What it means
The Butterfly is an extension pattern: B retraces 0.786 of XA and D completes beyond X, at 1.27 (sometimes 1.618) of XA.
Because D is beyond X, the pattern often forms at new lows (bullish) or new highs (bearish).
Why traders use it
Bryce Gilmore and later Scott Carney described the Butterfly. It aims to catch the end of a move that sweeps the previous extreme, which links it to liquidity sweeps.
Chart examples
Bullish Butterfly
How to identify it objectively
- 1XA impulse.
- 2B: about 0.786 of XA.
- 3C: 0.382–0.886 of AB.
- 4D: 1.27 of XA, beyond X.
Bullish use
- 1D makes a new low beyond X.
- 2Bullish reversal close at D.
- 3Stop below D by a buffer.
Bearish use
- 1D makes a new high beyond X.
- 2Bearish reversal close at D.
- 3Stop above D.
What confirms it
- D sweeps the X extreme and is reclaimed.
- A reversal close.
What invalidates it
- Price keeps closing beyond the 1.618 extension.
How a hypothetical setup is built
Entry
At D after a reversal close back above X.
Stop
Below D (beyond the 1.618 extension for a wider stop).
Target
Back to B, then A.
A hypothetical illustration of how the concept is turned into a plan, not a recommendation. Practise it on a paper account first.
Related concepts
Historical testing
Not tested on The Tradeskill. In the drawing XA = 10 points: B = 102.14 (0.786), C = 107, D = 97.3 (1.27 of XA below A).
Limitations: when it fails
- Extensions can keep extending.
- Stops beyond D can be wide.
- No proven edge from the ratios alone.
Knowledge check
Pick an answer to see the explanation. Nothing is saved.