The Crab pattern is one of the harmonic trading patterns that traders use in finding trading opportunities with good reward/risk ratios. Widely used across the financial markets — forex, futures, and stock — the harmonic trading method is a technical analysis technique that uses certain price patterns, which are based on specific Fibonacci retracement and extension levels.
As you can remember from our post on the harmonic patterns, harmonic patterns make use of Fibonacci and geometric ratios to get geometric shapes from multiple price swings with the aim of identifying, in advance, the zone where the price is likely to reverse. Thus, the patterns provide traders with potential “leading” trading signals.
Since the crab pattern is one of the most effective harmonic patterns, we decided to take a detailed look at the pattern. So, we have this ultimate guide to trading the crab pattern. In this post, you will learn:
- What the crab pattern is
- The psychology behind the pattern
- The various types of the pattern
- How to draw and identify it
- Tools for locating the patterns in a price chart
- How to trade the pattern effectively
What is the Crab pattern?
The Crab pattern is one of the harmonic patterns discovered by Scott Carney in 2000. As a variation of the XABCD harmonic patterns, the Crab pattern consists of five swing points (X, A, B, C, and D) and four price swings — the XA, AB, BC, And CD swings. The shape is similar to that of a double top or double bottom as it has two consecutive swing highs (though the second high is lower) during an uptrend or swing lows (the second low is higher) in a downtrend.
But rather than signal the beginning of a new trend in the opposite direction, the four swings represent a much deeper counter-trend price action with multiple legs, finally culminating at the potential reversal zone (PRZ) from where the price turns to continue the previous trend. Thus, the Crab pattern offers traders the opportunity to trade in the direction of the trend, which offers higher odds of success and increases profit potentials.
In terms of shape, the Crab pattern is similar to the Butterfly pattern, but the measurements are different — the Fibonacci ratios for the retracement and extension levels are different. But like every other harmonic pattern, it is very useful in anticipating the possible depth of a multi-legged retracement, spotting potential trend continuation trades, determining a good level for the stop-loss order, and estimating the right profit target.
The structure of the Crab pattern
Apart from the Fibonacci retracement and extension tool, the pattern makes use of no other technical indicator or tool. Here are the components of the pattern:
- XA swing: Starting from point X and ending at point A, the XA swing is an impulse wave in the direction of the trend preceding the pattern formation, while point A is a local top in a bullish formation or bottom in a bearish formation.
- AB swing: This wave starts from point A and ends at point B, which is higher than point X in a bullish pattern and lower than point X in a bearish pattern. So, the AB swing is a correctional wave and is usually a 38.2% to 61.8% retracement of the XA wave.
- BC swing: Starting from point B to point C, the BC wave is a continuation of the XA swing but ended before it could breach the point A level. So, point C is lower than point A in a bullish pattern and higher than point A in a bearish pattern. The BC swing is usually about 38.2% to 88.6% retracement of the AB swing.
- CD swing: The CD wave starts from point C and ends at point D, which extends not only beyond point B but also point X. In a bullish pattern, point D, which is the final swing point of the formation and often referred to as the potential reversal zone (PRZ), is below point X, while in a bearish pattern, it is above point X. The CD wave is a 222.4% to 361.8% extension of the BC wave and a 161.8% extension of the XA wave.
The psychology behind the Crab pattern
The Crab pattern shows a counter-trend price movement that extends beyond the initial impulse wave, thereby appearing as if the trend has changed direction. With the XA swing being the initial impulse
wave, the AB, BC, and CD swings constitute the multi-legged counter-trend movement (pullback) that ends at point D, which extends beyond the point X — the beginning of the initial impulse wave.
Now, taking a look at the psychology behind the counter-trend movement, you would notice that, as with every pullback, it started with profit taking. As some big traders started taking some of their profits out of the table, the price retraced to the B point. However, retail traders who were looking to enter the market on price correction jumped into the market, pushing the price to start advancing in the direction of the trend.
However, their effort was truncated by the big boys who were still taking profits, which cut the BC swing short of reaching the A point. Also, some of the big boys looked to add to their positions but would like to do that at better price levels, so they hunted for the stop loss orders of those retail traders that entered around point B.
By pushing the price beyond the B level, the big boys created the impression that the trend has changed, as the pattern then resembled a double top/bottom pattern that has broken the neckline. With this, the retail traders changed their positions, and traders on the sidelines jumped in the new direction, thereby pushing the price far beyond the X point.
All these while, the big boys were taking opposite trades. When they have finished taking their positions, they push the price back in the intended direction.
Types of the Crab pattern
The original Crab pattern can be bullish or bearish, depending on the type of signal it creates. A bullish Crab pattern is one that creates a potential bullish reversal setup at the D point, which is known as the potential reversal zone (PRZ). The pattern consists of an upward XA wave, a downward AB wave, an upward BC wave, and a downward CD wave. It is often seen in an uptrend.
