The Butterfly pattern should be very symmetrical in its formation and structure. Just like the Gartley “222” pattern, the Butterfly pattern is formed with four legs. The difference between them is the last leg (the CD leg) of the Butterfly pattern extends beyond the X point and moves toward the 1.272 or 1.618 expansion of XA. The BC leg also is an extension. However, the completion point is generally determined by the XA swing.
The AB leg of the pattern usually is at the .618 or the .786 retracement levels. The pattern also is valid if this retracement is at the .382 or .50. This retracement of the AB leg can go further than the .786. Nevertheless, the pattern will be negated if it goes beyond X. One clue of a Butterfly pattern possibly forming is that when the first retracement, the AB, goes to the .786 retracement level or further. It is crucial to know what invalidates this pattern. Here are five items that would negate this pattern:
- Absence of an AB=CD within the AD swing. This pattern must contain an AB=CD.
- An extension moving beyond the 2.618 of XA. The 1.618 expansion is generally the maximum risk.
- B point above (for a sell pattern) or below the X point (for a buy pattern).
- C above or below the A point.
- Failure of D to extend beyond X: D must extend beyond X to be a Butterfly pattern.