Crab pattern Forex trading Strategy

Author: Consultant Finmaxfx

The Crab pattern is one of the harmonic patterns based on Fibonacci retracement levels. The shape of the pattern is similar to such reversal formations as double-top and double-bottom as it has two consecutive lower highs during an uptrend and higher lows in a downtrend. However, the nature and meaning of the Crab pattern are entirely different as it continues the previous trend. Five touch points form a graphical analysis formation to determine a possible depth of counter-trend price action and signal the end of the retracement. The trading approach based on Crab patterns gives an opportunity to Forex traders to open by-the-trend deals aimed to maximize profits and increase the overall efficiency of a trading system.

It also can be used together with additional technical indicators for better performance.

What is a Crab pattern?

The Crab pattern is a variation of XABCD harmonic patterns with four waves of the price action and five touchpoints. It is similar to the Butterfly pattern in geometry but different in measures. The pattern is used in the graphical analysis to spot a continuation of the previous trend, measure the possible depth of a retracement, find attractive price ranges to enter the market, using the by-the-trend trading strategy, and identify reasonable levels for stop-loss and take-profit orders. Ratios between the legs of the pattern use Fibonacci retracement levels, which makes the analysis different from such reversal patterns as double tops and double bottoms. One of the most powerful advantages of the Crab pattern is that it helps traders to find possible price ranges when the counter-trend price action could be exhausted and a reversal is likely. The measures and geometry of the pattern have to comply with the following conditions.

Crab pattern conditions:

  1. Point X is the starting point of the price action, while point A is a local peak/bottom. Wave XA often goes in the same direction as the previous long-term trend;
  2. Point B is a local bottom/top of the counter-trend price action. The retracement AB relates to wave XA as 0.382 to 0.618. Any value of the correction level in this range is acceptable;
  3. Point C is lower than point A for the bullish pattern and higher for the bearish formation. Wave BC is a continuation of XA and retracement of AB with a ratio of 0.382 to 0.886;
  4. Point D has the lowest level in bullish formations and highest in bearish patterns. Point D is a 1.618 extension of XA. It also marks the level of stop-loss order to place not far below/above the reversal point.

Crab pattern versus Gartley pattern

The main difference between the two harmonic patterns is that the final point D, which completes the formation, is lower than the starting point X for bullish type and higher for the bearish one. So the stop-loss has to be hidden below/above point D but not point X. The Gartley pattern has a fixed ratio of AB to XA, while a range of the ratio is acceptable for the Crab formation. Other metrics are similar and can be considered as values close to Fibonacci levels in certain ranges. The rest of the practical application in Forex trading is similar for both patterns as they continue the previous trend. So if the leg XA was headed north, then long positions have to be considered at point D. Short positions are opened if the initial wave XA was bearish.

How to draw Crab patterns?

The key visual reflection of the Crab pattern is similar to the double-top or double-bottom formation as the initial wave is a continuation of the previous trend, while the price action forms two descending peaks (bullish Crab) or two ascending lows (bearish Crab). Traders should connect all of the five touchpoints of the formation, using the XABCD drawing tool on the left side of the graphical analysis menu on the price chart. The next step is to watch the ratio displayed on the chart automatically. If all of the conditions are met and points are placed in the correct order and ratios between the waves appear in the mentioned ranges, then the pattern can be used for trading. Otherwise, it has to be ignored.

How to trade Crab patterns?

The most efficient way to trade Crab patterns is to wait for the formation to be completed at point D with all of the conditions met. After that, the price action should have confirmative signs of the reversal of the leg CD with potentially long downside shadows on candlesticks and/or local peaks higher than the previous bottom. Once the confirmation is spotted, traders should open long positions for bullish patterns and shorts for bearish ones. The stop-loss order has to be placed slightly below/above point D but the distance should not be larger than 1.886 of wave XA. The exact number of pips for the stop-loss order also depends on a particular currency pair, trading volume, volatility and other market conditions. The stop-loss order has to correspond to the individual trading strategy and risk management rules.

There is also a method of placing a postponed buy- or sell-order when the Crab pattern is not completed but the process of the formation is in line with conditions. For example, when point C is spotted and the price action already reversed the wave BC, forex traders can easily calculate the possible depth of the leg CD and place the buy-stop order, taking into account 1.618 extensions of the leg XA. They can also make sure that point D will be lower than point X. If-done orders are also applicable in this case with targets for take-profit orders at point C and point A in extension. The full list of trading rules of the strategy based on Crab patterns is indicated below.

Trading rules for Crab patterns

  1. If all of the conditions are met and the Crab pattern is completed, traders should open long positions for bullish formations and short deals for bearish ones;
  2. The stop-loss order should be placed not far below/above the entry point, while the longest wave of the counter-trend price action has to be 1.886 of the wave XA;
  3. If the price reverses and goes in the right direction, the trading position enters into the profitable territory. It is important to watch the price action at point B and remove the stop-loss order to the non-risk mode of the initial resistance is breached by the price. Otherwise, traders should consider closing the deal manually.

If the trend goes in accordance to the previous direction, traders should monitor point C as the initial target. If the asset breached point C, then the take-profit order could be removed in extension to point A. Otherwise, traders should consider taking profits on a failed test of level C. The most important meaning of the Crab pattern is that retracements happen during strong trends but do not necessarily reverse them. So until the initial rebound is in the range of 38.2% and 61.8% Fibonacci retracement levels, and the rest of the conditions are in play, the counter-trend price action is not able to reverse the previous trend. So harmonic patterns measure the threshold dividing corrections from reversals in the trend’s momentum, helping Forex traders to make accurate predictions for the future direction of the price change.

If you like this strategy, you might also be interested in this Aroon indicator

Bullish Crab patterns

Here is an example of a bullish Crab pattern on a price chart.

Bullish Crab patterns

Bearish Crab patterns

The screenshot below shows an example of a bearish Crab pattern.

aud-usd

Examples of profitable deals

At first glance, the 15-minutes chart of AUD/USD below has signs of a reversal double-bottom pattern as point C is higher than point A and point D is higher than point X. However, the graphical analysis based on XABCD formation showed that the chart setup is correspondent to the Crab pattern conditions as ratios between legs meet appropriate ranges of Fibonacci retracement levels. Therefore, a trader decided to open a short position at point D to follow the long-term trend. The stop-loss order was placed 30 pips above point D, but the price action reversed and went into the positive territory right away. After the exchange rate breached the support level at point B, the trader removed the stop-loss order to the non-risk mode. However, the downtrend resumed and both targets at point C and point A was achieved, so the trader took nice profits.

Examples of profitable deals

Conclusion

Crab patterns are widely used in the graphical analysis to spot trend continuations and apply trading strategies based on the following long-term trends. The mathematical background of the formation is based on Fibonacci retracement levels, which helps traders to identify price ranges where correction is likely to get exhausted and the previous trend is about to resume. Flexible ranges of ratios used to measure distances between the five touchpoints of the formation allow traders to apply the harmonic graphical analysis on any asset and any timeframe. On top of that, Crab patterns are powerful instruments to define reasonable stop-loss orders and accurate levels to take profits, keeping affordable profit-to-loss ratio and executing rules of risk management.

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