What is the Butterfly Strategy?

The butterfly principle, like Elliott's wave theory, uses the Fibonacci magic sequence as the structural basis. Under certain circumstances, it can not only ignore the existence of some commonly used technical indicators. From a certain perspective, the butterfly theory can even set aside the technical "truth" of homeopathy. Before you fully understand the principle of butterflies, you may disdain me to compare it with the famous Elliott Wave theory. But as you gradually understand the principles and applications of butterflies, you may slowly appreciate its superiority in analyzing the market.

Butterfly shape

discuss

The butterfly principle, like Elliott's wave theory, uses the Fibonacci magic sequence as the structural basis. Under certain circumstances, it can not only ignore the existence of some commonly used technical indicators. From a certain perspective, the butterfly theory can even set aside the technical "truth" of homeopathy. Before you fully understand the principle of butterflies, you may disdain me to compare it with the famous Elliott Wave theory. But as you gradually understand the principles and applications of butterflies, you may slowly appreciate its superiority in analyzing the market.

Chinese name

Butterfly shape

Foreign name

The butterfly morphology

Solid

Fibonacci Magic Sequence

Principle

Elliott Wave Theory

development process

First we need to introduce the origin of the butterfly principle and its development process. As early as 1935, a person named HMGartley published a book called "Profits in the Stock Market". This is a book on pattern and technology analysis. The book is more than 700 pages thick. A limited edition of 1,000 copies sold for $ 1,500 each. With the purchasing power of the United States at the time of the Great Depression, this book can buy three brand new Ford cars! The best part of it is on page 222, which discusses a pattern with the best time and price. This pattern is very powerful and effective. Later, the pattern was named Gartley222, which uses the name of a person as the name of the pattern.

What is to be explained here is the main market or stock market in that period. Elliott's "Wave Theory" was published in 1938, which is basically the same period as HMGartley's "Stock Market Profit". Interestingly, both the wave theory and the book written by Gartley use the ratio of the golden section for analysis.

Later, Scott M. Carney published a book called "The Harmonic Trader" in 1999, which is a book on pattern analysis and trading. Carney discussed Gartley222 in Part 3 of the book. Later, the butterfly form (Butterfly) is introduced and discussed in detail. The butterfly form is divided into a bull butterfly form and a bear butterfly form. The basis of the butterfly form is Gartley222, which enriches the content and content of the Gartley form.

It can be said that the development of butterfly shape to this day is not a masterpiece of one person, but has undergone multi-angle evolution and optimization. Some adjustments and changes have been made to the basic principles of butterfly shapes. Especially after confirming point C, the position of point D can be effectively predicted. The current application has a good effect in actual combat.

The butterfly form described in "Harmonious Transaction" (using the Fibonacci magic sequence as the structural basis) can be regarded as the product of the natural law of things. Ideally, if we confirm X, A, B in the chart , C, D points, we can judge the flipping market located after point D. The combination of callback ratios between X, A, B, C, and D points must satisfy a specific Fibonacci sequence combination. Of course, in the actual trend, the morphological characteristics of the trend and the magnitude of the callback will only be infinitely close to the ideal state forever. In this way, we must work hard on the selection of points.

We know that Fibonacci numbers have been widely used in technical analysis. Gann created his own system by combining the Filipino series with geometry; Eliot used the Filipino numbers to interpret the Dow theory and made waves; Jia Lu Lan created a spiral calendar with a combination of the Fischer number and the calendar. The butterfly principle is also formed by the combination of Fibonacci proportions. In addition, the above-mentioned analysis methods are not only applied to foreign exchange technical analysis, but are also effective in stock K-line and futures K-line. This can better explain the existence of the Fibonacci magic sequence in various fields of the objective world (this viewpoint recommends reading Chapter 1 of "The Application of Fibonacci Singular Numbers and Trading Strategies").

The beauty of the butterfly principle is its objectivity. This objective existence makes our analysis more objective. What we need to do is to find out this real existence, and that's it. This is why the butterfly principle is superior to many technical analyses. Many technical analyses are based on artificially acquiring experience and laws through historical trends, and combining them with auxiliary measures to predict such laws in the future, but it must be guaranteed that such laws must always exist. But this is often not the case. Today's support and resistance may become vulnerable tomorrow. A false break in the trend line will destroy your stop loss, and a false divergence may lose your position. Technical indicators suddenly failed, and people gave this a nice name called indicator passivation. Maybe you can achieve a higher forecast accuracy through the superposition of multiple indicators, but you may continue to change your trading ideas due to the passivation of indicators.