This overview covers a very basic, but powerful reversal trading pattern. There are two versions of

the pattern. The primary pattern is called a Gartley. The second pattern is a variation of the

Gartley and is called a Butterfly. The Gartley pattern is named after H. M. Gartley who wrote a

book in 1935 called “Profits in the Stock Market”. Pages 200-250 of his book display a library of

patterns that cover all the patterns in the market ever discussed. You may have heard the phrase

“Gartley 222” when referring to this pattern because the pattern is found on page 222 of H. M.

Gartley’s book.

The second pattern is called a “Butterfly”, which is a variation of the Gartley. How it was named

takes an introduction and brief story about the man who named it. His name is Larry Pesavento.

Larry was my introduction to these patterns. I first met him at a commodities seminar I attended

in Chicago in 1997. Larry Pesavento began his two hour talk by blurting out “Ninety percent of you

in this room are losers”. Needless to say he had captured every person’s attention immediately. He

went on saying the national statistics showed that 90% of retail commodity traders lose money.

He then said he was going to show us a pattern that he trades and has taught other traders to

trade that works on all stocks, all commodities and on all time frames. He pointed to a chart on an

overhead that had no price or time, just bars. Then he said “I’ll give anyone $100 who can tell me

what this is a chart of”. One trader in the front of the room returned the shock value back to Larry

by saying “It’s a 5 minute chart of Intel”. Larry’s eyebrows shot to the top of his head in shock. He

smiled, reached into his pocket and peeled a $100 bill from his money clip and handed it to the

trader. It didn’t go exactly as Larry had planned, but he didn’t miss a beat and he immediately

started teaching how he uses the Gartley pattern with fibonacci ratios to accurately trade

reversals. In hindsight, Larry played the odds that nobody in the room would recognize what the

chart was of, but he was obviously prepared to take his losses ($100) should the crowd prove him

wrong. It was a lesson within a lesson. You play the odds when they are on your side, but you

always know your exit strategy.

I bought Larry’s book “Fibonacci Ratios with Pattern Recognition” and within days I began seeing

the patterns form everywhere on the charts. I spent several hours a day searching out and trading

the patterns. I believe that no trader’s arsenal is complete without a thorough knowledge of how

to identify and trade Gartley and Butterfly reversals. They appear on five minute e-mini charts and

you can find them on quarterly charts of stocks.

It is easier to learn these patterns by first viewing charts that have already reached their price

targets and then reversed. I can tell you by experience that it is not easy to place the trades when

you first start trading these patterns because you will place orders at prices that are seemingly

nowhere near support or resistence areas. Now that I’ve traded these patterns countless times, it

is like riding a bike. I find the pattern, do my analysis and place the trade. I found some

interesting volume relationships on my own I’ve never seen addressed anywhere else. That one

little volume nugget I discovered has kept my winners at 70%. I teach that volume nugget on the

Gartley-Butterfly Training CD-Rom and I use it in my analysis of charts when I provide stock picks

for my subscribers at longorshort.com.

Before I dive into the charts I want to say this. What you are about to see and learn is NOT a

complete course for learning how to trade Gartley and Butterfly Reversals. My CD-Rom covers the

soup to nuts version. This is a basic overview of the patterns looking at some of the fibonacci

ratios used within the patterns that help pin point high probability reversal points. The power of

these patterns lies in the fact that they work in both bull and bear markets. Equally important is

that they work on all time frames. Now lets get started by covering some of the fundamentals

before showing how they are applied to actual charts.

We’ll start with the basics and quickly move on to completed examples. The first chart on the left

is a Bullish Gartley. It might not look bullish to you, but it should reverse at point D and move

higher. The chart on the right is a Bearish Gartley. In this case you would short at point D because

a decline from point D is expected.

There are several intricate components to a Gartley, but the most basic rules are: Leg X to A is an

impulse move and the retracement leg A to D is a distinct two wave move where leg A to B equals

leg C to D (in points).

Here is another key point. The X to A leg in a gartley pattern is ALWAYS greater than the A to D

move. In fact one of thecomponents of a good gartley is that you take the distance in points from

A to D and divide it by the distance in points from X to A, that result should be a key fibonacci

number. My CD-Rom covers the ratios in detail, but you will see some of the ratios in use in some

of the examples.

