Chapter 17, Part III - Gartley's Patterns. Page 13

Trading Butterfly and Crab patterns

We will pass through the trading process on an example of this nice Butterfly. Many steps in trading are very similar to trading AB=CD pattern. In general these steps are common to any harmonic pattern trading process.

Chart #6 | EUR/USD 4-hour Butterfly “Sell”
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If you’re attentive trader you will notice one important issue that tells – reversal from the 1.272 target has more chances to come compares to 1.618… Look at the chart – here is a clue.

Pipruit: Hm. I only see that CD leg in AB-CD move inside the Butterfly is slower, but not too much. They are almost harmonic.​

Commander in Pips: Right you are. Hence we intend to enter at 1.272 extension target and not at 1.618. Now major question is where to place stop. The common approach here is to place stop above the 1.618 extension, since we will treat the butterfly as failed if the market will move above it. Second, it will mean that market could reach at least the 2-2.24 extension target.

Pipruit: But Commander, this is 200 pips! I think it’s too much. Besides, we should place stop not just “at” 1.618 But 1.618 + 1 harmonic swing about 40 pips – 1.4480… May be some other ways exist of stop placing?​

Commander in Pips: And what the problem with 200 pips? Enter with 0.1 lot and your loss will be just 200$, or even 0.05 lot. Just be sure that your loss does not exceed 2% of total assets. You always want something different!

Pipruit: Trade such a good pattern just with 0.05 lot …​