The first swing down is created when the price drops from the starting point X to the ending point A.
The A to B swing up in price is a reversal in direction and retraces approximately 78.6% of the price move of the X to A drop.
The B to C swing back down is the next directional change and price falls back down with a retracement of between 38.2% to 88.6% of the price swing of the A to B upswing.
The C to D upswing and breakout is the last part of the butterfly pattern and is important for confirmation and completion. This harmonic pattern has close to a AB=CD price structure, but the C to D upswing frequently breaks out creating a 127%, 161.8%, or even a 224% price extension of the A to B upswing. Traders commonly use the point D price level at the end of the pattern to sell short seeing it as a good risk/reward ratio after the overbought move.
The Bearish Butterfly Pattern is a reversal chart pattern that can show technical traders a high probability price level to sell short at a very overbought reading after a long move and extension in price from the mean creates a high probability for a retracement and swing back down.
The A to B swing up in price is a reversal in direction and retraces approximately 78.6% of the price move of the X to A drop.
The B to C swing back down is the next directional change and price falls back down with a retracement of between 38.2% to 88.6% of the price swing of the A to B upswing.
The C to D upswing and breakout is the last part of the butterfly pattern and is important for confirmation and completion. This harmonic pattern has close to a AB=CD price structure, but the C to D upswing frequently breaks out creating a 127%, 161.8%, or even a 224% price extension of the A to B upswing. Traders commonly use the point D price level at the end of the pattern to sell short seeing it as a good risk/reward ratio after the overbought move.
The Bearish Butterfly Pattern is a reversal chart pattern that can show technical traders a high probability price level to sell short at a very overbought reading after a long move and extension in price from the mean creates a high probability for a retracement and swing back down.