Harmonic patterns are used continuously by traders because they offer an analytical approach to trading. These patterns utilize Fibonacci numbers to precisely predict future stock movements. Conservative traders tend to look for additional confirmation before they enter a trade.
If you want to use harmonic patterns effectively, here are three tips to help you spot the perfect patterns:
- Locate the harmonic price pattern.
- Measure the harmonic price pattern.
- After identifying, the pattern buys or sells.
As you trade using harmonic patterns, you need to understand the basics of this trading approach. You should know the most critical aspects of popular harmonic patterns.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is the 5-0 Pattern?
This is a new pattern that features a five-point reversal structure. The 5-0 makes harmonic patterns even more precise as it utilizes specific Fibonacci measurements for each of the points on the pattern structure. As a result, you have less room for speculative interpretation.
There are two options for the 5-0 pattern:
- Bullish 5-0 pattern
- Bearish 5-0 pattern
The 5-0 pattern is made up of 5 points within the structure, which are X, A, B, C, D. The starting point is typically 0, which can be a high or low point on the pattern. However, it must be the beginning of the extended price move. Also, keep in mind that the point X being the initial point must have a specific alignment with point A and B.
How to Identify the 5-0 Pattern?
When looking at trading patterns, you will see that the curve makes a distinct pattern. To precisely identify the pattern, you have to label the reversal points. You can see how the legs on the pattern retract then push higher to give you a distinct bearish or bullish pattern.
The pattern begins at 0 before a reversal at X, A, and B with a 113 to 161.8% extension. The C point moves beyond the 161.8 % extension, but it can’t go beyond 224%. As a result, AB and CD are reciprocal, and this is a requirement for the 5-0 pattern.
The Bullish 5-0 Pattern
This pattern starts at point 0 with a downward leg extension to the beginning of the pattern at point X. As the initial point, X acts as a low point before gaining a reactive bounce to point A. From point A the extension abruptly declines past to get support at point B.
From point B to point C, the extension struggles to rise, gaining 161.8% on this leg. Between points C and D, the leg dips, but the decline is equivalent to the one experienced earlier from A to B. If the extension between B and C doesn’t reach 161.8%, then the structure doesn’t qualify as a 5-0 pattern.
The Bearish 5-0 Pattern
The bearish 5-0 pattern begins at point 0 as well, but it is characterized by an upward rallying of the extension to point X. The extension declines down into point A before going up to point B. From B, it dips down 161.8% to point C from where there is gain to D, which is reciprocal to the increase from point A to B.
Again if the extension between B and C doesn’t get to 161.8%, then the structure is not considered a 5-0 pattern.
5-0 Pattern vs. the Shark Pattern
Both patterns were created by the same person: Scott Carney. And although it follows specific Fibonacci ratios for its structure to be validated, the shark pattern has a different starting point, which is point C instead of point 0X. The structure of the shark pattern features an impulse extension XA, which finds a retracting extension from A to B. From B to C, the leg must reach the Fibonacci extension of 161.8%.
The Shark harmonic pattern can have both the bearish and the bullish patterns. They both adopt the M and W shapes, respectively, as one would find in the 5-0 pattern.
Technical Indicators That Work Best With 5-0 Patterns
Moving Average
This indicator lets you identify the direction of the current prices when there is no interference from short term spikes. The moving average indicator uses data collected over time to arrive at the current trend.
Exponential Moving Average
The exponential moving average uses recently collected data, unlike the moving data above, to chart the new trends. This is more responsive information that helps traders using 5-0 patterns to make significant market moves.
Moving Average Convergence Divergence
Also referred to as MACD, this indicator compares two moving averages to detect the changes in the momentum of the prices. As a result, traders can sell or buy opportunities at the best times.
The convergence of two moving averages means they are coming together, so their price momentum is increasing. Divergence means they are moving apart, and their price momentum is reducing.
Stochastic Oscillator
The stochastic oscillator shows a comparison of an asset’s closing price to its range of prices over time. You can easily see the strength and momentum of the asset using this indicator as it gives you a reading between 0 and 100.
Relative Strength Index
The RSI (relative strength index) helps you to monitor the market conditions, momentum, and warning signals for assets with dangerous price movements. It also is presented between 0 and 100. If the asset is at 30 is considered as oversold while one at 70 is under bought.
Bollinger Bands
The Bollinger band gives you the range of prices an asset typically trades within. The volatility of the asset will dictate how the band’s widths come close or far away from each other. When they are close, the lower the volatility, and when they are far apart, the higher the volatility.
How to Trade 5-0 Pattern?
Trading Legs
A trading leg is a strategy in which the trader uses future contractors or several options contracts to profit from a spread. Legging means you have entered numerous individual positions to form one position for an advantage in trading. This is a popular strategy as it gives you leverage to hedge a position.
Entering a Trade
Make sure that when you enter a 5-0 harmonic pattern trade, you understand the direction the markets are trading. This assures you of better success in trading. You can take a trade if it has:
- The right reason for trading
- A trade trigger to tell you it’s time to trade
- A stop-loss order to mitigate your losses
- The right profit potential
- A safe reward to risk ratio
Setting Stop Loss Targets
Setting up stop-loss targets means you identify the times during the trading that you will place a stop-loss order. For long trades, the stop-loss order is placed just below the most recent swing low. However, in short trades, it is placed above the recent high swing.
Setting Take-Profit Targets
The take profit targets can be identified based on chart patterns. Trend charts will show when the asset’s price tends to be up and when they drop. Since you can tell the tendencies of the market you are trading in, it is possible to set up your profit targets.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
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Conclusion
The harmonic pattern uses a more precise risk ratio, so traders can achieve better price rewards. The patterns enable you to stop and start trading, depending on the future movement of prices. This is because harmonic patterns work exceptionally with market context and symmetry helping traders make calculated moves.
Using 5-0 patterns allows you to achieve more efficient trading as long as you:
- Use the technical indicators
- Work with trading best practices
- Learn to locate 5-0 patterns in trading
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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