reversal zone for a Butterfly may have as many as five harmonic numbers congregated within a very precise price zone. Such a harmonic set-up is very significant because, when a reversal occurs at the completion of this pattem, the following price action can be very strong.
In my opinion, the Butterfly pattem yields more significant reversals than any other pattem. Also, it is a very strong indicator for a potential reversal because there are usually at least three numbers in this harmonic area. Sometimes, the reversal zone possesses four or more harmonic projections. It is important to note that the potential reversal zone for the Butterfly is not as precise as the other pattems. In fact, it can be larger than three points. Also, the pattem might require a greater stop loss limit. Therefore, when you trade these set-ups, you might want to permit a larger price zone for an execution. Since the reversal zone is usually larger in this pattem, you might wait one price bar or for a clear reversal sign before executing a trade. Your patience will be rewarded because the pattem is a very harmonic set-up that often yields very significant reversals. Bullish Butterfly  bullish butterfly ab=<cd buy at d! In a bullish Butterfly, the pattem requires that the points be located in specific areas. It is important to memorize this pattem because it can often resemble a Gartley. The pattem begins at point X witii an initial move up to
point A, the highest point in the pattem. The AB=CD starts from this point. An important consideration is that point must not exceed point A. The most critical aspect of a bullish Butterfly is the completion point at D. This point will be the lowest - below all the other points in the pattem. This is one of the most distinguishing elements of a Butterfly versus a Gartley. Remember, in a bullish Gartley, the completion point completes above the initial point at X. The AB=CD pattem will usually require an altemate calculation -usually a 1.27 of the AB leg. At a minimum, I prefer to see an exact AB=CD pattem within the Butterfly before executing a trade. The AB=CD pattem - exact or altemate - will converge with other harmonic numbers and define an excellent buying opportunity. Bullish Butterfly Stop Loss  bullish butterfly with stop loss ab=<cd stop limit below d! The stop loss in a Butterfly is more difficult to determine than the other pattems. Unlike the Gartley, which has a critical price point at X to gauge the validity of the pattem, the Butterfly lacks such a relative measure. Since a Butterfly pattem usually occurs at price extremes, there is no prior price action to define support or resistance. So, the stop loss limit in a
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