Feb Gold May Flutter South

At 3:28pm ET I sent this Tweet:

"Entered limit order to short Feb Gold from 1830 due to a possible bearish Butterfly pattern. Stop 1847, initial Target 1806."

See the hourly chart above for the bearish Butterfly pattern. The D point hasn't yet established itself, but the expected level is the 127.2% Fibonacci extension, which is at 1830.44.

The limit order was filled at 1830, which I shaded a little from 1830.44 to account for slippage. I set the Stop at about 5 points over the 161.8% Fibonacci extension, which is 1847. The Target is the 61.8% Fib retracement of the AD range of the Butterfly. Until we know what the actual D point is, we can't calculate the Target. But we can use an initial guess based on today's high, which is 1831.40. Based on that, the estimated Target is:

1831.40 - .618(1831.40-1789.10) = 1805.2586 ~ 1805.30

That would give us an estimated Risk:Reward of:

Risk: Stop - Entry = 1847 - 1830 = 17

Reward: Entry - Target = 1830 - 1805.30 = 24.7

R:R = 24.7/17 = 1.5:1, which is not great but its acceptable for a proven pattern like the Butterfly.

It would be very typical if price rises higher before establishing the D point. If that happens, we'll need to adjust the Target, but not the Stop because the Stop is based on the 161.8% Fib extension of the XA range (1821.60 - 1789.10), which is independent of the D point.

Summary:

Entry: 1830

Stop: 1847

Target (with estimated D point): 1805.30

R:R 1.5:1