Although we’ve said that Butterfly is a reversal pattern, but total reversal happens relatively rarely. Most of the time, potential targets of butterfly are Fib retracement levels from the CD leg or AD leg. The target of Butterfly could be estimated by applying Fib ratios – 1.272; 1.618; 2.0; 2.618. The most common are first couple of ratios. If market continues its move outside 2.618 level, then Butterfly treated as failed. But I have to say that the most crucial level for Butterfly is 1.618. If market moves further then risk of the pattern’s failure increases significantly. Hence, it’s better to use as targets 1.272 or 1.618 extensions and treat movement outside 1.618 as failure. 1. Butterfly starts when price action has begun as “222” but then D point moves outside X point and tends to 1.272 or 1.618 extension of X-A swing; 2. AB leg of pattern will usually reach 0.618 or 0.786 Fib retracement of XA initial swing; 3. Although pattern will be valid even if AB will reach just 0.382 or 0.5 – in this case it mostly will turn to Crab; 4. AB could go even above 0.786, to 0.88 or even 1.0. The major condition is B point should be inside XA leg; 5. Early clue that probably Butterfly is forming is that AB leg has reached 0.786 of XA. Pattern has to be treated as invalid, if: 1. AB-CD pattern is absent on AD swing; 2. Extension move is beyond 2.618 of XA leg. Most common 1.618 is treated as maximum risk; 3. B point outside XA swing; 4. C point outside XA swing; 5. D point remains inside XA, i.e. « 222 » pattern . So, there are a lot of rules, but in general, you can remember just one – all swings, except extension to the D point should stay inside of XA.