1. Butterfly Pattern
Leslie Jouflas Founder of Presents The Butterfly Pattern ©2010 Trading Live Online, LLC. All Rights Reserved

2. Disclaimer – Please Read
THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD BE AWARE OF THE FOLLOWING: (1) IF YOU PURCHASE A COMMODITY OPTION, YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIUM AND OF ALL TRANSACTION COSTS. (2) IF YOU PURCHASE OR SELL A COMMODITY FUTURE OR SELL A COMMODITY OPTION, YOU MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO ESTABLISH OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUIRED FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT. (3) UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN THE MARKET MAKES A "LIMIT MOVE." (4) THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR, SUCH AS A "STOP-LOSS" OR "STOP-LIMIT" ORDER, WILL NOT NECESSARILY LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS. (5) A "SPREAD" POSITION MAY NOT BE LESS RISKY THAN A SIMPLE "LONG" OR "SHORT" POSITION. (6) THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. YOU SHOULD THEREFORE CAREFULLY STUDY COMMODITY TRADING BEFORE YOU TRADE.
Please read this carefully

3. Books By Leslie Jouflas
“Larry Pesavento and Leslie Jouflas, the quintessential traders of chart patterns and the techniques of past masters of technical trading, have put together a compilation of their studies. Their experience extends over forty years. This book covers the essence of chart patterns trading plus the mental preparation necessary for successful trading. There is something in this book for both the beginner and experienced trader, Highly recommended.”
- John Hill, President, Futures Truth Co.
Now available in 4 languages – English, Japanese, Chinese and Italian.
TRADE What You SEE
How to Profit from
Pattern Recognition

4. Books By Leslie Jouflas Essentials of Trading:
It’s Not WHAT You Think
It’s How You Think
Great motivational book for traders!

5. What we will cover in the Butterfly Pattern Presentation
History of the Butterfly Pattern: where did it come from?
Butterfly Pattern Structure: how it forms
Chart Examples
Characteristics of the Butterfly Pattern

6. Butterfly Pattern The Butterfly pattern is an Extension Pattern
First named “Butterfly” by Larry Pesavento
Found in all markets and in all time frames
Tend to occur at major tops and bottoms
Reversal Pattern
When this pattern fails – it usually fails big

7. History of the Butterfly Pattern
The Butterfly pattern was “born” in 1992 when Larry Pesavento was sitting with Bryce Gilmore watching a pattern form from a program Bryce Gilmore developed called the Wave Trader.
The Wave Trader Program calculated each swing and ratio using the Fibonacci summation series.
The program analyzed and labeled patterns from 1 to 10. The highest level, ten, was the level when 10 swings and ratios came together at the same time and price.
Larry Pesavento was watching as a Wave 10 pattern formed. It appeared in many colors and as two colorful right triangles. Larry commented that it looked like a butterfly and the rest is history.

8. Butterfly Pattern Structure
Should have symmetry
The structure has 4 legs
Must have an AB=CD leg in the extension
The C - D leg extends beyond “X”
The completion point is generally determined by the extension of the X - A leg
This pattern takes some time to identify and
learn, but well worth the effort!
Sometimes traders are confused when learning this pattern with the Gartley pattern, both contain an AB=CD, this clue is in the extension of the CD leg above or below X.

9. Butterfly Buy and Sell Patterns Two Triangles
The Structure of this pattern will form triangles; first the XAB leg then the BCD, these two components will form 2 right triangles. The market will always be moving higher to form a sell pattern. The market will always be moving lower to form a buy pattern.

10. Butterfly Pattern Basic Structure
Butterfly Buy outline
Left is a buy pattern and the right is a sell pattern. This is basic outline showing the labeled “legs” of the pattern. There are 4 legs to this pattern and 2 retracements …The X point will be found using swing highs and lows.
Butterfly Sell Outline
AB is a retracement of the XA leg
BC is a retracement of the AB leg
The final leg, C to D will extend
above (sell) or below (buy) the starting point of X

11. Fibonacci Retracements Used
.382
.50.
.618
.786
.886
1.27 extension
1.618 extension
The 2 retracements can be measured using Fibonacci ratios. These are the most common Fibonacci ratios for the retracements, all are acceptable for a valid pattern. There are 2 retracements that will occur with this pattern; 1. AB and 2. BC

12. Fibonacci Extensions Used for Pattern Completion areas
Once the second retracement, BC leg, completes and turns up or down, you will either have an AB=CD pattern that does not exceed the X point or it will exceed the X point and will be a Butterfly pattern. It is only when the X point is exceeded with the final leg that there will be a butterfly pattern. To find the potential completion points, use the XA swing and the AB=CD extended leg completion points. I find this is the easiest way to look for completion areas. The extension beyond X can also go beyond the 1.27 and can go to the It can also fall short of either of these…..

