Part III  Gartley's Patterns
Commander in Pips: Let’s continue to deal with Gartley patterns. We’ve already discussed how to trade them on the example of AB=CD pattern. Such kind of approach acceptable to any Gartley pattern, but still we will give some more clarification when it is really needed. Most content we will spend on describing patterns and noting crucial moment in their formation.Gartley “222” pattern
This pattern is easy to understand, because it consists of AB=CD pattern and another swing – look at picture:
Pipruit: And why it calls “222”?
Commander in Pips: This is an interesting story – name “222” has linked to it, because Gartley told about this pattern on 221  222 pages of his book in 1935.
So, as you can see here – while AB=CD pattern consists of just 3 legs, “222” consists of four. There is another swing that anchors the ABCD pattern. Also, to be valid, a “222” pattern has to have ABCD as its part.
This initial swing marked as X to A. As AB=CD as “222” pattern could be found on any market and any timeframe. This pattern is widely spread and could be met very often. This is continuation pattern, and it’s major idea that we should buy/sell the initial ABCD retracement after trend shifting. So, we act as with simple AB=CD in direction of previous Xswing, that we suppose was the initial thrust after trend reversal.
As with others patterns “222” patterns have some crucial moments:
1. D completion point can’t exceed X;
2. The C point can’t exceed A, although it can be equal to it, so that after the initial XA swing market forms double top or double bottom, when AB equals BC;
3. Point B can’t exceed X also;
Here are all the warning signs applicable to this pattern as well as to AB=CD, so I just repeat them:
1. If right after the C point, a gap takes place in the direction of the D point or somewhere on the way to the D point, it could be an early warning sign that probably the CD leg will be extension of AB;2. If right after the C point, a long ranged bar (twice normal size) takes place in the direction of the D point or somewhere on the way to the D point, it could be an early warning sign that probably the CD leg will be extension of AB;
3. If a Gap and/or long ranged bar occurs right near the D point (assuming that AB=CD) this is also a sign that CD could be extension of AB;
4. Ideally AB should be equal to CD in price and in time. So, if the AB leg forms in 10 bars so the CD leg also should form in 10 bars. This gives the AB=CD pattern strength and increase the odds that the market could show reversal at the D point – temporal or permanent;
5. If the CD leg has greater slope than AB, then probably it could be a 1.27, 1.618 or even greater extension of AB leg;6. Also keep an eye on BC depth not as itself but in comparing it with the AB move. If, say, the AB up move takes 20 bars and BC takes 10 and has reached only 0.382 of AB  it tells us that the market is absorbing the selloff at high price and when sellers pressure will weaken – the market could show solid up thrust – the CD leg could be extended leg.
7. If BC reaches 0.618 or 0.786 then probably there is a good chances that AB and CD will be equal.
Pipruit: But here we also have a limitation that the D point couldn’t be outside X, right?
Commander in Pips: Not necessary. Simple observation will help us. First, the X point will be the high or low point of the swing and the starting point of the pattern itself. Sometimes it could be some significant low or high on daily and higher timeframes. But sometimes, it could be even intermediate low or high that appeared after retracement on a longterm trend.
On non24/5 markets, as on the stock market, these swings could form on daily basis, when the trading session is opened and the X point becomes an anchor price for XA initial swing starting to form.
Commander in Pips: Its major value is that it allows us to join to some move that has started recently. Most traders rarely buy or sell right on the bottom or top, so they need some retracement to join the move – and “222” pattern allows us to do it. Also, it allows us to place a tight and reasonable stop – generally speaking make our entry and position as comfortable as possible.
Commander in Pips: I’m afraid not. This is a natural process. All that you can do is to wait when AB=CD retracement will start. Besides, if you’ll see gaps, long bars, tail closes in the direction of the XA move then possibly you will have to wait some time. Very often this XA leg shows breaks of previous classical support or resistance lines. But the only way to determine that this initial move has finished – is to see the start of the AB leg. From time to time near A point could be formed some candlestick patterns that we know already – doji, engulfing or tweezers.
Commander in Pips: Right. Then time has come to watch the AB leg. Here we should look at:
1. Fib retracement level from initial XA swing that will be reached by AB leg;
2. The number of bars in the AB leg.
This will give us initial information about possible retracement of total ABCD pattern. Say, if the AB pattern forms more than 810 bars, then probably whole ABCD will reach 0.6180.88 of initial swing – i.e. ABCD move will be deep.
The next crucial moment is watching over the BC leg. Remember, it should stay inside the XA move.
Commander in Pips: Absolutely, we not just can do it, but we have to do it. It’s very well that you’ve remembered about that. Nice work.
Commander in Pips: Oh, yes, I’ve not told you that:
1. All the same numbers for retracement: 0.382; 0.5; 0.618; 0.786, maybe 0.88 and 1.0. This is for depth of ABCD move inside XA swing;
2. Speaking about ABCD itself  apply all rules that we’ve noted in the previous part. The only limitation – the D point has to be inside XA and can’t exceed the X point. Say, if the CD leg is some extension of AB (1.27; 1.618…) watch it.
At the end of this brief discussion we make a description of socalled “perfect” “222” pattern:
1. Move AB should be 0.618 of XA;
2. Move BC should be 0.382 or 0.886 of AB;
3. If BC is 0.382 of AB, then CD should be 1.272 of AB. If BC is 0.886 of AB, then CD should be 1.618 of AB.
4. Move CD should reach 0.786 of XA.
But as you understand a “perfect” pattern could be met only very rarely.
