Dear Traders,
I hope today marks a new beginning that opens new horizons
for you in the financial markets. Financial trading is a promising field that
can unlock wealth and prosperity when done correctly. So, what should we do to
succeed in this field? The answer lies in getting acquainted with technical
analysis. Technical analysis is one of the most effective ways to acquire
knowledge and skills. To succeed in financial markets, you need to arm yourself
with the right knowledge and the right strategies. Harmonic patterns are one of
the many tools and methods used in technical analysis. These patterns, like
other technical analysis tools, help us forecast future price fluctuations.
The Crab harmonic pattern takes center stage in today's
article. What is the Crab pattern, how does it form, and how can you trade
using this pattern? You will find the answers to all these questions in this
article.
 |
| The Crab Harmonic Pattern |
What is the Crab Harmonic Pattern?
The Crab pattern is one of the most popular harmonic patterns in technical analysis. Like other technical analysis tools, we can use
this pattern to predict price movements and integrate it into our trading. This
pattern can be seen in both uptrends and downtrends. There are usually two
types of Crab patterns:
- Bullish Crab: The Bullish Crab pattern signals an upward price action. In this pattern, the X-A movement is upward, but the C-D movement represents a downward corrective move. So, with the completion of the pattern, a rise in the market can be expected.
- Bearish Crab: The Bearish Crab pattern, on the other hand, signals a downward price movement. In this pattern, the X-A movement is downward, but the C-D movement represents an upward corrective move. Therefore, upon completion of the pattern, a downward action in the market can be expected.
The Crab pattern gets its name from its appearance when
completed, resembling a crab's shell on the chart. Some traders also liken it
to crab legs. The formation of this pattern involves price movements creating a
specific pattern that resembles the legs of a crab, leading to the use of this
name. When the pattern is completed, it generally forms four long legs and two
short legs on the chart, resembling the legs of a crab. This visual resemblance
has led to the pattern being named the Crab.
How does the Crab Harmonic Pattern Form?
The Crab pattern indicates that price movements may
experience a retracement followed by an extension. In this pattern, measurement
targets such as Fibonacci extension levels are commonly used. A Crab pattern
usually consists of five main points and guides us in identifying possible
reversals in the market.
In the Bullish Crab Pattern:
- From point X to point A: An initial upward movement occurs. The magnitude of this movement is not important.
- From point A to point B: A downward movement occurs equal to one of the Fibonacci retracement ratios (such as 0.328, 0.618).
- From point B to point C: An upward movement occurs in the opposite direction of the movement from point A to point B, and is typically 0.382 or 0.5 times the size of the initial movement.
- From point C to point D: The last move is in the opposite direction of the initial movement and is equal to one of the Fibonacci extension ratios (such as 1.618, 2.24, 3.618) downward. A price reversal is expected at this point.
The Bullish Crab pattern forms as a corrective wave where
the C-D movement is usually opposite to the X-A movement. Therefore, upon
completion of the pattern, it's likely that the market will shift towards an
upward trend.
In the Bearish Crab Pattern:
- X Point: This is the starting point of the pattern.
- A Point: Represents the first low level or corrective movement from X. This point indicates that the market is beginning to gain a downward momentum.
- B Point: Represents an upward movement from A. This point typically occurs between the 38.2% and 61.8% Fibonacci retracement levels of the X-A movement. The placement of the B point within these levels can increase the reliability of the formation.
- C Point: Represents a downward movement from B. The C point is usually found between the 38.2% and 88.6% Fibonacci retracement levels of the X-A movement.
- D Point: Represents an upward movement from C and is related to the completion of the pattern. The D point forms between approximately 161.8% to 224% Fibonacci extension levels of the X-A movement. Therefore, the D point is between the 2.24 to 3.618 Fibonacci extension levels. These levels indicate the completion of the pattern and a period where the downtrend may gain strength.
The Bearish Crab pattern usually forms as a corrective wave
where the C-D movement is often opposite to the X-A movement. This situation
can lead to a downturn in the market upon completion of the pattern.
How to Trade with the Crab Harmonic Pattern?
The Crab harmonic pattern is used to predict the possible direction of price movements. When analyzed correctly, this pattern can offer us profitable buying and selling opportunities. Other indicators should also be considered to confirm the signals provided by the pattern. After the completion of the Crab pattern formation, it's a more sensible approach to use additional indicators to confirm which direction the price will move. To confirm this pattern as a reversal signal, it should be supported by other technical indicators as well. For instance, other indicators such as MFI, RSI, MACD, among others, showing overbought or oversold conditions at the completion levels of the pattern can provide more reliable results.
Trading the Bullish Crab Pattern:
The Bullish Crab harmonic pattern usually indicates that a
downtrend in the market is nearing its end. This can stimulate buyers' interest
and lead them to enter long positions. The most notable point here is the D
point because a change in direction is expected at this point. This point is
crucial for placing buy orders. If the price finds support at this point, it
may tend to move upward. The completion of the pattern is done with the
formation of the D point and confirmation from other technical analysis indicators.
Buy (Long): When opening a buy position, a buy order is
usually placed just above point D.
Stop Loss: The stop loss level is usually set slightly below
point D.
Target: The target price is set using Fibonacci extension
ratios.
The following image shows a Bullish Crab pattern on the
daily US Dollar Index chart. After this pattern was completed, prices started
to move upwards. You can take a closer look at the details for a trading
example:
 |
| The Bullish Crab on the USD Index chart |
Trading the Bearish Crab Pattern:
When the Bearish Crab harmonic pattern is observed, it usually
indicates that the uptrend in the market is approaching its end and there is a
possibility of a reversal. The D point plays a critical role here. If the price
encounters resistance at this point, a downward movement is often seen. After
the completion of the Bearish Crab pattern, we might consider opening sell
positions. However, it's important not to forget to confirm the completion of
the pattern before opening short positions. At this stage, bears enter the
market, and selling increases. One of the main approaches that can be used when
trading with the Bearish Crab pattern is to evaluate the pattern alongside
momentum and volume indicators. Momentum indicators are used to measure the
speed and momentum of price movements, while volume indicators can be useful
for measuring the intensity of selling volume.
Sell (Short): A price slightly below point D can be selected
for selling.
Stop Loss: The stop loss order is placed above point D.
Target: Targets can also be aligned with support levels or
Fibonacci extension levels, which are determined based on price movements prior
to the formation of the pattern.
This chart shows the Bearish Crab pattern on the 4-hour
timeframe of the US 500 Index. After the formation is completed, prices start
to decline. If you want to learn more about the trading example, you can refer
to the chart details:
 |
| The Bearish Crab on the US 500 Index chart |
Remember: While Forex trading can offer high returns, it also comes with risks. Therefore, avoid relying too much on a single technical indicator's reliability. The Crab pattern, like other technical analysis tools, does not guarantee definite results, and caution should be exercised when making trading decisions. It's vital to use other technical indicators to confirm the signals provided by the pattern.