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. Harmonic patterns are chart patterns that form part of a trading strategy. They can help traders to spot pricing trends by predicting future market movements. They create geometric price patterns by using Fibonacci numbers to identify potential price changes or trend reversals.
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:
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. Because it’s a reversal chart pattern so a break of the bearish trend will turn the bears into bulls. In a 5-0 bullish pattern, we will enter only on the minor retracement after bearish trend breakout by point C.
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. When this pattern forms, it turns the bullish wave into a new bearish wave. It forms at the end of a trend. As it signals the start of a new bearish trend, it can sometimes give a high-risk reward.
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 consists of 6 points: 0, X, A, C, and D. That is why, perhaps, the author gave it such a weird name, provided that normally patterns consist of five points on the chart.
Visually, the pattern looks like an inverted Head and Shoulders, and both can be called trend reversal patterns.
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.
The main thing to remember is the correct position of point D. It forms near the correction level of 0.50 of the strong BC move. The price must bounce off the price channel border.
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 is a chart pattern that possesses only two numbers – the 50% retracement of the BC leg and the Reciprocal AB=CD Pattern.
5-0 pattern totally depends on Fibonacci ratios. If any Fibonacci ratio is not meeting a specific criterion, then it will be an invalid pattern. This feature makes it a totally natural and valid chart pattern. Because Fibonacci is a natural pattern, and it works.
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.
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