Trading Gartley “222” pattern
Ok let’s start from an example directly, since we’ve studied all of the “222” properties. On chart #1 we can clearly see this pattern – the initial XA swing down and ABCD retracement. Here the AB move has reached the 0.5 level and the AD move – almost 0.786. Also take a look that AB=CD is rather harmonic, so that AB equals CD.
To enter the market due harmonic patterns you may act differently. You may enter, say, blindly – just around the target of ABCD at 1.43251.4330. But here you have to be sure that the CD leg will not be extended compared to AB. Existence of Agreement could give you more confidence with that, but this is not the case in our example. I do not want to say that this method is bad – sometimes you may even get excellent entry points, but another one exists also.
Trading Gartley “222” pattern continued
The second way to enter is a bit conservative, that could lead to skipping some trades, or even getting a worse entry that from the first one. This method is based on getting some confirmation from the market that the ABCD move has completed. Chart #1 shows one of the possible ways how market could do that. Precisely around 1.0 ABCD target, the market has formed a Bearish engulfing pattern that gives us more confidence and assume that probability is on our side. But here you will enter on a worse price. So the choice is up to you how to act. This links to your personality also, as with other aspects.
It doesn’t matter how, but let’s assume that we intend to enter short. The first question that we have to answer is where to place stoploss order. I strongly recommend think about the stop order prior to thinking about entry level. Because there is a risk, that since you’ve decide to enter you will try to force the stop level so, that it will be in a row with your risk management. Here you may deceive yourself, because in this case your stop could be illogical and just driven to your wishes but not by common sense.
Chart #1  60min EUR/USD and Gartley’s “222” pattern
Here we have three possibilities to place stop loss order:
1. Based on confirmation pattern around ABCD target;
2. Based on overall “222” pattern;
3. Based on harmonic swing value.
Only the second way is suitable to trade this pattern absolutely flawlessly. And it assumes placing stop beyond the XA swing. In our case it’s above 1.4413 level. This stop placement comes from the major rule that states – “D point can’t stay beyond XA swing”. If that happens the pattern is treated as failed one. That’s why placing stop beyond the Xpoint makes it reasonable. If market will trigger it, then it will cancel the “222” pattern.
Commander in Pips: The major problem with such stop placement is that distance between D point and X point could be very significant. Imagine that you trade this pattern on weekly or even monthly time frames.
Also this could happen due to a shallow ABCD retracement inside XA swing. Say, only till 0.618 or even 0.5 level. That’s why we should have some reserve ways to place stops.
On chart #1, for instance, we can apply the first way that is based on some confirmation pattern, since this pattern has appeared at D point. Where we should place stop for bearish engulfing, a?
Commander in Pips: That’s right. In our example it has worked perfectly. Although you have a worse entry, you also have a tighter stop.
And the third way to place stop – use harmonic swing value. I will not write a lot about it – the principle is the same as with ABCD pattern. Also you can use money stop, but in this case you have to be ready to reenter and may be not just one time. Because while market will stand below X point, “222” pattern will hold valid and your stop could be triggered just by extension of the CD leg, that lasts for 1.272 instead of just 1.0, for instance.
Commander in Pips: Yes. Still, the CD leg easily could be an extension of AB in a “222” pattern, if, say, the AB leg is small and the initial XA move is solid.Pipruit: And how we could estimate the initial XA swing. It always has to be a reversal against previous trend, or what?
Commander in Pips: Not necessary. Simple observation will help us. First, the X point will be the high or low point of the swing and the starting point of the pattern itself. Sometimes it could be some significant low or high on daily and higher timeframes. But sometimes, it could be even intermediate low or high that appeared after retracement on a longterm trend.
On non24/5 markets, as on the stock market, these swings could form on daily basis, when the trading session is opened and the X point becomes an anchor price for XA initial swing starting to form.
Pipruit: And what advantage could this pattern give us?
Commander in Pips: Its major value is that it allows us to join to some move that has started recently. Most traders rarely buy or sell right on the bottom or top, so they need some retracement to join the move – and “222” pattern allows us to do it. Also, it allows us to place a tight and reasonable stop – generally speaking make our entry and position as comfortable as possible.
Pipruit: And could we estimate the length of XA move in advance?
Commander in Pips: I’m afraid not. This is a natural process. All that you can do is to wait when AB=CD retracement will start. Besides, if you’ll see gaps, long bars, tail closes in the direction of the XA move then possibly you will have to wait some time. Very often this XA leg shows breaks of previous classical support or resistance lines. But the only way to determine that this initial move has finished – is to see the start of the AB leg. From time to time near A point could be formed some candlestick patterns that we know already – doji, engulfing or tweezers.
Pipruit: Ok, I see – sit on our hands and wait for the XA swing completion.
Commander in Pips: Right. Then time has come to watch the AB leg. Here we should look at:
1. Fib retracement level from initial XA swing that will be reached by AB leg;
2. The number of bars in the AB leg.
This will give us initial information about possible retracement of total ABCD pattern. Say, if the AB pattern forms more than 810 bars, then probably whole ABCD will reach 0.6180.88 of initial swing – i.e. ABCD move will be deep.
The next crucial moment is watching over the BC leg. Remember, it should stay inside the XA move.