Let’s take a look at a Bearish Gartley that has already completed so we can see the formation on

an actual chart. On the right is a daily chart of the S&P 500. The X to A move as you can see, is an

impulse down. The two wave move higher from A to D was formed with two equal legs, so that

AB=CD. If you look closely you will see in the C to D leg, there is a small two wave move as well.

This does not have to occur, but the odds it will reverse at point D seem to be higher when that

two wave move is present in the CD leg.

The chart on the left is a Bullish Butterfly. It might not look bullish to you, but it should reverse at

point D and move higher. The chart on the right is a Bearish Butterfly. In this case you would short

at point D because a decline from point D is expected. Larry named this pattern based on the fact

that it looked like the wings of a buttefly. (I drew the thin lines to make that more obvious). The

biggest difference between this pattern and the Gartley is that the A to D leg is always GREATER

(in points) than the X to A leg. The A to D leg will most often be 1.272 or 1.618 times greater (in

points) than the X to A leg.

There are several intricate components to a Butterfly, but the basic rules are: Leg X to A is an

impulse move and the retracement leg A to D is a distinct two wave move where leg A to B equals

leg C to D (in points).

Unlike the Gartley, the X to A leg of a Butterfly pattern is ALWAYS shorter than the A to D leg. In

fact one of the components of a Butterfly is that you calculate the distance in points from X to A

and multiply that number by several fibonacci ratios. That number is then used to calculate where

the reversal target D should end.

You may notice that ratios of “time” are noted on the chart to the right. That is another component

of both Gartley and Butterfly formations that pinpoint turns.

I want to really drive home the point about how these patterns often trade independent to general

market. Today is June 6th 2003. On June 2nd I posted a chart on longorshort.com of a Bearish

Gartley that was forming on MSFT. It is the chart at the bottom on the left. As you can see on the

the top left hand corner of that chart, MSFT made three attempts to close above 26.00 on an

hourly basis. If you look closely you can see that each of the three bars that approached 26.00

were rejected and each bar sold off and closed at the low end of that bar. It was clear that sellers

were showing up in size on each attempt to clear 26.00. The final attemept was followed by a

strong move below 25.50 which had been acting as support before now. Put this level in memory

because it becomes important later.

It is crucial to recognize these patterns early before they reach point “D” because many times you

will only get one shot at getting filled at the target reversal area. Look on the chart below and

focus on wave C to D. You can see that MSFT was trading at 24.97 and I was targeting 25.25 for

point D, plus or minus a nickle. Once I see prices in a C to D leg of a Bearish Gartley move above

the swing high of point B, I then calculate where point D should target as a reversal level. It is

very simple. You add the distance (in points) of leg A to B and add that number to the low of point

C, targeted 25.25 for point D. (That is where leg AB would equal CD). If you look at the chart you

will recall that 25.50 used to be support. I can tell you from experience, 25.50 would now act as

resistence if MSFT tried to rally. A stop just above at 25.55 or 25.60 would be a natural spot to

place a buy stop, to cover any shorts taken in the point “D” range. The downside target here is

.618 of the C to D leg. If you run the math you’ll see that a winning trade will net you almost twice

as much as you would lose if stopped out of the trade. If you trade these patterns often enough

and follow my advice using time, price and volume as I teach on the CD-Rom, then you should win

on 7 out of 10 trades. A 2:1 win/loss ratio of points won verses points lost would be good even if

the strategy was only correct 50% of the time. BUT! you should be able to get that 2:1 per trade

ratio with 70% of your trades ending up winners.

The chart on the right is a snapshot of a daily chart of MSFT around noon on 6/6/03. Two days

after posting the chart on the left, MSFT rallied up into the reversal zone. The next day it gapped

down. The point I want to make is that MSFT is a major component of the Nasdaq 100 and the

S&P 500, both of which continued to go on to new highs while MSFT collapsed. One could say that

MSFT’s weakness could stall the indicies short term given its size in the market weighted average.

But the point I’m making is you have to trade each chart independent of others. Each sector and

each stock dances to a different beat.

Let’s look at a chart from the archives. I want to say this is from 1999, but I really don’t

remember when it was posted. It is a followup chart showing what happened once prices reached

the point D reversal zone. On this chart I actually labeled the smaller ab=cd that appeared in the

larger C to D leg. The smaller ab=cd is not a necessary component of a Butterfly reversal, but I

have found that it adds to the validity of the pattern. Ask yourself this question… would you have

shorted the Nasdaq 100 near 3900 AFTER it had clearly broken above the 3800 resistence? These

patterns answered a lot of “whys” I had about breakouts failing. The downside target is .618 of the

C to D level or about 278 points off of 3900 around 3622, which was reached in a half a dozen

bars once 3900 was hit.

