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Fernando Palmer

Butterfly

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Hi Fernando, thanks for asking this question. 

The butterfly is a harmonic chart pattern that consists of five points. Like every other harmonic pattern it is heavily based on the Fibonacci retracement numbers and can come as a bullish and bearish chart pattern. The initial leg (XA) starts the trend in one of the two directions.

What follows is a series of measured moves that aim to predict where the final point “D” is to come and which will provide us with an entry to buy (bullish version) or sell (bearish version). In order to come to this point, here are the steps that have to be undertaken:

XA - Any bullish or bearish move that starts the trend classifies as the XA leg.

AB - This leg takes place opposite of the XA and point B should come as a 78.6% Fibonacci retracement of the XA leg.

BC - The point C is either 38.2% or 88.6% Fibonacci retracement of the AB move.

CD - If the BC retracement is 38.2%, then the CD leg should end at the 161.8% Fibonacci extension. If the BC leg ends at 88.6% of the AB leg, then the point D arrives at 261.8% or 224.2% extension, according to some school of thoughts. 

XD - Finally, the ultimate point D should be at 127% or 161.80% Fibonacci extension of the initial XA leg.


 

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Hello Fernando,

The Butterfly refers to the reversal chart pattern that belongs in the category of Harmonic patterns. It represents price consolidation and can often be spotted at the end of an extended price movement.

Traders can use this pattern to identify the end of the trending movement and prepare for the start of a correction or new trend phase. In terms of the Elliot Wave principle, the Butterfly can often be seen during the last wave (Wave 5) of the impulse sequence. 
 

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