How to Trade with the 5-0 Pattern

FXOpen

The 5-0 pattern is a relatively new harmonic trading formation revealed by Scott Carney in 2007. It is a reversal setup signalling a change in the direction of the market trend. In this FXOpen article, you will learn more about the 5-0 formation and why it’s worth spotting it on a chart. You’ll find out how to trade it effectively and see a real-market example of the 5-0 setup placed on the TickTrader platform.

What Is the 5-0 Harmonic Pattern?

The 5-0 is a harmonic pattern consisting of five points: X, A, B, C, and D. These form two interlocking features: an AB=CD pattern and a 50% BC retracement. The AB=CD model is composed of two legs (AB and CD) of equal length, linked by a BC retracement. The BC leg projects to point D, in line with the AB leg.

Unlike other harmonic patterns, it does not require a specific alignment of Fibonacci ratios in every case – it is sufficient that it falls within the appropriate range. Like most patterns, the 5-0 formation can be bullish and bearish, depending on the prevailing trend.

Bullish 5-0 Pattern

A bullish 5-0 setup represents a potential reversal of a downtrend. It starts with a downward impulse (0X) followed by an upward correction (XA). Then, the price reverses and forms a downward AB line.

Next, the price resumes the uptrend and forms an upward BC line. Finally, the price reverses again and forms a downward CD line, which is equal in length to the AB and completes the AB=CD formation. In addition, the 50% retracement of BC should coincide with D, which should also form above X.

The completion of the bullish 5-0 pattern indicates that the sellers have exhausted their momentum, and the buyers are ready to take over. Therefore, traders look for buying opportunities near D, expecting a rally in the direction of the XA.

Bearish 5-0 Pattern

A bearish 5-0 setup represents a potential reversal of an uptrend. It starts with an upward impulse (0X) followed by a downward correction (XA). Then, the price reverses and forms an upward AB line.

Next, the price resumes the downtrend and forms a downward BC. Finally, the price reverses again and forms an upward CD line, which is equal in length to the AB and completes the AB=CD formation. In addition, the 50% retracement of BC should coincide with D, which should also form below X.

The completion of the bearish 5-0 pattern indicates that the buyers have exhausted their momentum and that the sellers are ready to take over. Therefore, traders look for selling opportunities near D, expecting a drop in the direction of the XA leg.

How to Spot a 5-0 Pattern

The theory sets out the following steps to spot a 5-0 setup on a chart:

Identify an extended price move. The 0 point will serve as the starting point, and X is the end of this initial move. OX is typically an impulse move.

Identify point A at the end of the retracement from X. The XA structure should ideally form an impulse move.

Draw a Fibonacci tool from X to A to identify point B. It should be between 1.13 and 1.618 Fibo extension of the XA leg.

Draw a Fibo line from A to B. The BC leg, which follows, should be the longest of the structure and should extend between the 1.618 and 2.24 Fibo levels of the AB leg. If the BC leg doesn't reach a 1.618 extension of the AB leg, the pattern is not valid.

After the BC leg has reversed, measure a 50% Fibonacci retracement from point B to point C. This defines point D.

The AB should ideally be equal in length to the CD leg and should extend from point C (forming AB=CD). Check if D lies above X for a bullish 5-0 pattern or below X for a bearish 5-0 pattern.

If all these conditions are met, you have identified a valid 5-0 formation on the chart. You can use any timeframe and trading instrument to spot the 5-0 as long as there is enough price data to form the five points.

Examples of the 5-0 setup

You can use the TickTrader trading platform to identify and draw the 5-0 setup for free.

5-0 Pattern Trading

Once you have spotted a 5-0 pattern on the chart, you may want to use the following rules to apply the 5-0 pattern to your trading.

Entry

The entry point for the 5-0 is at D, where the AB=CD pattern and the 50% retracement of BC converge. This is where the reversal of the trend is most likely to occur. The theory states that traders can enter a long position for a bullish 5-0 pattern or a short position for a bearish 5-0 pattern as soon as the price reaches D or wait for a confirmation signal such as a candlestick formation, a breakout, or an indicator crossover.

Stop Loss

The stop loss for the 5-0 pattern may be placed beyond X, which is the extreme point of the setup. This is where the reversal of the trend is invalidated, and the risk of further losses is high.

Take Profit

The take profit for the 5-0 is based on the Fibonacci extension of the CD leg. The most common targets are the 38.2%, 50%, and 61.8% extensions, which correspond to the potential retracement levels of the new trend. Traders tend to choose one of these targets or use a trailing stop to lock in profits as the price moves in their favour.

Real-Market Example

Let's look at an example of a bullish 5-0 pattern on the GBP/USD daily chart:

As you can see, the price formed a downward 0X from 1.3145, followed by an upward XA impulse. Next was AB, which extended 158.62% of XA. Then, the price formed an upward BC that expanded at 1.65 of the AB and a downward CD that was equal in length to the AB (AB=CD pattern). The 50% retracement of BC overlapped with D, which was above X. These conditions confirmed a valid bullish 5-0 setup on the chart.

A trader could have entered a long position at D, with a stop loss below X and a take profit at the 50% Fibonacci extension of the CD. The trade would have been profitable as the price rallied to reach the target within the following days.

Conclusion

According to its creator, Scott Carney, the 5-0 is a unique technical formation directly linked with Fibonacci ratios. Still, it may provide incorrect signals or be misinterpreted. Therefore, it’s worth practising spotting it on charts on different timeframes.

If you want to learn more about 5-0 harmonic trading, check out the free educational materials on our website or open an FXOpen account and try them in a real-life market.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

Latest from Trader’s Tools

What Is a BTST Strategy, and How Does One Trade It? What Is the Gold/Silver Ratio, and How Do Traders Use It? What Is the Wolfe Wave, and How Can You Trade It? Analytical XRP Price Forecasts: What Are the Expectations for 2024-2030? What Is a Liquidity Sweep and How Can You Use It in Trading?

Latest articles

Indices

Tech Stocks Back in Vogue as Nasdaq 100 Rallies to Record High

The tech-heavy Nasdaq 100 index (US Tech 100 mini on FXOpen’s TickTrader platform) reached a new all-time high on Monday, closing the trading session at 18,684.2 according to FXOpen pricing, fueled by renewed investor enthusiasm for technology

Commodities

Gold Price Reaches Historic High

According to confirmed information, Iranian President Ebrahim Raisi, considered a potential successor to the country's supreme leader, Ayatollah Ali Khamenei, died in a helicopter crash in a mountainous area near the border with Azerbaijan. The helicopter also carried Foreign Minister

Forex Analysis

Commodity Currencies Retreat from Local Highs

Despite the cooling labour market in the US and declining inflation, the American currency continues to move towards new highs. For instance, the USD/JPY currency pair might update the current month's high at 156.70, the NZD/USD sharply

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 60% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.