Countless times I have watched for this one pattern alone in stock trading. How many times have

you seen a stock poke its head above resistence only to fall back below the breakout point? Some

stock traders place buy stops above the market to catch prices that rally above recent highs on

strength. This technique works well and I even use that technique trading certain momentum

patterns. Just learning this one pattern alone will prevent you from placing buy stops near a point

D target of a Bearish Butterfly. Pattern traders who see this formation early are just waiting to use

your buy stops as liquidity to get the upticks needed for them to get short the very stock you are

trying to buy.

It takes time to learn how to identify and trade both the Gartley and the Butterfly setups. You

won’t learn them overnight, but after seeing them form in real time again and again, you will gain

confidence in trading them. When I first started, Larry Pesavento was nice enough to take a few

phone calls and help coach me while I was a newbie. He faxed me a few charts that he had been

watching and it really helped to see them unfold in real time. One of the reasons I opened

longorshort.com was to help traders learn how to identify and trade these patterns. In fact one

trader even posted his picks on my site.

I used to chat on an active technical analysis message board where traders shared ideas and

strategies. I met a trader there who asked a ton of questions and I shared what I had learned

about Gartley and Butterfly Reversals and off he went. He did exactly as I did. He started sifting

through hundreds of charts and started watching patterns unfold in real time. Like myself, he

found this strategy to be robust, and he was so good I invited him into longorshort.com to post his

picks because he focused on small to mid-cap stocks.

He posted his charts prior to prices reaching point D just as I did. That way, subscribers could get

positioned via limit orders placed days in advance of prices reaching their point D target level. The

chart below is a chart he posted after the pattern had completed and after he was stopped out of

the remainder of the position.

I share this with you to show you that anyone can become proficient with these patterns if they

just put in the time it takes to learn them. I’ve been told by subscribers that one of the reasons

they subscribed to longorshort.com was to avoid the time it takes to find the patterns (I did all the

hard and dirty work). They also wanted to learn by watching the patterns form in real time. That

way, they could see where I place my orders and stops.

There were several things I didn’t teach my subscribers while I ran longorshort.com. I just labeled

the chart with buy/sell points and where to place stops on a daily basis. What I didn’t show them

was the few critical extra filters and steps I take that no other gartley or butterfly trader uses that

I found on my own from trading these patterns over the last six years. I knew that some of my

subscribers ran their own web sites and I was keeping the really juicy stuff to myself because I

didn’t want to lose subscribers. I don’t run the site anymore so I’ll share with you those extra

filters that make all the difference in the world!

I am going to show you how critical it is to follow these patterns as they relate to analyst upgrades

and downgrades. The more you trade these patterns the more you will find that you have to ignore

wall street. The chart below is just one of many in my archives where a perfectly good reversal

pattern was delayed short term by wall street games.

It had all the makings of a great setup for a short at point D near 52. By mid-August it should

have rolled over on its own had wall street not decided to pump and dump their inventory into the

public’s accounts via their brokers. I feel bad for unsuspecting new stock brokers who don’t

understand how the whole “system” is setup and might have actually called a client to recommend

MSFT at 53. I have a whole archive of charts like this where wall street distributed reports at key

turning points marked by a Gartley or Butterfly Reversal Pattern.

In the case of MSFT below. I didn’t just hold onto shorts… I added to them. There is nothing quite

like trading on the same side as the big boys once you understand how the game is played. I can

tell you it took me a while to swallow that truth having come from Wall Street and having worked

for a firm I assumed had my best interests in mind.

Remember, this is just a brief overview of Gartley and Butterfly Reversal Patterns. What I have

just shared with you would cost $25-$50 for a basic book that covers the patterns. You are

probably wondering at least two things by now. Where can I get more specifics on how to trade

these patterns, and how much will it cost? There are only a handful of sites that cover these

patterns in detail. They cost from $50 a month to $300 a month. However, that is just to get

online and watch the patterns unfold. If you want specialized training, their going rates are $3000-

$6000 for 3-5 days of hands on training.

Source: Longorshort.com

All Trade Ideas and trading scenarios found on FX360.com are hypothetical. FX360.com has not placed these Ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

Our team of analysts uses these popular Fibonacci patterns to identify trend continuations and reversals, as well as find potential market entry and exit points. Click on each image below to read a description of each pattern and to learn how you can use it for discovering new trading opportunities.