Pipruit: Well, It’s clear. Commander, could we apply here tools that we’ve studied in advanced Fibonacci chapters? I mean Agreement. After all, potential ABCD target could coincide with some Fib retracement level and creates Agreement – this could clearly show us the potential level to watch for entering?
Commander in Pips: Absolutely, we not just can do it, but we have to do it. It’s very well that you’ve remembered about that. Nice work.
Pipruit: And what Fib retracement levels could reach AB=CD pattern inside “222”?
Commander in Pips: Oh, yes, I’ve not told you that:
1. All the same numbers for retracement: 0.382; 0.5; 0.618; 0.786, maybe 0.88 and 1.0. This is for depth of ABCD move inside XA swing;
2. Speaking about ABCD itself  apply all rules that we’ve noted in the previous part. The only limitation – the D point has to be inside XA and can’t exceed the X point. Say, if the CD leg is some extension of AB (1.27; 1.618…) watch it.
At the end of this brief discussion we make a description of socalled “perfect” “222” pattern:
1. Move AB should be 0.618 of XA;
2. Move BC should be 0.382 or 0.886 of AB;
3. If BC is 0.382 of AB, then CD should be 1.272 of AB. If BC is 0.886 of AB, then CD should be 1.618 of AB.
4. Move CD should reach 0.786 of XA.
But as you understand a “perfect” pattern could be met only very rarely.
Trading Gartley “222” pattern
Ok let’s start from an example directly, since we’ve studied all of the “222” properties. On chart #1 we can clearly see this pattern – the initial XA swing down and ABCD retracement. Here the AB move has reached the 0.5 level and the AD move – almost 0.786. Also take a look that AB=CD is rather harmonic, so that AB equals CD.
To enter the market due harmonic patterns you may act differently. You may enter, say, blindly – just around the target of ABCD at 1.43251.4330. But here you have to be sure that the CD leg will not be extended compared to AB. Existence of Agreement could give you more confidence with that, but this is not the case in our example. I do not want to say that this method is bad – sometimes you may even get excellent entry points, but another one exists also.
Trading Gartley “222” pattern continued
The second way to enter is a bit conservative, that could lead to skipping some trades, or even getting a worse entry that from the first one. This method is based on getting some confirmation from the market that the ABCD move has completed. Chart #1 shows one of the possible ways how market could do that. Precisely around 1.0 ABCD target, the market has formed a Bearish engulfing pattern that gives us more confidence and assume that probability is on our side. But here you will enter on a worse price. So the choice is up to you how to act. This links to your personality also, as with other aspects.
It doesn’t matter how, but let’s assume that we intend to enter short. The first question that we have to answer is where to place stoploss order. I strongly recommend think about the stop order prior to thinking about entry level. Because there is a risk, that since you’ve decide to enter you will try to force the stop level so, that it will be in a row with your risk management. Here you may deceive yourself, because in this case your stop could be illogical and just driven to your wishes but not by common sense.
Chart #1  60min EUR/USD and Gartley’s “222” pattern
1. Based on confirmation pattern around ABCD target;
2. Based on overall “222” pattern;
3. Based on harmonic swing value.
Only the second way is suitable to trade this pattern absolutely flawlessly. And it assumes placing stop beyond the XA swing. In our case it’s above 1.4413 level. This stop placement comes from the major rule that states – “D point can’t stay beyond XA swing”. If that happens the pattern is treated as failed one. That’s why placing stop beyond the Xpoint makes it reasonable. If market will trigger it, then it will cancel the “222” pattern.
Pipruit: I suppose that’s enough, why we need other ways of stop placement at all?
Commander in Pips: The major problem with such stop placement is that distance between D point and X point could be very significant. Imagine that you trade this pattern on weekly or even monthly time frames.
Also this could happen due to a shallow ABCD retracement inside XA swing. Say, only till 0.618 or even 0.5 level. That’s why we should have some reserve ways to place stops.
On chart #1, for instance, we can apply the first way that is based on some confirmation pattern, since this pattern has appeared at D point. Where we should place stop for bearish engulfing, a?
Pipruit: Somewhere above the high of this pattern.
Commander in Pips: That’s right. In our example it has worked perfectly. Although you have a worse entry, you also have a tighter stop.
And the third way to place stop – use harmonic swing value. I will not write a lot about it – the principle is the same as with ABCD pattern. Also you can use money stop, but in this case you have to be ready to reenter and may be not just one time. Because while market will stand below X point, “222” pattern will hold valid and your stop could be triggered just by extension of the CD leg, that lasts for 1.272 instead of just 1.0, for instance.
Pipruit: I see. And what about targets?
Commander in Pips: The major idea of trading is the same – create double position with risk no more than 2% of total assets. Close the first half with profit equal to stoploss value, close the second half at some other level as it shown at chart #2:
We do not tell about that, but in general, harmonic patterns also are some kind of fractals. They are just another view on the structure of the market that is used in EW theory. The major difference is that harmonic patterns are treated as a separate, selfsufficient tool for trading, while EW theory tries to link them into waves.
Here, on chart # 3 you can see a lot of AB=CD’s and “222” patterns that include each other:
H&S pattern, by the way, very often includes a Gartley Butterfly, as well as AB=CD and “222”. Particularly the Butterfly and other animals we will talk below.
Bat pattern
1. AB move usually 0.3820.50 of XA;
2. BC could be any – as 0.382 as 0.886 of AB;
3. Since BC could show any retracement of AB, hence CD leg also could have different extension from 1.618 to 2.168 of AB.
