Studying the peculiarities of the formation and construction of trading strategies based on the popular pattern
The convergence zones identified with the help of the Shark pattern allow us to identify the rebound quite accurately, but do not necessarily result in the restoration of the previously existing trend. On the contrary, often rollbacks serve to determine the ability of the forces dominant on the market in the previous period (bulls or bears) to get the initiative back to their own hands. If they are not enough, the final reversal of the previous trend takes place, but already within another pattern - 5-0.
Bearish 5-0 pattern
To identify the 5-0 pattern correctly, first you need to find the Shark pattern, wait for the implementation of its targets at 88.6% or 113% and the subsequent rollback in the direction of 50% of the BC wave. The length of this wave in both graphic configurations is 161.8-224% of AB. If after the convergence zones of the Shark pattern are reached, a correction in the direction of 23.6%, 38.2% or 50% has followed, we can talk about the transformation of the original pattern into 5-0.
Bullish 5-0 pattern in the USD/JPY chart
As with the 4-hour chart of the USD/JPY, after the target at 113% of the Shark pattern was reached, it was followed by a rollback in the direction of 38.2% of the CD wave. The trader must search this area for confirmation signals to form a long position. It can be both indicators, prompts from price action, or other tools and techniques of technical analysis. In the above example, a combination of corrective patterns 1-2-3 and Anti-Turtles appeared at the important levels.
Using Victor Sperandeo's 2B Base/Top approach, The entry to the long position is carried out at the high of the bar of the previous extremum. A simpler methodology for 1-2-3 assumes opening a long position at the break of the correctional high at point 2. Profit is taken after reaching the target benchmark for another bullish pattern 5-0. If the trader uses a floating stop order, the effectiveness of their trade increases.
Strategy based on the bullish 5-0 pattern in the USD/JPY chart
Therefore, it must be understood that in itself a rollback in the transformation of the Shark pattern in 5-0 is not indicative. It may reach the level of 50% according to the classical approach, it may not hold out or, on the contrary, go above it. Most importantly, in the area of convergence, another reversal pattern must appear. It is usually referred to as a subsidiary pattern. Of course, if a trader is accustomed to using other tools of technical analysis, this may be useful too.
Along with the pattern 1-2-3, Three Little Indians works well on the correction. As with the 4-hour chart of the NZD/JPY, its formation followed by the fall of quotations below the low of the bar of the second Indian allowed the trader to form a short position. The exit from it is carried out at the target level at 113% according to the Shark pattern. As in the previous example with the USD/JPY, the use of a floating stop order allows to increase the effectiveness of the applied strategy.
Strategy for the bearish 5-0 pattern in the NZD/JPY chart
It should be noted that the rollback within the transformation of the Shark in 5-0 reached 61.8%. Typically, if the quotes of the currency pair go above 78.6% and 88.6% of the wave BC, the risks of the previous trend restoring increase. And, on the contrary, the inability of the bulls (in the example with NZD/JPY) to push them above 23.6% indicates their weakness. Thus, the less deep the correction appears, the greater the chances of getting a reversal of the existing trend.
Pattern 5-0 has a lot in common with other price action patterns, including the Expanding Wedge or the Wolfe Waves. We will talk about this in subsequent materials.
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Price chart of USDJPY in real time mode
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