Today we will discuss a detailed explanation of what the crab pattern is and how we can profit from the forex market using this pattern.
Crab pattern is a very profitable harmonic trading pattern that has years of a successful history of providing gains. Many institutional traders and successful retail traders use this pattern to make a good profit.
However, before going to a Crab pattern trading strategy, it is essential to know how to identify it in the chart.
What is the Crab Pattern in Forex?
Therefore, this pattern usually appears at the top and bottom of the price.
Like other harmonic patterns, Crab pattern starts with five swing points starting from X, A, B, C, and D. Among these points, the point X is the starting point, and point D is the entry point.
Let’s have a look at the image to see how a Crab Pattern looks like:
How to Identify the Crab Figure in the Chart?
Crab pattern is consists of trend lines and Fibonacci ratios, which is almost the same as the butterfly pattern.
Let’s have a look at what Crab figures are:
- XA: The XA leg is the primary Crab figure that appears at the top or bottom of the price. As it is the first leg, there is no specific Fibonacci levels for it, but the next legs depend on the movement of XA.
- AB: AB is the second leg of a Crab pattern that forms based on the Fibonacci ratios. Point B should retrace from 38.2% to 61.8% level of the XA leg.
- BC: BC is the third leg that can move up to 38.2% to 88.6% Fibonacci levels of the AB leg. In the Crab pattern, Point C should not move below or above point A. If point C exceeds the A, it will invalidate the Crab Pattern.
- CD: CD leg is the final and longest leg of the Crab pattern that moves against the XA leg from a 161.8% extension level. Furthermore, it can extend up to 224.0% to 361.8% extension level of the BC leg.
In the image below, we can see an example of a Crab figure in both bullish and bearish market conditions with appropriate Fibonacci ratios.
Rules for the Crab Figure
Like other harmonic trading patterns, Grab pattern uses the approximate value of Fibonacci levels, but there are some additional rules that a trader should follow:
- Point B remains within the XA leg.
- Point C never exceeds below or higher of point A.
- Point D is the extreme level that breaks the high or low of point X.
Crab pattern works as a market reversal pattern in both bullish and bearish market conditions. Therefore, this trading tool can provide both bullish and bearish trading strategy.
How to Trade the Crab Pattern?
Crab pattern works as an indication of potential market reversal. Therefore, if you trade market reversal, you can use it to identify the potential trading zone.
On the other hand, you can use this tool as an individual trading strategy as it covers the entry-level with an appropriate stop loss and take profit zone.
Bullish Crab Pattern Trading Strategy
As a reversal pattern, the bullish crab pattern will appear after a bearish trend to indicate the potential bullish opportunity.
It would help if you waited until the XA leg forms after the bearish move. Therefore, draw the Fibonacci ratios from point X to point D to identify point B.
The buying opportunity will appear at point D, which is approximately 161.8%, Fibonacci extension level of XA leg.
Look at the image below to see how bullish Crab figure forms.
- Entry: Monitor the market until it reaches Point D. Therefore, enter the trade as soon as you see a bearish rejection candle (like pinbar candlestick, engulfing bar, two bar, etc.).
- Stop Loss: In a bullish Crab pattern, D is the lowest point. Therefore, put your stop loss below the bearish rejection candle with some buffer (10-15 pips).
- Profit target: The standard price target level is point A. However, it depends on market pressure and reaction. If the market becomes corrective at point B, you should take some profit and move your stop loss at breakeven. Furthermore, if the bullish sentiment remains strong at point A, you can extend the take profit level for further gain.
The image above represents how we can set take profit levels for the bullish Crab pattern trading strategy.
Bearish Crab Pattern Trading Strategy
Like the bullish crab pattern trading strategy, bearish crab pattern will appear after a bullish trend to indicate the potential selling opportunity.
It would help if you waited until the XA leg forms after a bullish move. Therefore, draw the Fibonacci ratios from point X to point D and identify point B. The selling opportunity will appear at point D, which is approximately 161.8% Fibonacci extension level of the XA leg.
Look at the image below to see how a bearish Crab figure example forms in a real market:
- Entry: Wait for the price to reach at Point D. Therefore, enter the trade if the price shows a bullish rejection with a candle close (like pinbar, engulfing bar, two bar, etc.).
- Stop Loss: In a bearish Crab figure, D is the highest point. Therefore, put your stop loss above the bullish rejection candle with 10 to 15 pips buffer.
- Profit target: The standard take profit level is point A. However, you may change the take profit level based on market behavior. If the market becomes volatile at point B, take some profit and move the stop loss at breakeven. However, if the price shows extreme bearish pressure, you can extend the take profit level.
The image above represents how we can set take profit levels for the bearish Crab pattern trading strategy.
In the above section, we have seen how the Crab pattern explained. Let’s summarize the concept of trading the Crab pattern:
- Crab Pattern is a market reversal pattern that is seen at the top or bottom of a trend.
- XA is the first leg where Point B should retrace from 38.2% to 61.8% level of the XA.
- Point C never exceeds below or above point A, but Point D exceeds the high or low of point X.
- Ideal stop loss is below the reversal candlestick pattern, and the perfect take profit level is the area of point A.
Trading in the financial market consists of risks that a trader cannot avoid. Therefore, no trading strategy can guarantee you a 100% profit.
In the case of market volatility and uncertainty, your trade setups might go wrong.
Consequently, you should use an appropriate money management system in your trading plan to minimize the unavoidable risk.