Before starting this lesson, you should first have read through:

The Crab pattern is similar to a Butterfly pattern in that it is a reversal pattern composed of four legs marked X-A, A-B, B-C and C-D.

The Crab is another reversal pattern that allows you to enter the market at extreme highs or lows.

Like the Butterfly, it can help you identify when a current price move is likely approaching its end. This means you can enter the market just as the price reverses direction.

However, while the Butterfly pattern ends at a point that represents a 127% Fibonacci extension of the initial X-A leg, the Crab ends at a point that represents an even deeper 161.8% Fibonacci extension of the X-A leg.

The Crab's inner retracements are also slightly different to those of the Butterfly.

As with many patterns, there is a bullish and a bearish version of the Crab.

How to identify the Crab pattern

See the price chart below for an example of what a bullish Crab pattern looks like:

crab1st

As shown above, the Crab pattern looks very similar to the Butterfly pattern, with four distinct legs labelled X-A, A-B, B-C and C-D.

X-A

In its bullish version, the first leg forms when the price rises sharply from point X to point A.

A-B

The Crab is very similar to the Butterfly pattern but the final C-D leg makes a deeper 161.8% extension of the initial X-A leg and the pattern's inner retracements are also slightly different.

The A-B leg then sees the price change direction and retrace 38.2% to 61.8% of the distance covered by the X-A leg.

B-C

In the B-C leg, the price changes direction again and moves back up, retracing 38.2% to 88.6% of the distance covered by the A-B leg.

C-D

The C-D leg is the final and most important part of the pattern. As a trader you would place your long (buy) trade at point D as this is where the bullish Crab pattern completes.

A major difference with the Crab pattern over the Butterfly pattern is you look to place your trade entry order at the point where the C-D leg has achieved a 161.8% Fibonacci extension of the X-A leg.

Note: point D will not always be exactly the same as the 161.8% extension, however, if point D is the same as the 161.8% extension, it means that the signal to enter is stronger.

Ideally, point D should also represent a 224% – 361.8% Fibonacci extension of the B-C leg.

MetaTrader 4 can automatically add Fibonacci extensions

The following shows you how this looks on a chart using the Fibonacci tool on MT4.

If you apply the Fibonacci tool to your MetaTrader 4 platform, it can automatically mark key Fibonacci levels on your chart.

The chart below shows what a bullish Crab pattern looks like with the Fibonacci retracement and extension levels marked on the X-A and B-C leg:

crab1

If you want to know how you can configure the Fibonacci tool in MT4 in order to get the various levels that you need, you can go to the following tutorial:

Article
How to set up Fibonacci retracement levels in MetaTrader 4.
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Checklist for the Crab pattern

Before you try and trade the Crab pattern, confirm from the following checklist that the pattern is authentic. It should include the following key elements:

  • An extension of the AB=CD pattern
  • A 224% – 361.8% Fibonacci extension of the B-C leg
  • A 161.8% Fibonacci extension of the X-A leg

How to trade the Crab pattern

We will now look at a way you can trade the Crab pattern, using a bullish Crab as our example.

Entry

Identify where the pattern will complete at point D – this will be at the 161.8% extension of the X-A leg. Place a buy order here.

See the chart below for an example of this:

crablong

el1 Long entry

Stop loss

Place your stop loss just below point D, as below:

crabstop

el1 Long entry
sl2 Stop loss

Profit target

Where you place your profit target with this pattern is highly subjective and depends on your trading objectives as well as market conditions.

If you want an aggressive profit target, however, you can place it at point A of the pattern. For a more conservative profit target, place it at point B.

See the chart below for an example of this:

crabprofit

el1 Long entry
sl2 Stop loss
tp3 Conservative take profit
tp4 Aggressive take profit

Try the following exercise to practise placing your entry order and stop loss:

Exercise 1: Place your entry and stop loss Show exercise

How to trade a bearish Crab

To trade a bearish Crab pattern, place your short (sell) order at point D (the 161.8% Fibonacci extension of the X-A leg), position your stop loss just above point D and place your profit target at either point A (aggressive) or point B (conservative).

See the chart below for an example of this:

crabbearish
es1 Short entry
sl2 Stop loss
tp3 Conservative take profit
tp4 Aggressive take profit

Summary

In this lesson, you have learned that …

  • ... the Crab is a reversal pattern that allows you to enter the market at extreme highs and lows.
  • ... it is similar to the Butterfly pattern but the final C-D leg makes a deeper 161.8% extension of the initial X-A leg.
  • ... to trade the Crab, enter the market with a long or short trade at point D of the pattern – the price should reverse direction here.
  • ... place your stop loss just below (bullish trade) or above (bearish trade) point D.
  • ... for an aggressive profit target, place your take profit order at point A.
  • ... for a more conservative profit target, place your take profit order at point B.

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