The major condition of Bat is that reversal happens around 0.886 Fib retracement level of XA swing.
Gartley Butterfly and Crab
Butterfly pattern is rightly seen as favorite reversal pattern among most traders, because particularly this pattern very often forms at a top or bottom. Trading Butterfly can get you an opportunity to enter right at the extreme. Sometimes the market could form Butterfly at different time frames that point on the same target level. And you can see this pattern in any market and on any timeframe as with other harmonic pattern. Trading Butterfly gives you excellent risk/reward ratio, but as with any pattern in could fail, so using stoploss order is must here as well. Concerning Butterfly there is a proverb that exists: “If Butterfly works – it works perfectly, but if it fails – it fails miserably”. This is based on the quality of Butterfly. The point is if this pattern works – it precisely shows reversal point, so that market reverses almost at theoretical target of butterfly. But if it fails and market goes beyond its target – then this move could be very significant. This is also gives excellent possibilities sometimes.
While “222” is a continuation pattern in direction of initial XA swing, Butterfly and Crab are reversal patterns and in general they are failed “222”, when ABCD move comes beyond initial XA swing. Let’s see, how they look theoretically:
Pipruit: Sounds very poetic.
Commander in Pips: Right, but let’s put lyrics aside and speak about major issues of this pattern. Since Butterfly is a reversal pattern it’s also an extension one. As “222” as Butterfly patterns start similarly – initial swing and ABCD retracement. But when we see that “222” has failed and the market moves beyond the X point – this could be start of Butterfly.
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 XA 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. ABCD 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.
Commander in Pips: Well, yes, in general they are the same as ABCD pattern:
1. Look for CD move. If it shows signs of a solid thrust – longranged bars, gaps through 0.6180.88 XA retracement levels – this will mean that some shifting in market’s sentiment is happening. If market shows acceleration near 1.272 target then most probable target will be 1.618;
2. Symmetry is also important here. If slope of CD is much greater than AB, then the 1.618 target is more probable. Otherwise, if the AB and CD moves are quite harmonic in terms of time and number of bars near the 1.272 target – then possibly the market could reverse here.
3. Watch for the 1.618 target – moving outside it will tell that this trend has solid odds to continue further.
Commander in Pips: Sure. Look at the picture – here is a perfect example of Butterfly “Sell” pattern at 4hour USD/CHF. We’ve traded it in real time by the way on the FPA forum.
Initially we see strong upside bars close to 1.272 reversal Butterfly’s point, but then all has turned as it had to be. Take a look how sharply the market has touched 1.27 target of whole Butterfly first and shown shallow retracement and then accelerated to the 1.618 target and even further.
How do you think – had we to hold position at 1.272 target or not?
Commander in Pips: You’re absolutely right. Besides right the top we see strong acceleration to the downside – this is an early confirmation that Butterfly probably will work. But we could even imagine that it will reach 2.5 target of AD swing! Still this level is not very typical for Butterflies. Although this could happen, better to found your position on 1.272 or 1.618 targets as maximum. But in most cases target will be much smaller – some retracement level from the AD swing.
Ok, now let’s take a look at schematic Crab pattern, and turn to trading process of these patterns.
See – they quite the same, Crab just assumes 1.618 target, at minimum and extreme extension of CD leg, compares to AB. This is just a version of Butterfly.
Here is how it looks like on real market:
Commander in Pips: The major idea of trading is the same – create double position with risk no more than 2% of total assets. Close the first half with profit equal to stoploss value, close the second half at some other level as it shown at chart #2:
Chart #2  60min EUR/USD and targets of Gartley’s “222” pattern
Let’s assume that we’ve placed stop based on harmonic swing – 40 pips above completion of ABCD retracement. Our first exit will be at 1.4290 – and profit is equal to potential loss. Then we move our stop loss to breakeven and turn the second half into a riskless trade. As you can see from the picture, there are a lot of potential targets where you can take a profit. Which one you will choose depends on your experience and market action. Most probably that we will take rest of profit at 0.618 or 0.786 level. Still, we have another couple of targets. First one is 0.618 extension of greater ABC Fib extension pattern, where AB is our initial XA swing, BC is total ABCD retracement and CD is continuation of “222” pattern. Also you can see that market is forming a greater AB=CD pattern and it’s rather harmonic, so you can wait the target at Dpoint around 1.4030 area. AB=CD retracement of “222” pattern is a BC leg of this large AB=CD.
We do not tell about that, but in general, harmonic patterns also are some kind of fractals. They are just another view on the structure of the market that is used in EW theory. The major difference is that harmonic patterns are treated as a separate, selfsufficient tool for trading, while EW theory tries to link them into waves.
Here, on chart # 3 you can see a lot of AB=CD’s and “222” patterns that include each other:
Chart #3  8hour EUR/USD harmonic patterns as fractals
You’re absolutely right. Besides, since CD is extended leg, it’s very often take the shape of a “222” pattern. Treating classical patterns in such way allows you to trade them even during the time when they are forming. Also it gives you huge advantage in terms of stop placement.
H&S pattern, by the way, very often includes a Gartley Butterfly, as well as AB=CD and “222”. Particularly the Butterfly and other animals we will talk below.