A bearish Crab pattern consists of a downward XA wave, an upward AB wave, a downward BC wave, and an upward CD wave. Often seen in a downtrend, the pattern creates a potential bearish reversal setup at the D point (PRZ) after a multi-legged upward pullback.
Apart from the original Crab pattern, Scott Carney also described another form of the Crab pattern and called it the Deep Crab pattern. The Deep Crab pattern is similar to the original one with 5 swing points, 4 swings, and similar Fibonacci ratios, except for the AB swing which must be about 88.6% retracement of the XA swing.
Another thing that differs in the Deep Crab pattern is the AB=CD structure, which suggests that swing AB should be equal to swing CD. But the structure typically possesses the 1.27AB=CD variation. In the market, however, a lot of flexibility is required in analyzing and trading the pattern. It is very difficult to find a perfect combination of the ratios.
As with the original Crab pattern, the Deep Crab pattern can be bullish or bearish. Here is a bullish Deep Crab pattern:
Here is a bearish Deep Crab pattern :
How to draw and identify the Crab pattern
The Crab pattern resembles the Butterfly pattern, except that the CD wave extension from the X point is 1.618 in the Crab and 1.27 in the Butterfly. Visually, the swings in both patterns are similar to that of a double top/bottom with two descending tops in the case of the bullish formation and two rising bottoms for a bearish setup.
So, when you see three swings form two descending peaks or two ascending bottoms, have it at the back of your mind that while it can be an actual double top/bottom, it could also be the Crab harmonic pattern that is about to form. In this case, grab your drawing tool and measure the retracements and extensions of the various swing points.
Here is how you do it:
- Identify the first swing high/low and note where it started, which automatically is your first swing point
- Grab your drawing tool and click on the first swing point, giving it the X label
- Drag the tool to the second swing point and drop the A label there and continue dragging the tool to the third and fourth swing points, labeling them B and C respectively
- Now, drag the D label to the 1.618 extension of the X point and wait for the price to reach there, which would become your Crab pattern’s potential reversal zone
- Meanwhile, note the area 1.27 extension from the X point, in case the price reverses from there and forms a Butterfly pattern instead.
Next, crosscheck your swing points to be sure they meet the required Fibonacci ratios
Crab pattern rules: the checklist
- The AB wave should be about 38.2% to 61.8% retracement of the XA swing.
- The BC swing should be about 38.2% to 88.6% retracement of the AB swing.
- The D point should be 222.4% to 361.8% extension of the B point and a 161.8% extension of the X point.
Tools for locating the Crab pattern in a price chart
While it is possible to manually draw the Crab pattern using trend lines, the Fibonacci retracement and extension tools, and a labeling tool, the process can be overwhelming and time consuming. Interestingly, there are tools that you can use to do that very fast, which traces the price swings, labels the price swing points, and displays the Fibonacci retracement and extension ratios.
TradingView has some built-in tools for drawing the various harmonic patterns. For the Crab pattern, the harmonic tool you use is the XABCD Pattern. You can use it to draw the pattern once you see up to three swings and four swing points.
If you are trading with the MetaTrader 4 (MT4) platform, you can get the custom harmonic indicator known as the ZUP indicator. You can get it online from trading forums like the Forexfactory and MQL5 community. One of the most popular harmonic indicators for the MT4 platform, the ZUP indicator is derived using MT4’s zig-zag indicator, and it also includes the relevant Fib ratios within it.
How to trade the Crab patterns
Trading the Crab pattern and other harmonic patterns may seem very difficult at first because it requires advanced price action analysis with Fibonacci ratios, but you can master it if you follow these rules and learn the steps for identifying and trading the bullish and bearish Crab patterns.
Trading rules for the Crab patterns
Here are a few rules to observe when trading the Crab or any other harmonic pattern:
- Wait for the pattern to complete at the D point (PRZ): Even though the harmonic patterns are leading in nature and you know the potential reversal zone before the price gets there, it is not advisable to make use of limit orders, as the price can go significantly beyond the zone or may even fail to honor the pattern entirely. You should wait for the pattern to complete before placing a trade.
- Combine with a potent trade trigger: Even after the pattern has completed, you need a sign that the price is about to reverse before placing a trade. For this, you can use reversal candlestick patterns, such as pin bars, engulfing patterns, inside bars, and morning or evening star. You can also use oscillator divergence signals or even a counter-trend trend line.
- Determine your stop loss level before entering a trade: You should have an idea of where you can safely place your stop loss before taking a position. Look for the right price structure and place your stop loss below or above it as the case may be.
- Use multiple profit targets: Owing to the nature of the Crab pattern — with many price swing points that can act as potential reversal levels, which may be difficult for the price to overcome — most harmonic pattern traders make use of multiple profit targets placed at different price levels. Some of the commonest places for the profit targets are just before the B point and the C point. Some traders also use Fibonacci levels for their profit targets, while others just trail their profits.
