Last Updated on October 17, 2022
Traders are always looking for a way to follow the pulse and rhythm of the market and the harmonic patterns do just that. We know that the Crab harmonic pattern is one of the many harmonic patterns named after animals. But what is the trading strategy?
As explained by Scott Carney in the year 2000, the Crab harmonic pattern is one of the XABCD harmonic patterns that has a high reward/risk ratio. The pattern has five pivot points (X, A, B, C, and D) and four swings — the XA, AB, BC, and CD swings. According to Scott, it is one of the most accurate of all the harmonic patterns and can give a bullish or bearish signal depending on its orientation.
In this post, we take a look at the Crab pattern, and at the end of the article we make a backtest.
What is the harmonic crab pattern?
The Crab pattern is one of the harmonic patterns discovered by Scott Carney. According to Scott, it is one of the most accurate of all the harmonic patterns, and it has a high reward/risk ratio. As with other XABCD harmonic patterns, the Crab pattern has five pivot points (X, A, B, C, and D) and four swings — the XA, AB, BC, and CD swings. The pattern can give a bullish or bearish signal depending on its orientation.
A bullish Crab pattern
Being an XABCD harmonic pattern, it starts with the XA swing, which is an impulse wave that extends from point X to A. This is followed by a retracement wave to point B. From there, the price reverses to make a correctional wave to point C, which does not reach the level of point A. The price then makes an extensive move in the opposite direction to point D, going not just beyond the level of B point but also beyond the level of X point — where the pattern started. Point D is the potential reversal zone (PRZ), which is where you look for a signal to capture the next price wave back toward the level of C point, as you can see in the chart above.
What are harmonic Crab pattern rules?
Here are the Crab harmonic pattern rules:
- The AB wave should be about 38.2% or 61.8% retracement of the XA wave.
- The BC wave can be either 38.2% or 88.6% retracement of the AB wave.
- If the BC wave is a 38.2% retracement of the AB wave, the CD wave should be a 224% extension of the BC wave, but if the BC wave is 88.6% retracement of the AB wave, then the CD wave should extend up to 361.8% of the BC wave.
- The CD wave should be a 161.8% extension of the XA wave.
What are harmonic patterns?
The harmonic patterns are advanced chart patterns that are formed by a series of four consecutive price swings/waves. They often indicate a trend reversal or the reversal of a multi-legged pullback. The patterns, after a series of price swings, show potential exhaustion in price action, which traders spot to trade the reversal.
The potential reversal zone often coincides with a key support or resistance level, which makes it more prominent. Traders often use reversal candlestick patterns, such as the hammer/shooting stars or the engulfing pattern as the trade entry trigger at that level.
Harmonic crab pattern trading strategy (backtest and example)
Unfortunately, we are not able to make a meaningful backtest of the harmonic crab pattern strategy. Any backtest requires strict trading rules and some additional settings, but because this is a very subjective pattern, we are not able to jot down what is needed. It’s simply too many rules that are needed.
Because of the lack of objectivity, we believe traders are better off NOT trading on classical chart patterns (or technical analysis in general). Why spend time on something that is mostly based on subjectivity and not any objective standards? How do you know a pattern is profitable if you have not backtested it?
Backtesting is no sure thing, but at least you have an idea that something has worked in the past. If it has not worked in the past, you can skip it immediately. If you know how to backtest you can develop a portfolio of trading strategies pretty fast. There is no best trading strategy because you need many to smooth returns.
(If you are new to backtesting and it looks like a daunting task, you might be interested in our backtesting course.)
We believe you can get many trading ideas to form a trading strategy by looking at what we have to offer. We have hundreds of different trading strategies on this website – all of them backtested with strict trading rules. You find all our products in our shop.