Bat pattern
This pattern is just a subcase of “222” pattern. Bat assumes a potential reversal point at 0.886 Fib retracement level of the XA swing. In fact, we could not speak about it, because there is no any difference with “222”, but since this name you can see very often, and to avoid any confusion from your side, it’s better to make mention of it here:1. AB move usually 0.3820.50 of XA;
2. BC could be any – as 0.382 as 0.886 of AB;
3. Since BC could show any retracement of AB, hence CD leg also could have different extension from 1.618 to 2.168 of AB.
The major condition of Bat is that reversal happens around 0.886 Fib retracement level of XA swing.
Gartley Butterfly and Crab
Commander in Pips: Although our primary object here is the Butterfly pattern, we will say a couple of words about the Crab first. Crab is the same subcase of Butterfly as Bat is a subcase of the “222” pattern. So, Crab and Butterfly are the same pattern, with only difference that Crab has some specific demand for retracement/extensions parameters, and if you see that these parameters are accomplished, then you call it Crab instead of Butterfly. Still if you call Crab as Butterfly – you always will not be wrong. We’re speaking about that again only for clarification, so that you will not be surprised with the unknown when you see or hear somewhere Crab name of harmonic pattern.Butterfly pattern is rightly seen as favorite reversal pattern among most traders, because particularly this pattern very often forms at a top or bottom. Trading Butterfly can get you an opportunity to enter right at the extreme. Sometimes the market could form Butterfly at different time frames that point on the same target level. And you can see this pattern in any market and on any timeframe as with other harmonic pattern. Trading Butterfly gives you excellent risk/reward ratio, but as with any pattern in could fail, so using stoploss order is must here as well. Concerning Butterfly there is a proverb that exists: “If Butterfly works – it works perfectly, but if it fails – it fails miserably”. This is based on the quality of Butterfly. The point is if this pattern works – it precisely shows reversal point, so that market reverses almost at theoretical target of butterfly. But if it fails and market goes beyond its target – then this move could be very significant. This is also gives excellent possibilities sometimes.
While “222” is a continuation pattern in direction of initial XA swing, Butterfly and Crab are reversal patterns and in general they are failed “222”, when ABCD move comes beyond initial XA swing. Let’s see, how they look theoretically:
Now I suppose you see, that Butterfly looks very similar to “222” with only difference that the D point stands outside the XA swing, but not inside it as with “222” pattern. Also I link X point with B and B point with D point so, that you can clearly understand why this pattern calls “Butterfly” – these two triangles resemble wings and the overall shape reminds us of a Butterfly.Pipruit: Sounds very poetic.
Commander in Pips: Right, but let’s put lyrics aside and speak about major issues of this pattern. Since Butterfly is a reversal pattern it’s also an extension one. As “222” as Butterfly patterns start similarly – initial swing and ABCD retracement. But when we see that “222” has failed and the market moves beyond the X point – this could be start of Butterfly.
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 XA 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. ABCD 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.
Also take a note that it’s very common to see smaller patterns, say ab=cd as a part of some leg – for instance, BC or CD. Most welcome is if both patterns give the same target. This gives more confidence that market will meet support/resistance in that area and chances to get profit increase.Pipruit: Cool. And does this pattern have some “what to watch for” moments?
Commander in Pips: Well, yes, in general they are the same as ABCD pattern:
1. Look for CD move. If it shows signs of a solid thrust – longranged bars, gaps through 0.6180.88 XA retracement levels – this will mean that some shifting in market’s sentiment is happening. If market shows acceleration near 1.272 target then most probable target will be 1.618;
2. Symmetry is also important here. If slope of CD is much greater than AB, then the 1.618 target is more probable. Otherwise, if the AB and CD moves are quite harmonic in terms of time and number of bars near the 1.272 target – then possibly the market could reverse here.
3. Watch for the 1.618 target – moving outside it will tell that this trend has solid odds to continue further.
Pipruit: And can we appoint some ultimate target of a Butterfly pattern?
Commander in Pips: Sure. Look at the picture – here is a perfect example of Butterfly “Sell” pattern at 4hour USD/CHF. We’ve traded it in real time by the way on the FPA forum.
Initially we see strong upside bars close to 1.272 reversal Butterfly’s point, but then all has turned as it had to be. Take a look how sharply the market has touched 1.27 target of whole Butterfly first and shown shallow retracement and then accelerated to the 1.618 target and even further.
How do you think – had we to hold position at 1.272 target or not?
Pipruit: Well, all that I see is strong black candles near the 1.272 target. From that point of view, we could count on continuation…
Commander in Pips: You’re absolutely right. Besides right the top we see strong acceleration to the downside – this is an early confirmation that Butterfly probably will work. But we could even imagine that it will reach 2.5 target of AD swing! Still this level is not very typical for Butterflies. Although this could happen, better to found your position on 1.272 or 1.618 targets as maximum. But in most cases target will be much smaller – some retracement level from the AD swing.
Chart #4  USD/CHF 4hour Butterfly has reached ultimate targets
Ok, now let’s take a look at schematic Crab pattern, and turn to trading process of these patterns.
Here is how it looks like on real market:
Chart #5  EUR/USD 4hour Crab… But looks like it will fail…
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.
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 22.24 extension target.
Commander in Pips: And what the problem with 200 pips? Enter with 0.1 lot and your loss will be just 200$, or even 0.05 lot. Just be sure that your loss does not exceed 2% of total assets. You always want something different!
Trading Butterfly and Crab patterns
We will pass through the trading process on an example of this nice Butterfly. Many steps in trading are very similar to trading AB=CD pattern. In general these steps are common to any harmonic pattern trading process.
