A five-point XABCD harmonic reversal. The endpoint D extends to 1.272 to 1.618 of XA, pushing past the origin X to reverse at an overshot extremity. That deep depth reflects the last chase into a stretched trend and its exhaustion.
A butterfly is a harmonic reversal pattern drawn by connecting five points (XABCD) at Fibonacci ratios.
Its defining trait is that the endpoint D extends past the origin X. Price overshoots in the trend direction (an extension), runs out of strength beyond the very point it started from, and reverses. Where many reversal patterns turn just short of the prior high or low, the butterfly waits beyond the prior extreme, further out still.
Formalized by Scott Carney, the bullish version aims to buy a reversal at the end of a decline where D prints a new low, while the bearish version aims to sell a reversal at the end of an advance where D prints a new high.
The key thing to hold onto is that a butterfly tends to be a counter-trend trade at the final stage of a stretched move. A deep D means you are catching the exhaustion that follows once a crowd has already piled into the "one last push."
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