What Is The 5-0 Pattern & How To Trade With It

5-0 Pattern

The 5-0 pattern is a type of Harmonic pattern that describes a potential reversal at point D.

Developed by Scott Carney and mentioned in the book, “Harmonic Trading of Financial Markets: Volume two,” the 5-0 is a recent Harmonic pattern family member.

What is the 5-0 pattern?

The 5-0 pattern compromises of five legs (X, A, B, C, and D). These legs or points depend on Fibonacci ratios to complete the 5-0 pattern. The five legs create highs and lows five times before finally signaling a reversal at point D.

Although the pattern has five legs, the first step of the 5-0 takes place at point 0. This makes the pattern one of a kind.

This how the pattern appears on the chart:

5-0 pattern on a chart
5-0 pattern on a chart

 

To identify the pattern, traders need to go through a few rules. They are:

  • AB should retrace between 1.13 and 1.68 of the XA leg.
  • BC should retrace AB leg between 1.61 to 2.24.
  • CD should retrace BC leg at 0.5.

After its formation, traders take their positions at point D.

The traditional Harmonic patterns have a structure similar to M and W. As the above chart illustrates, the pattern kind of looks like W with an additional leg.

Some people think that the Shark pattern is identical to the 5-0 pattern. They are partially correct. The 5-0 pattern does resemble the Shark and contains similar Fibonacci ratios. However, the difference lies at the point D. There is no point D in the Shark pattern.

How to use the 5-0 pattern?

The 5-0 has two variations; bullish and bearish.

a. Bullish 5-0

The bullish 5-0 occurs in a downtrend and presents a reversal at point D. Traders can take their long positions at point D with stop-loss placed near it.

Bullish 5-0 pattern
Bullish 5-0 pattern

b. Bearish 5-0

The bearish 5-0 emerges in an uptrend at signals a potential reversal at leg D. Traders can take their short positions at point D with a stop-loss set near its high.

Bearish 5-0 pattern
Bearish 5-0 pattern

Scott Carney suggested that traders should notice the pattern at the OX leg when there is a strong upward (in case of bearish) and downward (in case of bullish) movement. He described this sharp movement as an Extreme Harmonic Impulse wave with the Fib ratio of 88.6. Besides this, traders should be careful about entering at point D. It is often common to wait for the confirmation of a trend reversal.

In situations where the 5-0 produces false signals, other technical analysis can help. If a trader observes the pattern, it is a series of highs and lows. This means the price can move in favor of or against the trader’s will. So, by combining the 5-0 with other indicators, a trader can pinpoint the trend’s direction.

5-0 pattern trading strategy

The 5-0 pattern can give distorted signals on shorter timeframes. Therefore, one may wish to look for the 5-0 pattern on longer timeframes.

The short-term traders can take advantage by predicting the direction of the trend with 5-0 and then apply the analysis for short-term trading.

5-0 pattern buy strategy

  • Locate the pattern in a downtrend.
  • Wait for the price bar to go bullish before entering.
  • Enter the trade at point D.
  • Place a stop-loss near the recent low from D leg.
  • Exit the trade before the price declines.

5-0 pattern sell strategy

  • Look for the pattern in an uptrend.
  • Wait for the price bar to go bearish before entering.
  • Enter the trade at point D.
  • Set a stop-loss near the recent high from D leg.
  • Exit the trade before the price rises.

5-0 pattern conclusion

The 5-0 pattern is a potential indicator of a price reversal. To identify the pattern, traders need to consider the points mentioned above and may only wish to trade after confirming a trend.

The 5-0 Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

I would prefer to use the majority of candlestick patterns such as the 5-0 Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.

The 5-0 Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the 5-0 Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the 5-0 Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!

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