Chart #6  EUR/USD 4hour Butterfly “Sell”
If you’re attentive trader you will notice one important issue that tells – reversal from the 1.272 target has more chances to come compares to 1.618… Look at the chart – here is a clue.
Pipruit: Hm. I only see that CD leg in ABCD move inside the Butterfly is slower, but not too much. They are almost harmonic.
Commander in Pips: Right you are. Hence we intend to enter at 1.272 extension target and not at 1.618. Now major question is where to place stop. The common approach here is to place stop above the 1.618 extension, since we will treat the butterfly as failed if the market will move above it. Second, it will mean that market could reach at least the 22.24 extension target.
Pipruit: But Commander, this is 200 pips! I think it’s too much. Besides, we should place stop not just “at” 1.618 But 1.618 + 1 harmonic swing about 40 pips – 1.4480… May be some other ways exist of stop placing?
Commander in Pips: And what the problem with 200 pips? Enter with 0.1 lot and your loss will be just 200$, 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 …
Commander in Pips: Ok. There is couple other ways. The first alternative way is to not trade at all, if your stop is too large for your account and to wait:
1. Try to enter when and if market will reach 1.618 target (that’s has not happened in our example);
2. Try to enter on retracement when the down move has already started, using some retracement up.
Commander in Pips: Trading is not funny stuff at all. I tell you – if you have not much money – wait, maybe the market will reach 1.618. This is an excellent strategy.
Commander in Pips: Enter first from 1.272 with harmonic stop 40 pips. If you will be stopped out – you will have to enter again from the 1.618 level. Using such strategy here could give you excellent entry point right at the high, because our Butterfly has been accomplished pips to pips.
Commander in Pips: Ok, now we have to estimate potential targets. AS with AB=CD it’s a better entry with a lot size that is divisible by 2.
Suppose we’ve entered with 0.2 lot at 1.4280. Our initial stop loss – 1.618 target + 40 pips = 1.4480 area.
Our potential targets are: retracement levels of AD move, ultimate targets of Butterfly – 1.272 or 1.618.
Approach to second target could be twofold.
1. Use any other Fib retracement level of the AD swing or ultimate target of Butterfly. Here we can see that all of them have been reached after some time. The major clue here is the nature of this market move. We can see that right to 0.618 Fib support level market shows thrusting black candles, telling us that move could continue. But then, this aggressive move is from time to time was interrupted by retracements. In such environment, it looks logical to take profit around 0.786 – 1.0 level of AD move. Although, as we see – market has reached 1.272 and shown solid pullback, then finally reached 1.618. But it is very difficult to see it in advance.
2. Use support levels of larger swing as potential targets – take a look at chart #8:
Choosing the targets is more an art rather than straight algorithm. In the beginning you will take retracements from AD swing, but later when your experience will become greater, you will be able to recognize what extended target to choose, depending on nature and strength on move.
Commander in Pips: Don’t forget your butterfly net. And here is nice example of 1.27 Butterfly “Buy” as a parting gift, since we didn’t talk about it:
Here is by the way a perfect example, how general Butterfly target at 1.618 coincides with 1.618 Fib expansion target of inner AB=CD. See – both target (green and blue lines at the bottom) stand in very tight range.
Commander in Pips: Ok. There is couple other ways. The first alternative way is to not trade at all, if your stop is too large for your account and to wait:
1. Try to enter when and if market will reach 1.618 target (that’s has not happened in our example);
2. Try to enter on retracement when the down move has already started, using some retracement up.
Pipruit: It sounds not funny, Sir.
Commander in Pips: Trading is not funny stuff at all. I tell you – if you have not much money – wait, maybe the market will reach 1.618. This is an excellent strategy.
Pipruit: And what about the second approach?
Commander in Pips: Enter first from 1.272 with harmonic stop 40 pips. If you will be stopped out – you will have to enter again from the 1.618 level. Using such strategy here could give you excellent entry point right at the high, because our Butterfly has been accomplished pips to pips.
Pipruit: That is much more attractive compared to the first way. Thank you
Commander in Pips: Ok, now we have to estimate potential targets. AS with AB=CD it’s a better entry with a lot size that is divisible by 2.
Suppose we’ve entered with 0.2 lot at 1.4280. Our initial stop loss – 1.618 target + 40 pips = 1.4480 area.
Our potential targets are: retracement levels of AD move, ultimate targets of Butterfly – 1.272 or 1.618.
Chart #7  EUR/USD 4hour Butterfly “Sell” with potential targets
First profit we should take as sooner as possible to shift trade in riskfree – 0.382 Support of AD swing at 1.4058, making profit ~ 220 pips. This is equal to initial risk. Stop loss on the second half of
Approach to second target could be twofold.
1. Use any other Fib retracement level of the AD swing or ultimate target of Butterfly. Here we can see that all of them have been reached after some time. The major clue here is the nature of this market move. We can see that right to 0.618 Fib support level market shows thrusting black candles, telling us that move could continue. But then, this aggressive move is from time to time was interrupted by retracements. In such environment, it looks logical to take profit around 0.786 – 1.0 level of AD move. Although, as we see – market has reached 1.272 and shown solid pullback, then finally reached 1.618. But it is very difficult to see it in advance.
2. Use support levels of larger swing as potential targets – take a look at chart #8:
Chart #8  EUR/USD 4hour Butterfly “Sell” at daily chart
Here is how our Butterfly looks on daily time frame. See – 0.382 and 0.618 support levels from larger swing on daily time frame could be used as potential targets. Besides, they stay very close to ultimate targets of Butterfly.