13. Calculating the Extension
1.27 Ratio
1.618 Ratio
Most software programs have Fibonacci tools, but you can calculate easily by hand if you don’t have access to one. Walk through the example on left…Always a good idea to do a few by hand to get the feel of it and to understand the extension ratios.
X = 1012, A = , Total length of swing = 8.75 points. Multiply 8.75 x 1.27 (or 1.618) = Add that number to the low of A (or subtract from the high of A if it is a buy pattern) =
Always start the swing measurement for the 1.27 or extensions at X.

14. Butterfly Pattern Structure Tips
Look for symmetry
The final leg, or 4th leg, is “extended” beyond the previous swing high or low which is labeled “X”. Final leg is the CD leg.
The extension will usually be a 1.27 or 1.618, but you may see other ratios.
The BC leg will also be extended, but the completion point is usually determined with the X – A leg and the AB=CD completion areas.
The AB and BC legs of the pattern will usually be the .618 or .786 retracement.
The pattern is valid if a .382 or .50 retracement of the AB leg or the BC leg.
The B retracement can not exceed X and the C retracement can not exceed A.
There may be other AB=CD patterns within the legs of the pattern

15. Comparison Asymmetrical Symmetrical
Very good comparison for study of patterns.

16. Structure of the Butterfly Pattern on a price chart
Use this chart to study the pattern structure from slide 13. Smaller ab=cd within the larger swings

17. Butterfly Pattern Structure
SP Emini Butterfly
SP Emini Butterfly
butterfly pattern in the SP 500 Emini, it completed on the close one day and opened with a large gap down.

18. Extended CD Leg AB=CD in Extended leg Extended Leg
Notice the extended leg above the previous swing high contains an AB=CD. It must have the AB=CD to be a butterfly pattern. If you are measuring from High to Low swing then the extension will be High. If you are measuring Low to High then the extension will be Low. Note: the CD leg often times will be longer than the AB leg

19. 5 Items that Invalidate the Butterfly Pattern
No AB=CD Pattern
Extension move beyond the of X to A. The is generally the maximum risk
B can not be below X in a buy pattern formation. B can not be above X in a sell pattern formation
C can not be above A for a buy pattern or below A for a sell pattern.
Failure of D to extend beyond X
Go over these points in the next slide…..

20. Failed Butterfly Pattern
From #2 of invalidated items, beyond the When they fail, they can move much further in the direction of the original trend. You must use pre determined stop loss orders.
Only D
Extends beyond X

21. “B” Can not be below “X” – but you may still have a valid AB=CD Pattern (Can you find the butterfly sell?) D x B C A
Two things going on in this chart. Red dashed line shows that B is just below the X. Technically not a butterfly pattern, but there is a valid AB=CD Buy pattern.

22. Make sure you have a valid AB=CD Pattern C Can not exceed A B Can not exceed X
Take time to study the structure of the pattern, such as C can’t exceed A and B can’t exceed X

23. Series of Butterfly Patterns
SP 500 Emini formed a series of butterfly patterns. Notice how each one was a profitable trade, they do not always get a entire reversal of trend, even the ones that do not can be very good trades.

24. 2 Butterfly Patterns within an AB=CD
There are 2 Butterfly Sell patterns in this chart. One begins where the “B” is and would be labeled X in the blue rectangle.
The second is in the yellow highlight.

25. Euro 2 Butterfly Sells
Not unusual to see multiple butterfly patterns form near major highs and lows

26. Butterfly Sell Pattern
Use Retracements
Butterfly Sell to retracement
Butterfly Sell Pattern
Not all butterflly patterns will be major reversals. Sometimes they will yield a retracement and of course they can always fail

27. Euro Butterfly Buy
Example of a powerful reversal after a Butterfly buy pattern.

28. AAPL Stock Butterfly Sell Pattern
Market and news was very bullish on AAPL when this pattern formed. This is a true contrarian trading pattern, you must learn to “Trade What You See”.

29. Multiple Indexes with Butterfly Sells
Example of the DOW, SP 500 Emini, NAZDAQ and Russell Indexes all forming Butterfly patterns simultaneously
Example of the indexes; Dow, Nazdaq, Russell and SP 500 all forming butterfly patterns simultaneously
Sp Emini

30. March 2009 Butterfly Buy Pattern
Great example of a major Butterfly Buy Pattern that formed as the market was extremely bearish.