Trade Setup
The X-A leg is generated by an initial price swing in one direction.
The market forms the B if it touches at least a 78.6% retracement of the XA and it does not touch the X point (100%).
The market forms the C if it touches at least a 38.2% retracement of the AB and it does not exceed the A.
The Market forms the D (completion point) by fulfilling an 127.2% extension of the AB leg.
Conventionally, limit orders are set at the D point with the expectation that price will reverse. If the order is triggered but price does not immediately reverse but rather continues in the direction of the C-D leg, targets should be adjusted accordingly. The Fibonacci retracement tool should be re-stretched from A to the new price extreme, D. Target 1 and Target 2 should be moved to these new levels.
If Target 1 one is hit, conventional rules state that half of the initial position should be closed and the stop loss for the remaining half should be placed at the original entry point (breakeven).
Butterfly Target 1: 38.2% retracement of the AD leg.
Butterfly Target 2: 61.8% retracement of the AD leg.
Butterfly Stops: My personal preference is the 161.8% extension of the XA leg. However, conventional stop loss levels are at the 141.4% extension of XA.
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