Choosing the targets is more an art rather than straight algorithm. In the beginning you will take retracements from AD swing, but later when your experience will become greater, you will be able to recognize what extended target to choose, depending on nature and strength on move.
Pipruit: I see. Thanks Commander. This lesson was very interesting and useful. I’ll go home and try to find some Butterflies.
Chart #9  EUR/USD Daily Butterfly “Buy”DMA
And another one on monthly USD/CHF that is not finished yet:
Here is by the way a perfect example, how general Butterfly target at 1.618 coincides with 1.618 Fib expansion target of inner AB=CD. See – both target (green and blue lines at the bottom) stand in very tight range.
Chart #10  USD/CHF Monthly potential Butterfly “Buy”
Comments
T
toshaukr
11 years ago,
Registered user
Hello Sive!
As I understood the target of butterfly right wing i.e the reversal point is the 1.27 or 1.618 ext of XA swing. I am using MT4 and I cant find out how to mark extensions from single swings (XA)
Fib ext tool doesn't work as it requires indication of the retracement point.
Thank you in advance!
As I understood the target of butterfly right wing i.e the reversal point is the 1.27 or 1.618 ext of XA swing. I am using MT4 and I cant find out how to mark extensions from single swings (XA)
Fib ext tool doesn't work as it requires indication of the retracement point.
Thank you in advance!
Sive Morten
11 years ago,
Registered user
> Hello Sive!
As I understood the target of butterfly right wing i.e the reversal point is the 1.27 or 1.618 ext of XA swing. I am using MT4 and I cant find out how to mark extensions from single swing..
Hi Anton,
you should use Fib retracement tool  just add two levels there  1.618 and 1.272  MT4 allows to do that. When you will apply it draw it vice versa  so, that extensions place in opposite direction to previous move. I hope you will get it.
As I understood the target of butterfly right wing i.e the reversal point is the 1.27 or 1.618 ext of XA swing. I am using MT4 and I cant find out how to mark extensions from single swing..
Hi Anton,
you should use Fib retracement tool  just add two levels there  1.618 and 1.272  MT4 allows to do that. When you will apply it draw it vice versa  so, that extensions place in opposite direction to previous move. I hope you will get it.
T
toshaukr
11 years ago,
Registered user
> Hi Anton,
you should use Fib retracement tool  just add two levels there  1.618 and 1.272  MT4 allows to do that. When you will apply it draw it vice versa  so, that extensions place in opposite..
Yes, I got it. This is actually the only alternative I was thinking of. Thanks for confirming, Sive!
you should use Fib retracement tool  just add two levels there  1.618 and 1.272  MT4 allows to do that. When you will apply it draw it vice versa  so, that extensions place in opposite..
Yes, I got it. This is actually the only alternative I was thinking of. Thanks for confirming, Sive!
U
Urum
11 years ago,
Registered user
Hi Sive
What do you think, roughly, what percentage of the time harmonic patterns work? Also do you find that any of the patterns work more often than others, if so which ones? Or do they all work same percentage of time?
Thanks. Great lessons.
What do you think, roughly, what percentage of the time harmonic patterns work? Also do you find that any of the patterns work more often than others, if so which ones? Or do they all work same percentage of time?
Thanks. Great lessons.
Sive Morten
11 years ago,
Registered user
> Hi Sive
What do you think, roughly, what percentage of the time harmonic patterns work? Also do you find that any of the patterns work more often than others, if so which ones? Or do they all work sa..
Hi Urum,
well, it also depends on what do you mean with "work". If you're speaking about 1.618 extension of whole pattern, say Butterfly, than probably my answer will be "no". But, if we use minimum target as 0.382 retracement, then harmonic patterns work nice.
I think that harmonic patterns work better than classical one, especially on intraday charts.
What patterns work better than the others? Difficult to say, because some patterns appear much oftener than the others. For example, 222 pattern is very often, while butterlfy is relatively seldom, Broadening top/bottom even more seldom.
I have not checked this exactly  this is the work to do.
What do you think, roughly, what percentage of the time harmonic patterns work? Also do you find that any of the patterns work more often than others, if so which ones? Or do they all work sa..
Hi Urum,
well, it also depends on what do you mean with "work". If you're speaking about 1.618 extension of whole pattern, say Butterfly, than probably my answer will be "no". But, if we use minimum target as 0.382 retracement, then harmonic patterns work nice.
I think that harmonic patterns work better than classical one, especially on intraday charts.
What patterns work better than the others? Difficult to say, because some patterns appear much oftener than the others. For example, 222 pattern is very often, while butterlfy is relatively seldom, Broadening top/bottom even more seldom.
I have not checked this exactly  this is the work to do.
D
D873
8 years ago,
Registered user
Hello Commander in Pips!
First of all thank you very very much for putting all this information free on the internet and for all the work you have put in this!
Without you i would never start trading in Forex.
I have a question concerning Butterfly pattern.
Can you confirm this is also a butterfly pattern? I found it today in 15m EUR/GBP. See pic below.
https://charts.mql5.com/7/623/eurgbpm15safecapinvestmentsltd.png
https://www.mql5.com/en/charts/3335228/eurgbpm15safecapinvestmentsltd
My fib extensions become really low due to the long CD leg, they are below fib retracement 0.382 level. Should i rely on retracement or should i use takeprofit as 1.618 extension level.
