Top 8 chart patterns to use in crypto trading
Article by CryptoJelleNL
When first getting into crypto trading, it can be hard to know where to start. Technical analysis is generally seen as the cornerstone of crypto trading, and thus many new traders start there, learning everything there is to know about price action, and technical chart patterns.
In that spirit, today's article covers our top 8 chart patterns to use in crypto trading, what they look like, and how they generally play out. Read on to learn everything there is to know about continuation and reversal patterns!
What are chart patterns?
Chart patterns are easily recognisable price structures that can be found across many different timeframes. There are two main categories of chart patterns; continuation patterns and reversal patterns. As the names suggest, continuation patterns are structures that suggest the current trend will continue, whereas reversal patterns suggest the current trend is coming to an end, and the trend will reverse.
Chart patterns have been studied for decades, which gives us a lot of data about their reliability, and their use. Let's dive into different chart patterns that have stood the test of time.
Head & shoulders pattern
The first pattern on our list is known as the head & shoulders pattern. This pattern is a reversal pattern, where a larger peak (the head) is accompanied by two smaller peaks to either side of it (the shoulders). The pattern presents itself in bullish (regular) and bearish (inverse) forms; where the bullish head & shoulders is an upside-down variant of the head & shoulders, as can be seen in the example below.
Two smaller shoulders accompany a larger head. After the second shoulder is completed, a breakout to the upside can be expected. Traders generally use the distance between the top (or in the inverse pattern, bottom) of the head and the neckline to determine a target for this pattern.
Double top and bottom pattern
The double-top pattern is a common reversal pattern, that consists of two (roughly) equally sized peaks in close proximity. It shows buyer exhaustion, as the price fails to break a price level twice in a row. After the second peak forms, the price often breaks down and reverses into an opposite trend.
The below chart on the left shows Bitcoin's peak at 69,000 USD. This was a perfect example of what a double top looks like – two peaks that fail to push higher, followed by a break of the neckline, resulting in a bearish trend.
A double bottom pattern is exactly opposite of the double top, a bullish reversal pattern suggesting seller exhaustion, consisting of two (roughly) equally sized bottoms in close proximity. The above chart on the right shows an example of a double bottom, resulting in a move higher.
Rounding top and bottom pattern
The rounding top and bottom patterns are reversal patterns, that are very easy to identify. The chart below shows an example of a rounded bottom – where a downtrend slowly weakens until it starts trending up again.
Traders generally start buying as the downtrend weakens, and will start adding to their positions when price starts trending up.
Flag pattern
Flag patterns are a continuation pattern, that signals a period of consolidation within a strong trend. They tend to be a perfect time to get into new positions, to take advantage of the trend.
Generally speaking, an explosive move eventually slows down, and enters a brief consolidation, before resuming the trend. Flag patterns can be bullish and bearish, depending on the direction of the overarching trend. The below charts are examples of bullish (left) and bearish (right) flags.
Cup & handle pattern
This bullish continuation pattern shows a period of "pause" before the overarching trend continues. The first part of the pattern (the cup) looks similar to a rounding bottom, while the second part appears similar to a bullish flag.
After the cup is completely formed, the handle forms and the uptrend continues. The below chart shows an example of this in practice – though ideally, the bottom is more rounded than the one in this example.
Wedge pattern
Wedge formations are a type of reversal pattern that often forms when the price pushes into resistance or support. It consists of two trendlines - in a formation that tightens as the pattern progresses. There are two types of wedges; rising (bearish) and falling (bullish). The below charts are examples of the falling (left) and rising (right) wedge.
Wedges generally break out in the opposite direction of the wedge itself – that is, a falling wedge generally breaks out to the upside, and a rising wedge generally breaks out to the downside.
Generally speaking, the falling wedge is more common in a bullish market, and a rising wedge is more common in a bearish market.
Ascending triangle pattern
Ascending triangles are a bullish continuation pattern, that signals consolidation within a strong trend. They tend to be a good time to get into new positions, to take advantage of the trend.
Generally speaking, an explosive move slows down, and enters a consolidation, where equal highs and a higher lows result into compression and eventually, expansion. The below chart is an example of an ascending triangle pattern, and the breakout that follows.
Descending triangle pattern
Contrary to the ascending triangle, descending triangles are a bearish continuation pattern – a consolidation within a strong trend. Descending triangles are generally a good time to take on new positions, to take advantage of the trend.
Generally speaking, an explosive move slows down and enters a consolidation, where equal lows and lower highs result in compression and eventually, continuation lower. The below chart is an example of a descending triangle pattern and the breakdown that follows.
Closing thoughts
All in all, chart patterns are powerful tools that help you spot reversals or continuations. Keep in mind that chart patterns are not foolproof, and may still resolve in another direction than the pattern would follow.
Author's Disclaimer: This article is based on my limited knowledge and experience. It has been written for informational purposes only. It should not be construed as trading or investment advice in any shape or form.
Editor's note: CryptoJelleNL provides insights into the cryptocurrency industry. He has been actively participating in financial markets for over 5 years, primarily focusing on long-term investments in both the stock market and crypto. While he watches the returns of those investments roll in, he writes articles for multiple platforms. From now on, he will be contributing his insights for WOO as well.
Check out his twitter: twitter.com/cryptojellenl
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