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The
structure of the Butterfly pattern was discovered
by Bryce Gilmore. In my experience, I believe an
Ideal Butterfly Pattern, which requires specific
Fibonacci ratio to define the structure - including a mandatory
0.786 retracement of the XA leg as the B point -
offers more precise Potential Reversal Zones (PRZ)
and more significant trading opportunities.
Also, the Butterfly pattern must include an AB=CD
pattern to be a valid signal. Frequently, the
AB=CD pattern will possess an extended CD leg that
is 1.27 or 1.618 of the AB leg. Although this is
an important requirement for a valid trade signal,
the most critical number in the pattern is the
1.27 XA leg. The XA calculation is usually
complemented by an extreme (2.00, 2.24, 2.618) BC
projection. These numbers create a specific
Potential Reversal Zone (PRZ) that can yield
powerful reversals, especially when the pattern is
in all-time (new highs/new lows) price levels.
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