Forex Trading Articles

FIBONACCI  FOR FOREX TRADING
(Part III)

By Dick Thompson for Forexmentor
©2009, Forexmentor.com, Feb, 2009

The Butterfly pattern is similar to the Gartley in that it begins with a swing from a point X to a point A and then retraces through a zig-zag AB=CD pattern to a final point D. The difference is that in the Gartley pattern, the retracement from A to D is less that the swing X to A, (less that 100% retracement) and in the Butterfly, this retracement is greater than the swing from X to A, or greater than 100% retracement. Note the differences in the following two Figures:

As with the Gartley pattern, the characteristics of the Butterfly are described in Larry Pesavento’s 1997 book “Fibonacci Ratios with Pattern Recognition”. These characteristics are given below
and are presented with permission.

• An AB=CD pattern is present in the retracement move from A to D.
  
• The retracement from A to D will be either 1.27 or 1.618 of the X to A swing. Any move beyond 1.618 negates this pattern and usually will lead to a strong continuation.
  
• The retracement moves inside the Butterfly will usually contain .618 and .786 moves.
  
• This pattern is found (should be traded) only at significant tops and bottoms.

The Butterfly is a very high probability pattern, but it must be used within these guidelines.

Lets look at a couple of real examples: Figure 3 is the EURUSD shown on a 4 Hour chart in November 2008. Figure 4 is the AUDUSD also on a 4 Hour chart, in December 2007.

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