You can view two groups of Fibonacci patterns, bearish (down) and bullish (up). Simply click on the name to switch between the two groups.

Bearish Fibonacci Patterns

Bullish Fibonacci Patterns

The Bullish Butterfly Pattern Download The Bullish Butterfly Pattern PDF

What Is It?

Contains an ABCD pattern preceded by a significant low (X)

Convergence of Fibonacci extension ratios

o Point D = extension of BC and XA

Formed by two connecting triangles at B

Pattern is found only at significant tops (highs) and bottoms (lows)

Why Is It Important?

Convergence of Fibonacci extension ratios may provide higher probability for change in market direction

May provide lower risk with potential for higher reward

Pattern failure may suggest a strong continuation move

Sounds Good... So How Do I Find It? Butterfly patterns are similar to Gartley patterns in that they resemble a “M” shape on a price chart. However, a butterfly pattern completes at the convergence of two separate Fibonacci extension levels, whereas the Gartley completes at the convergence of a Fibonacci retracement and extension. The symmetry between the two connecting triangles at point B is one of the keys to this pattern. As with all geometric patterns, a buy or sell signal occurs as the pattern completes at point D.

Source: GFT

The Bullish Butterfly Pattern Rules 1. The swing from A-to-D should be a 127.2% or 161.8% extension of XA o Note: D must be below X

A valid ABCD must be observed in the extension move (AD)

Additional confirmation may be attained when the times of the XAB and BCD triangles are in proportion. Ideally, these two triangles will be nearly equal in time. Otherwise, look for the BCD triangle to complete between 61.8% and 161.8% of XAB

A move beyond 161.8% negates the pattern and may suggest a potentially strong bearish continuation is in progress

Example 1: EUR/JPY, 15 min

Source: GFT

Example 2: USD/JPY, 30 min

Source: GFT

Gartley Pattern Trading Made Easy Posted by admin in Technical Analysis | 4 comments

DEC 02, 10

One of my favorite trading setups is the Gartley Pattern a.k.a The Butterfly. Some of the variations of this pattern

offer excellent risk vs. reward ratios and there are countless ways to trade it. The accuracy or success rate of this

pattern is around 80%, which is an outstanding rate in the world of real, no-hype trading methods and systems.

Seeing these Butterfly-shaped pattern used to overwhelm me when I first learned about them. The ones drawn

by certain software or Metatrader indicators seemed the most complicated to me. However, after I learned the

basics of the pattern and practiced it with enough repetition on the charts, it immediately became one of my

trading delights.

The beauty of this pattern – and it is actually pleasing to the eyes – is in the fact that it is an untraditional chart

formation which can actually give long signals and short signals alike, depending on which flip side of the pattern

is formed on the charts.

The bullish Gartley

The bearish Gartley

In this powerful variation of the pattern, when the A-B leg is equal to the C-D leg, it actually adds more accuracy

and thus increases the probability of success.

Note that when you connect the points X-B and B-D you get a shape similar to a butterfly spreading its wings.

Gartley 222 The pattern was named after the person who discovered it and wrote about it in a book that he published in 1935.

The book was called Profits in the Stock Market. H. M Gartley outlined this great pattern in his book but it was

the Harmonic Trader that further optimized the Butterfly pattern by outlining the Fibonacci ratio relationships in

its structure.

The Gartley 222, which is the variation we are going to focus the most on today, got this name because it was on

the page 222 of H.M. Gartley’s book.

I believe the most powerful Gartley trading patterns are the ones formed when the market changes its state from

bull to bear market, from bear to bull market, from sideways to bull market or from sideways to bear market.

The Harmonic Trader’s Tweak What the Harmoic Trader did was apply Fibonacci ratios to Gartley’s work, which made it easier to measure and

quantify as well as simpler to identify on price charts.

The Harmonics were:

The A-B leg retraces about 61.8% of the X-A leg (critical for identification of the pattern)

The B-C leg retraces 38.2% to 88.6% of the A-B leg

The C-D leg ends at around 127% to 161.8% of the B-C leg (projection)

The C-D leg ends also at around 78.6% retracement of the major X-A leg

Let’s apply this to the structure we have.

