Stocks & Commodities V.

19:4 (52-56): The Butterfly Setup by Rudy Teseo

TRADING TECHNIQUES

Pinpoint This Pattern

The Butterfly
Setup
Theres more than one way to use harmonic
patterns to find likely buy/sell candidates.
by Rudy Teseo
f youve looked for Gartley patterns
while scrolling through your charts,
its more than likely that youve
discovered some patterns that resemble
the Gartley but slant downward rather
than upward, the way that the Gartley
setup does. This pattern sort of
Gartley, sort of not is known as the butterfly. Like the
Gartley, it comes in two forms, bullish and bearish.
The bullish butterfly is similar to the Gartley. However,
although the same ratios are used as the Gartley setup 61.8,
78.6, 1.27, and 1.618 they occur at different parts of the
pattern. This results in a point D that is lower than point X, as
can be seen in Figure 1. But I should note that this is an ideal
pattern; not all ratios will match the ideal in the real world,
even though the pattern is a legitimate butterfly.

1 Start with a weekly chart (Figure 4). Note a nice upward

move starting around 35, culminating in a new high
around 60. This will be our line XA, which at this point
is experimental.
2 Now switch to a daily chart so you can make more
accurate calculations. Construct line XA. (This is
optional. It is easier to analyze the pattern by drawing all
the lines and entering all the ratios.) Enter the values 35
in A6 and 59.64 in A11 (Figure 3). The price difference
XA (24.6) is shown in D6.
3 The target for B (0.786*XA = 40.273) is shown in F8.
You will be monitoring your chart for a price reversal
somewhere around 40 (Figure 4).
4 The price actually reverses at 41.37. Enter this value in
A16. The price difference AB is shown in D11. Construct
line AB. If your charting program does not have a
retracement tool, use a calculator to divide AB by XA.
This will result in a ratio of 0.742. This is only slightly
off 0.786 and accounts for the slight difference in the
actual reversal. Enter this value in your chart.

TUTORIAL
You can compute all the targets in a butterfly setup using the
spreadsheet in Figures 2 and 3. Ill step through the creation
of the chart pattern and spreadsheet model. If youre using
this article as a tutorial, it will help to have both your chart
(Figure 4) and your spreadsheet on screen. Then construct the
chart and enter the spreadsheet data as I give it. (Switching
back and forth is easy with alt+tab.)

.618/.7

86

T
B
.786

1.618

FIGURE 1: BUTTERFLY DIAGRAM. Gartley

setups slant upward, but butterfly setups slant
downward.

X
1.27/1.618

D
Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 19:4 (52-56): The Butterfly Setup by Rudy Teseo

5 The range of targets for C is shown

in E13 and F13. You will be
monitoring your chart for a price
reversal somewhere in this range.

6 The price actually reverses at 54.65,

which is within our range. Enter
this value in A23. Construct BC
and calculate its ratio to AB. It is
0.726. This falls within the range
0.618/0.786.
targets. I personally thought the
range was too wide to be useful, so
I ignored the AB = CD of 36.38 and
decided to make 25 my D target.
This was so I could complete the
diagram and make final ratio
measurements. I didnt like the BD
ratio of 2.23, but I was comfortable
with the XA of 1.41.
8 The price actually reversed at 22.06.
Entering this in A28 produced an
initial target of 42.20.

MICROSOFT EXCEL

7 We now have four possible D price

FIGURE 2: WORKSHEET. This Excel spreadsheet for a butterfly, both bullish and bearish, can be used to
automate your calculations.

Well, the price failed at 33.06, which

does not make this a failed butterfly. A
50% profit in one month isnt bad!

MIRROR IMAGE
The bearish butterfly is a mirror image
of the bullish pattern. I find it helpful to
have a diagram of the butterfly pattern in
front of me as Im scrolling through my
charts. If you hold a mirror above Figure
1 perpendicular to the page and draw
what you see there, you will have a
bearish butterfly pattern. The same
spreadsheet model works for this pattern.
Good hunting and have fun!

FIGURE 3: FORMULAS. Use the formulas given to create the spreadsheet shown in Figure 2.

Rudy Teseo is a retired communications

and computer consultant. He has also
taught courses in investing, technical
analysis, and options trading.

Gartley, H.M. [1981]. Profits In The Stock

Market, Traders Press (reprint from
1935 original).
Teseo, Rudy [2001]. The Gartley Setup,
Technical Analysis of STOCKS &
COMMODITIES, Volume 19: January.
www.harmonictrader.com
www.tradingtutor.com

TRADESTATION

REFERENCES

FIGURE 4: BUTTERFLY PATTERN. Heres a bullish butterfly pattern setup in Dell Computer.

See Traders Glossary for definition

Copyright (c) Technical Analysis Inc.