Forecasting with Fibonacci and Deep Crab patterns – Official Olymp Trade Blog

Olymp Trade Team

Fibonacci Ratios are Key to Crab Patterns

Fibonacci Ratios are widely used in trading. Primarily, Fibonacci Levels can be used to identify support levels. Also, they can be used in wave analysis.

When R.N. Elliott was developing his theory, N.M. Gartley published his book "Profits in the Stock Market". Gartley suggested using Fibonacci ratios to find patterns that would help understand where the price will go. The Crab Pattern is the most famous one. Let’s have a look at it.

Building Crab Patterns

How Do You Build a Bearish Crab Pattern?

The image above shows the movements the price follows as per the Crab pattern rules. As you can see, it makes four steps or waves, eventually forming a Double Bottom pattern.

• XA reflects the first price drop.
• AB is a correction from 38.2% to 61.8% of the Fibonacci that follows.
• BC is the second price drop. Frequently, it is quite deep and may reach 88.6% of AB. Sometimes, the fall is not very strong and reaches 38.2%.
• CD is the growth phase that comes next. It may span from 261.8% to 361.8% of BC and 161.8% of XA.

This pattern can be used on any time frame. Let's take the American Tower Corporation stock price chart as an example of how this works.

Bearish Crab Pattern Use Example

• First, the stock drops from $32.68 to $29.3. That is XA.
• After that, it gets back up to $31.40. This is approximately 61.8% of the Fibonacci retracement level. Therefore, it corresponds to the AB upward correction.
• The price drops again, leaving the level of $29.30. That corresponds to BC. In this particular case, BC is not 88.6% of AB. Instead, AB and BC are equal.
• CD is formed as the price goes up again. It is just over 161.8% of XA and falls short of 361.8% of BC. After that, a strong downtrend forms.

How Do You Build a Bullish Crab Pattern?

This case is the previous one reversed. Therefore, we will have four steps or waves done by the price that form a Double Top pattern. The ratios between each price step are the same.

• XA reflects the first price rise.
• AB is a correction from 38.2% to 61.8% of the Fibonacci that follows.
• BC is the second price rise. Frequently, it is steep and may reach 88.6% of AB. Sometimes, the rise is not very strong and reaches 38.2%.
• CD is the downward phase that comes next. It may span from 261.8% to 361.8% of BC and 161.8% of XA.

Let's see how it works with the example of the Apple stock price and try to understand where the end of the last wave will be.

Bullish Crab Pattern Use Example

• The rise from the $138.27 level to $182.94 may be taken as XA.
• The following downward AB movement ends at $150.10, which is just over 61.8% of XA.
• The second BC growth phase takes the price up to the level of $179.61.
• Once the second top has formed, the price goes down again. That is CD.

With the Crab pattern rule, our objective is to forecast the target for the CD wave to identify the level where it may end. According to Gartley's theory, CD will likely span from 224% to 361.8% of BC and 161.8% of XA.

For the CD wave to be equal to 161.8% of XA, the price has to stop at about $109.7 or simply drop below $110. Here is our deep Crab Pattern. After that, we can wait for the price to start rising.

Learn and Practice

As effective as the Crab Pattern rule may be, it requires skills and experience for consistent results. As always, we recommend traders to use it in combination with the other technical tools, abundantly available on the Olymp Trade platform.

Risk warning: The content of the article does not constitute investment advice and you are solely responsible for your trading activity and/or trading results.