Taking the most important 2 ratios will help us predict a price reversal area. As you can see in the diagram, even

if the price is still forming the last leg (C-D), we already have an idea about where the leg would end. All we have

to do is see where the B-C leg 127% projection and the 78.6% retracement of the X-A leg are located, then be

prepared to buy in this area if the pattern is bullish or sell in this area if the pattern is bearish.

I’m going to use the bearish Gartley for the next illustration. The bullish case will be just the opposite.

Planning a Trade Now for the most important part, which is how do we plan a trade around this nice symmetrical formation in order

to make some real money?

The answer to that is simple,

Your entry would be to buy or sell the area where the 78.6% of X-A and 127% of B-C meet. Some traders

like to have their order placed so that when price hits this level they are positioned immediately for the

potential move. Others like to see price penetrate this level then wait for signals that their method or system

provide after the level have been hit. I prefer placing my orders near the level that is closer to price action.

Your stop loss would be below the origin of the X-A. Meaning below the high or low that is X.

For targets, some traders like to for 61.8% as a minimal target, and copy the X-A leg and project it from the

point D for the extended target.

For trailing your stop, you can raise it to a breakeven as soon as the minimal target is achieved.

How to Easily Find the Pattern in the Price Action Mess (as it is

still being formed) Some traders find the pattern a bit challenging to recognize in real time. In my opinion, it is very simple provided

that you devise a step-by-step plan for searching for it, and you shift your attitude towards price action

from reactive to predictive. This is very important. We will look at an actual recent example of a Gartley pattern

as it developed.

Once you’ve learned to identify the market trend which I explained in a previous article, always look for the

move that breaks the previous structure highs or lows. This will be the X-A leg of the Gartley. Place an X on

the origin of the move and an A on the end of the move.

Check the Fibonacci ratios, are they coherent with the guidelines of Gartley 222? Does A-B retrace about

61.8% of X-A? Does B-C retrace anywhere from 38.2% to 88.6% of the A-B leg? If so, label them B and C

and then draw and arrow along the A-B leg and copy it, then place its beginning on the C origin to find out at

what price level A-B would equal C-D.

Now to add to the accuracy of predicting the price reversal level at D, we look at the 78.6% retracement of X-

A, and the 127% projection of B-C. Then if you like, draw the rest of the pattern lines on the price action.

Here’s a view of what happened next in this trade: a nice and profitable reversal!

Final Advice Don’t be a perfectionist with the measurements and the Fibonacci ratios. The market will throw perfect,

symmetrical patterns your way from time to time but it won’t be the rule. Be willing to give or take a few points

here or there.

The other thing is with the retracements. After you have mastered finding the Gartley setups – which will be easy

if you practice enough – you will find patterns that don’t adhere to the retracements ratios we have outlined here.

It is normal to find such patterns and trade them too, just know that generally they have less chances of success

than the 222 variation.

What Is a Butterfly Pattern?

Contains an ABCD pattern preceded by a swing high or low (XA)

Reflects convergence of Fibonacci extension ratios

Point D at extensions of BC and XA

Formed by two connecting, symmetrical triangles

Click to Enlarge

Why Is the Butterfly Pattern Important?

Convergence of Fibonacci extension ratios increase probability of future support/resistance, thus

increasing odds of temporary market reversal

Typically provides more favorable risk/reward ratios

Pattern is found at significant tops and bottoms

Pattern failure may indicate strong continuation move

Click to Enlarge

How Do I Find a Butterfly Pattern?

Butterfly patterns are similar to Gartley patterns in that they resemble a skewed “W” or "M" shape on a

price chart. However, a butterfly pattern completes at the convergence of two separate Fibonacci

extension levels whereas the Gartley completes at the convergence of a Fibonacci retracement and

extension.

The beauty of the butterfly lies in its symmetry between the two connecting triangles at point B. As

with all geometric patterns, a buy or sell signal occurs as the pattern completes at point D.

Bullish Butterfly Pattern Rules (Buy at Point D)

Click to Enlarge

1. Swing down from A to D is 127.2% or 161.8% extension of XA

a. D must be below X

2. Valid ABCD must be observed in extension move (AD)

3. Additional confirmation attained when time and price are in proportion

a. Time of XAB and BCD triangles ideally "equal," but BCD may fall within 61.8%-161.8%

4. Move beyond 161.8% negates the pattern

a. May indicate strong continuation move in progress

Bearish Butterfly Pattern Rules (Sell at Point D)

Click to Enlarge

1. Swing up from A to D is 127.2% or 161.8% extension of XA

a. D must be above X

2. Valid ABCD must be observed in extension move (AD)

3. Additional confirmation attained when time and price are in proportion

a. Time of XAB and BCD triangles ideally "equal," but BCD may fall within 61.8%-161.8%

4. Move beyond 161.8% negates the pattern

a. May indicate strong continuation move Learning How to Trade the Fibonacci Butterfly Pattern

One of the many useful characteristics of options is that the astute trader can design strategies to capture profit from predicted price action forecasts from a wide variety of technical indicators. I think it is helpful to have knowledge of several approaches to technical analysis in order to recognize patterns that other traders may not see.

