The crab pattern is one of the most common harmonic trading patterns used to identify trading possibilities with favorable reward-to-risk ratios. The harmonic trading technique is a technical analysis method widely employed throughout the forex, futures, and stock markets. It makes use of particular price patterns that are bedded on particular Fibonacci extension and retracement levels.
As you may be aware, harmonic patterns employ Fibonacci and geometric proportions to create geometric forms from various price swings to predict where the price is most likely to turn around. As a result, the patterns offer possible “leading” trading indications to traders. We chose to examine the crab pattern in greater detail since it is one of the most successful harmonic patterns. So here is the complete manual for trading the crab chart pattern.
Crab Harmonic Pattern
In 2001, Scott Carney discovered the crab harmonic pattern. Similar to different harmonic forex patterns, this one is, in fact, a reverse one. The bearish crab harmonic pattern suggests a bearish price reversal, while the bullish crab pattern implies a bullish price deterioration. As in previous designs, each piece in the construction has a name.
A letter identifies each leg, starting with the swing high or low. In fact, there are a total of five swing points: X, A, B, C, and D. However, you should know that there are many designs that use only four (X, A, B, and C). This pattern is distinct due to the robust activity in the C-D leg. This is frequently a 1.61% Fibonacci regress of the X-A leg, the crab pattern’s first and most crucial aspect.
Deep Crab Harmonic Forex Trading Pattern
The deep crab harmonic pattern is a deviation from the conventional crab pattern. There has been a slight change in the importance of AB=CD, but the final point, D, is still at the 161.8% elongation of XA and the extension is still 5 points.
The significance of the respective 88.6% retracement point of B makes this pattern stand out the most. The deep crab pattern has a similarly drawn-out and extended motion in the direction of D as the crab pattern. As you can tell, the deep crab and the regular crab patterns are very different from one another.
What Trading Lessons Can Be Drawn From Crab Patterns?
Like the butterfly, the crab chart pattern may permit traders to identify when an existing price move is presumably reaching its end. Consequently, traders may start trading when the price moves in the other direction.
The crab and deep crab reflect substantially oversold and overbought levels, and the accompanying reaction is often rapid and severe. As a result, many experts and traders regard the crab pattern and deep crab as a couple of the fastest and most advantageous harmonic patterns.
If You Recognize The Pattern, How Should You Trade?
Trading The Bearish Crab Pattern
First, you would need to place a short order at point D to trade the bearish crab pattern (with the 161.8% Fibonacci stretching of the XA leg). After figuring out where the pattern will finish at point D, place your purchase, and don’t forget to place your stop-loss just under point D.
But what about taking profits? The placement of your earnings target is entirely subjective and is often determined by your goals and market status. If you wish to make an aggressive profit, put your wager at pattern point A. For a lesser but more sure profit, put it at point B.
Trading The Bullish Crab Pattern
Select the crab pattern charting utensil and go through the steps mentioned earlier to find the pattern. Keep in mind the importance of the Fibonacci proportions when trading this pattern. A pattern is faulty if the proportions don’t match the pattern’s requirements when you view it on a price chart.
Once the price movement verifies the existence of the pattern, place your order. Be careful to wait to place the deal if you consider yourself a cautious, conservative trader until there have been a few bullish confirmation candles to place your order.
Four targets—A, B, C, and X—make up the for a trader to place their crab pattern’s take-profit order. The market turns sideways as the price crosses point B, despite the traders’ initial attempts to pocket their whole profit at point A. As a result, before closing off all of your deals at point A, collect half of your profit there.
Because of this obvious justification, most traders set their stop-loss far lower than point D, but this is the wrong strategy because it increases risk. The pattern is automatically deemed invalid if the price action violates point D.
Final Thoughts
There is no getting around the reality that employing harmonic trading takes some getting used to. Moreover, it is more complicated than the bullish and bearish indications provided by a moving average or other technical indicator based on price. But those willing to study and practice the harmonic trading strategy may rest easy knowing that with the right groundwork and practice, there aren’t many trading strategies that would provide them a superior competitive edge.