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64

Bearish Butterfly Stop Loss

In the bearish Butterfly, a stock will often rally through the potential reversal zone and become extended. Although this may happen, if the pattem is valid, the reversal should occur quickly. So, it is important to allow a large enough stop loss limit to allow the stock to indicate whether or not it will reverse. Again, although you might risk more than other pattems in this set-up, a valid reversal will usually be quite significant. Lets look at the diagram.

bearish butterfly with stop loss

ab=<cd stop limit above d!

Although larger stop losses are advantageous in certain trade set-ups, I cant emphasize enough that the actual stop loss limit must be defined clearly before executing the trade. Whether you place an actual stop with the initial trade or maintain the limit mentally, your loss must be quantified. If you dont quantify your loss, you do not know how much you are willing to risk. If your risk is not defined, you are prone to experience more loss than is necessary because, when you do cover a losing position, your actions will more likely be based upon emotion - usually fear.



Ideal Bearish Butterfly

The ideal bearish Butterfly is a significant pattem, especially when it completes in an all-time high area. Bearish Butterfly pattems will define a specific selling area - usually within three points.

1.27/1.618 -

bearish butterfly ab=<cd sell at d!

It is important to wait for a stock to hit the 1.27 projection of the XA leg at a minimum before entering a trade. Sometimes, a stock will reverse shghtly shy of the 1.27. So, as the stock is approaching the 1.27, it is important to watch the price action closely. The most important aspect is to study the potential reversal zone. If several harmonic projections exist within a few points, a reversal is very likely. Also, the AB=CD will often require an altemate calculation when the pattem is not exact. Lets look at some examples.



This chart of US Airways illustrates the ideal bearish Butterfly very clearly. In this set-up, the potential reversal zone was in a very specific area. The 1.27 of XA was projected at 62 1/4, which closely coincided with the 1.27 altemate calculation ofthe AB=CD at 61 15/16. The 1.618 projection of the leg was calculated at 63 7/8. So, the potential reversal zone was approximately 2 points between 61 15/16 and 63 7/8. The stock exceeded this area by an 1/8 of a point, as it reversed at 64.

USAIRWAYS(l]): DAILY BEARISH BUTTERFLY



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