Sometimes in your documents it's not very clear if you are talking about retracement/extension levels or just about harmonic value multiplied by fib ext/retr numbers.
Thank you!
First of all thank you very very much for putting all this information free on the internet and for all the work you have put in this!
Without you i would never start trading in Forex.
I have a question concerning Butterfly pattern.
Can you confirm this is also a butterfly pattern? I found it today in 15m EUR/GBP. See pic below.
https://charts.mql5.com/7/623/eurgbpm15safecapinvestmentsltd.png
https://www.mql5.com/en/charts/3335228/eurgbpm15safecapinvestmentsltd
My fib extensions become really low due to the long CD leg, they are below fib retracement 0.382 level. Should i rely on retracement or should i use takeprofit as 1.618 extension level.
Sometimes in your documents it's not very clear if you are talking about retracement/extension levels or just about harmonic value multiplied by fib ext/retr numbers.
Thank you!
G
gwynfor
8 years ago,
Registered user
Hello Commander
Thanks for all your work for us poor recruits.
I have a question with 222 and Butterfly
Am I right that as 222 is continuation pattern then XA leg must be in direction of main trend, and on completion of ABCD this trend will resume
Am I also right that as Butterfly is reversal pattern XA leg will be counter to main trend with the CD leg in the direction of main trend but forming it's last thrust before reversal
Thanks for all your work for us poor recruits.
I have a question with 222 and Butterfly
Am I right that as 222 is continuation pattern then XA leg must be in direction of main trend, and on completion of ABCD this trend will resume
Am I also right that as Butterfly is reversal pattern XA leg will be counter to main trend with the CD leg in the direction of main trend but forming it's last thrust before reversal
S
shappons
7 years ago,
Registered user
> Hello Commander
Thanks for all your work for us poor recruits.
I have a question with 222 and Butterfly
Am I right that as 222 is continuation pattern then XA leg must be in direction of main trend..
i think your assumption is correct.
however how do we know which one to apply is the question.
i hope Sive will enlighten us in that regards though after a few years this article was written!!!
Thanks for all your work for us poor recruits.
I have a question with 222 and Butterfly
Am I right that as 222 is continuation pattern then XA leg must be in direction of main trend..
i think your assumption is correct.
however how do we know which one to apply is the question.
i hope Sive will enlighten us in that regards though after a few years this article was written!!!
Hamza Samiullah
6 years ago,
Registered user
Amazing lessen...
O
Onefm
5 years ago,
Registered user
This is mind blowing, thanks Commander.
Table of Contents
 Introduction
 FOREX  What is it ?
 Why FOREX?
 The structure of the FOREX market
 Trading sessions
 Where does the money come from in FOREX?
 Different types of market analysis
 Chart types
 Support and Resistance

Candlesticks – what are they?
 Part I. Candlesticks – what are they?
 Part II. How to interpret different candlesticks?
 Part III. Simple but fundamental and important patterns
 Part IV. Single Candlestick Patterns
 Part V. Double Deuce – dual candlestick patterns
 Part VI. Triple candlestick patterns
 Part VII  Summary: Japanese Candlesticks and Patterns Sheet

Mysterious Fibonacci
 Part I. Mysterious Fibonacci
 Part II. Fibonacci Retracement
 Part III. Advanced talks on Fibonacci Retracement
 Part IV. Sometimes Mr. Fibonacci could fail...really
 Part V. Combination of Fibonacci levels with other lines
 Part VI. Combination of Fibonacci levels with candle patterns
 Part VII. Fibonacci Extensions
 Part VIII. Advanced view on Fibonacci Extensions
 Part IX. Using Fibonacci for placing orders
 Part X. Fibonacci Summary

Introduction to Moving Averages
 Part I. Introduction to Moving Averages
 Part II. Simple Moving Average
 Part III. Exponential Moving Average
 Part IV. Which one is better – EMA or SMA?
 Part V. Using Moving Averages. Displaced MA
 Part VI. Trading moving averages crossover
 Part VII. Dynamic support and resistance
 Part VIII. Summary of Moving Averages

Bollinger Bands
 Part I. Bollinger Bands
 Part II. Moving Average Convergence Divergence  MACD
 Part III. Parabolic SAR  Stop And Reversal
 Part IV. Stochastic
 Part V. Relative Strength Index
 Part VI. Detrended Oscillator and Momentum Indicator
 Part VII. Average Directional Move Index – ADX
 Part VIII. Indicators: Tightening All Together
 Leading and Lagging Indicators
 Basic chart patterns
 Pivot points – description and calculation
 Elliot Wave Theory
 Intro to Harmonic Patterns
 Divergence Intro
 Harmonic Approach to Recognizing a Trend Day
 Intro to Breakouts and Fakeouts
 Again about Fundamental Analysis
 Cross Pair – What the Beast is That?
 Multiple Time Frame Intro
 Market Sentiment and COT report
 Dealing with the News
 Let's Start with Carry
 Let’s Meet with Dollar Index
 Intermarket Analysis  Commodities
 Trading Plan Framework – Common Thoughts
 A Bit More About Personality
 Mechanical Trading System Intro
 Tracking Your Performance
 Risk Management Framework
 A Bit More About Leverage
 Why Do We Need StopLoss Orders?
 Scaling of Position
 Intramarket Correlations
 Some Talk About Brokers
 Forex Scam  Money Managers
 Graduation!