Today I would like to introduce the topic of a technical pattern that is not commonly discussed and demonstrate its ability to give a high probability trade in a liquid underlying, the Market Vectors Gold Miners ETF (GDX).

The basis of the trade I would like to discuss is that of a Fibonacci butterfly, in this case, a bearish Fibonacci butterfly. This pattern is derived from price relationships and the proclivity of these relationships to form predictable zones of price resistance and reversals.

For those traders just beginning to wrap their heads around option terminology, I should point out that this butterfly is completely unrelated to the family of butterflies an option trader may elect to use as a trade structure choice. Don't let your butterflies get confused! The subject of the Fibonacci sequence, its origin, and potential applications is well beyond the scope of this posting. Suffice it to say that the numerical relationships found within the Fibonacci series have wide distributions across a host of natural relationships. For those interested in learning more about these relationships and their derivations, any internet search engine will point to a huge trove of supplementary information.

The Fibonacci butterfly was best described initially by legendary trader Larry Pesavento . It represents one of two well defined Fibonacci reversal patterns that include both the Gartley and the butterfly.

These are reversal patterns and identify high probability areas of change in price direction. The pattern is stereotypical and consists of: an impulsive initial move in price, either up or down, often including gap movement (the X:A thrust); retracement of that initial move (A:B counterthrust) to the 0.618 to around the 0.786 Fibonacci level; retracement of that retracement (the B:C secondary thrust); and the final retracement (the C:D counterthrust) which results in completion of the pattern.

The final C:D leg for a butterfly pattern completes when price reaches the zone between 1.272 and 1.618 Fibonacci extension of the initial price movement. Once this final C:D leg has completed within this defined Fibonacci zone, the predicted price movement is in the direction of the initial X:A movement.

It is important to await confirmatory triggers prior to initiating trades from these patterns because these patterns may fail and failed patterns very often lead to explosive moves in the direction of the failure.

Now, if your head has not yet exploded, and you are still reading, it is much easier to understand with a picture.

GDX 30-Minute Chart

The horizontal lines with numbers represent the various Fibonacci retracement levels that are important. For this pattern, focus on the B point a bit above the 0.786 retracement of the initial thrust, and the D point of pattern completion between the 1.272 and 1.618 levels. These Fibonacci tools are present in all modern charting packages and make calculation of critical levels instantaneous.

Triggers usually are taken from the next lower time frame. In this case, dropping from the illustrated 60 minute time frame in which the pattern completed, a bearish engulfing candlestick completed on the next 30 minute candle. The bearish trade was triggered.

The next decision was the option structure that would be most efficient to capture the expected move. A major factor to consider in this decision was that the July options cycle was only 9 days from expiration. The worst performing trade was to buy out-of-the-money puts because of the rapid time decay the position would suffer.

I also considered a put butterfly structure, but knew that adverse price action this close to expiration could be difficult to withstand. Remember that butterflies react strongly to price change close to expiration because gamma becomes quite large. Another structure I considered was that of a calendar trade, selling the weekly option and buying the monthly.

In the end, I decided to use the structure of a put vertical illustrated below. In this case I used a conservative structure, buying an in-the-money put, the 58 strike, and selling an at-the-money 56 strike. The chart below illustrates the profit and loss of a spread constructed in a 10×10 (10 Long July GDX 58 Puts / 10 Short July GDX 56 Puts) setup.

GDX Put Spread Theoretical Profit/Loss Graph

The trade did not last long; I closed it approximately 24 hours later on stronger than expected price action and failure to get rapid follow through on the completed bearish butterfly pattern. The result of the trade was a return of 16.5% on invested capital.

Recognition of patterns not routinely followed by the investing herds can often lead to solid risk / reward trades. Using options in a knowledgeable fashion to structure these trades can further increase your probability of success.

Courtesy of JW Jones, www.OptionsTradingSignals.com/specials/index.php

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