Step-by-step guide for trading a bullish Crab pattern
You can follow these steps to trade a bullish Crab pattern:
1. Identify a potential bullish Crab pattern
Many harmonic patterns look alike, especially in the early phase of their formation. The bullish Gartley, Bat, Butterfly, and, of course, Crab pattern all look like a descending double top pattern at the beginning when the fourth swing has not completed. So, when you see three swings with the appearance of a descending double top pattern, watch the price action closely to know how it plays out and start the second step immediately.
2. Draw the pattern and mark the potential reversal zone
Pick your harmonic pattern drawing tool — the ZUP indicator for the MT4 platform and the XABCD Pattern tool in TradingView — and start tracing the pattern. Start with the swing low that marks your X point and drag it up to point A (first swing high), then down to point B (intervening swing low) and up again to point C (the second and lower swing high). Finally, drag it down to point D, which is about 1.618 Fibonacci extension of point X, even though the price hasn’t gotten there yet. That is your potential reversal level.
3. Wait for the price to get to the potential reversal zone
After marking your D point (the PRZ), wait for the price to get there and watch how the price reacts. If the price pauses and shows signs of reversal, move to the next step, but if the price drops below it and keeps declining, the pattern may not play out. Note that the price is more likely to reverse if the PRZ corresponds to an already established support level.
4. Look for a bullish trade trigger
If the price is showing signs of exhaustion when it dropped to the PRZ, look for a bullish trade trigger. It can be a bullish reversal candlestick pattern, such as a bullish engulfing pattern, a morning star, a hammer, or a bullish inside bar. You can also use a bullish divergence in an oscillator.
5. Go long at the open of the next candlestick after the trigger
Place a long position when the next candlestick opens after the trade trigger has appeared. Here, you are using a buy market order. You may also place a buy stop order above the candlestick that formed or completed the bullish trigger.
6. Put your stop loss order
Place your stop loss some pips below the lowest point of the CD swing. It is better to use a hard stop loss than a mental stop loss because anything can happen in the market.
7. Manage your trade
You should have a plan on how you manage your trade. Most traders use multiple partial profit targets at different levels — just below point B, 61.8% retracement of the CD wave, and below point C. Some may also leave another portion of their trade and trail the profit if the price crosses above the C and A points. You should also know when you move your stop loss to breakeven — some do that when the price has crossed the X point.
Step-by-step guide for trading a bearish Crab pattern
Here are the steps for trading a bearish Crab pattern:
1. Spot a potential bearish Crab pattern
In the early stages of its formation, the bearish Crab pattern looks like any of the bearish Gartley, Bat, or Butterfly pattern. They all start with what looks like a rising double bottom pattern until the fourth swing has completed. So, seeing two ascending bottoms, watch the price action closely as the price climbs up and move to step two
2. Measure the pattern and mark the potential reversal zone
Use the harmonic pattern drawing and start to trace the pattern. Fix your X point at the swing high preceding the first bottom and drag the tool down to point A (the first swing low), then, drag it up to point B (the intervening swing high) and down again to point C (the second and higher bottom).
Even though the price hasn’t gotten there yet, drag it up to about 1.618 Fibonacci extension of point X, which is your point D or what is called the potential reversal level.
3. Wait for the price to get to the PRZ
When you mark your D point (the PRZ), wait for the price to climb there and watch the reaction of the price action. If the price climbs well beyond the level, the pattern may not play out, but if the price pauses and shows signs of reversal, move to the next step. Note that the price is more likely to reverse if the PRZ corresponds to an already established resistance level.
4. Look for a bearish trade trigger
When the price is showing signs of exhaustion after climbing to the PRZ, look for a bearish trade trigger. You can use a bearish reversal candlestick pattern, such as a bearish engulfing pattern, a morning star, a hammer, or a bearish inside bar, as your trigger. An alternative can be a bearish divergence in an oscillator.
5. Go short at the open of the next candlestick after the trigger
If everything is in order, place a short position at the open of the next candlestick after the trigger. Here, you are using a sell market order. A sell stop order below the candlestick that formed or completed the bearish trigger may be a good idea.
6. Put your stop loss order
Place your stop loss some pips above the highest point of the CD swing. Use a hard stop loss order rather than a mental stop loss.
7. Manage your trade
As usual, plan your trade management. You may use multiple partial profit targets at different levels — just above point B, 61.8% retracement of the CD wave, and point C. Trailing your profit is also an option; you may leave a small portion and trail the profit if the price crosses below the C and A points. Also, consider moving your stop loss to breakeven when the price crosses below the X point.
The Crab pattern is one of the harmonic patterns with the best outcome and reward/risk ratio. It is very useful in anticipating the possible depth of a multi-legged pullback, spotting potential trend continuation trading opportunities, determining a good level for your stop-loss order, and estimating the right place for your profit targets. You can improve your trading by learning how to trade this pattern.