Bearish and Bullish 5-0 Pattern in Trading
5-0 Harmonic Pattern Trading Guide
What is the 5-0 harmonic pattern?
The harmonic 5-0 pattern is a relatively new pattern, just like the shark pattern. This pattern was identified by Carney, who discussed it in the second volume of his harmonic trading series, “Harmonic Trading: Volume Two.”
One of the designs with the wonkiest appearance is the 5-0 pattern. The 5-0 will appear differently depending on your level of harmonic pattern knowledge, primarily because the 5-0 pattern starts with a 0. 0XABCD will surely appear different if you are used to viewing XABCD.
Despite being very young, the patterns have recently grown in popularity. Because it is intended to start a new trend rather than find retracement, it differs from the other harmonic patterns. This pattern comes in both bullish and bearish variations.
We can reliably identify the rebound thanks to the convergence zones found using the shark pattern, but the prior trend may not always return as a result. On the other hand, routine rollbacks are intended to assess the capacity of the forces (bears or bulls) that dominated the market during the previous time to regain the initiative. If they are insufficient, the final trend reversal takes place, but it does so within a different pattern—the 5-0 harmonic pattern.
How to find out the 5-0 pattern
Unlike other harmonic patterns that begin with X, the 5-0 pattern starts at 0. It begins at 0, and at D it is over. The symbol for this pattern is 0XABCD.
There are predetermined Fibonacci ratios for each wave that can be used in trading to identify the 5-0 pattern on the chart. To find the 5-0 pattern, you must adhere to these ratios.
- An initial wave is 0XA. After this wave, the pattern begins.
- The AB wave must retrace the XA wave between 1.13 and 1.618.
- The retracement of the BC wave must be between 1.618 and 2.24. Wave ABCD must retrace to BC0.5
- In the 0 to X wave, Point C should be located between 0.88 and 1.13.
Bullish 5-0 pattern
A higher-high at point C and lower lows made by the 0XAB wave to symbolise a bearish wave are prerequisites for a bullish 5-0 structure.
The bears will become bulls if the bearish trend is broken because it is a reversal chart pattern. After point C’s bearish trend breakout, we will only join the 5-0 bullish pattern on the slight retracement.
Bearish 5-0 pattern
Point C must create a lower bottom in the bearish 5-0 pattern, and 0XAB must signify a bullish wave formation of higher highs.
The bullish wave becomes a new bearish wave when this pattern emerges. At the end of a trend, it forms. It offers a high-risk payoff because it denotes the beginning of a new bearish trend.
What does 5-0 harmonic pattern indicate?
This harmonic pattern alerts traders to the impending beginning of a fresh impulsive wave. A new trend will begin now that the previous trend has finished.
Fibonacci ratios are wholly necessary for the 5-0 pattern. Any Fibonacci ratio that fails to satisfy a particular requirement is considered to be an invalid pattern. This characteristic renders it a wholly natural and legitimate chart arrangement. Fibonacci is a natural pattern that is effective.
How it represents trend reversal?
Basically, a wave becomes a bearish wave when it makes lower lows and lower highs. However, when a higher high occurs following a bearish wave, the trend is reversed, and it also functions on this basis. It becomes a more reliable chart pattern that can be employed in trading when fixed Fibonacci ratios are added.
What does the 5-0 pattern tell traders?
A long entrance is suggested by the 5-0 harmonic chart pattern upon pattern completion or confirmation of the pattern’s D point. The pattern, a distinctive 5-point trend reversal structure, usually represents the initial pullback of a significant trend reversal. It is a relatively recent pattern with four legs and specific Fibonacci measures at each point, allowing for a more adaptable interpretation. Compared to other harmonic chart patterns, the Potential Reversal Zone (PRZ) is described in a distinct way.
More evidence is sought after by cautious traders before entering a position. Since the reversal point may mark the start of a new trend, targets for this pattern are up to the trader’s discretion. The next crucial level for the Fibonacci sequence or a structure level past the D point is common stop-loss levels.
How to trade when you see the 5-0 pattern?
Looking at this pattern from the perspective of a weary and dissatisfied trader is one of the finest ways to interpret it. We may understand this by using the bullish 5-0 pattern as an illustration. B being below X at the end of the AB leg creates a lower low. The following move is longer in duration, with the BC leg taking the longest to complete and C coming out on top of A.
The transition from point B to point C can resemble a bear flag or bearish pennant. C to D represents severe shorting pressure and a bearish expectation of fresh lows. Instead, we reach D, which is BC’s 50% retracement. We obtain a confirmation swing establishing a higher low rather than brand-new lower lows. That action will probably result in a big corrective action or a brand-new trend reversal.
The elements of trading the pattern
- At the commencement of an extended price move, the pattern begins (with 0).
- The extent of an impulse reversal at X, A, and B after 0 has developed should be between 113 and 161.8 percent.
- C must extend beyond the 161.8 percent extension but not past 224 percent in order to meet the forecast off of AB.
- D is identical to AB and represents the 50% retracement of BC.
- AB=CD must be reciprocated.
Drawing the pattern properly
First, we must identify the X and A points of the pattern in order to accurately draw or detect a 5-0 harmonic chart pattern on the price chart. A strong bearish trend’s bottom is where the X point is located. At the peak of a bullish trend is where the A point is located. To get the B point of the chart pattern, traders must next construct a Fibonacci retracement tool from X to A. The 113 percent to 161.8 percent Fibonacci retracement of XA should contain the B point.
The entry point, or D point, of the 5-0 harmonic chart pattern will be obtained in the final step. By drawing a Fibonacci retracement tool from B to C, you may determine the pattern’s D point. The 50 percent Fibonacci retracement of BC must be where the D point is.
When the pattern’s D point is confirmed, traders can be confident. Additionally, the lower support level should serve as the order’s stop-loss. Therefore, the order’s profit goal should be set within the CD’s 50 to 88.6 percent Fibonacci retracement.
If the D point of a bearish harmonic chart pattern is on the C axis, that area can also be traded. If the entry are supported by the other technical analysis tools, the B point can be traded.
5-0 is a more intricate sort of harmonic pattern, but because it confirms a trend reversal, it has a high chance (lower low and higher high). If you discovered this pattern on the chart, I strongly advise you not to miss any opportunity related to it.
Don’t forget to backtest this pattern at least 100 times, though, before using a live account to trade it. Backtesting will also help you understand this pattern visually better. Additionally, it will let you know which pattern frequently works and which does not.