Best Chart Patterns for Cryptocurrency Trading
Do you sometimes look at crypto price charts and get confused by all the ticks, bars, and representation therein? Do they even make sense; you might ask yourself? Where are these best chart patterns for crypto experts to keep on talking about? And why are folks so comfortably making price predictions out of this Bitcoin or Ethereum price action mess?
Well, it may look messy at first, true. However, confusing as they may appear; they are rhythmic and after all, created by traders’ (human’s) impulses of buy and sell. All those buy and sell orders conducted simultaneously by fundamentalists, traders with no idea of what the heck is happening, chartists, and even those combining different approaches for signal generation, are reflected every second, minute, hour, daily, weekly, and monthly on price charts.
Therefore, as long as they may seem intimidating, decrypting these chart patterns is necessary. It is especially vital for traders who want to make sense of the crypto market now worth trillions. By decrypting these movements, a trader stands a chance to make money. Besides, who knows, they can amass a fortune out of the deep crypto market whose heart beats every day of the week, unlike the stock and other traditional markets.
What are the Best Chart Patterns for Crypto?
To understand what chart patterns are, we must first know that they are a creation of technical analysts. These are chartists who base their trading signals on the development of price charts. For them, price action is king. They are firmly convinced that despite all the chatter and rumors about crypto market manipulation, the market is efficient. They maintain that price action is a merger of all fundamental and technical factors revealing the state of the market at all points in time.
If this is the case, therefore, chart patterns help assess the market psychology using price action. Since price action interpretation on the same pair can vary between analysts, it means chart patterns are subjective depending on the interpreter. Depending on who is reading, chart patterns can convince a trader to go long or short—or even stay neutral. Chart patterns are used to gauge market sentiment at any point in time. When chart patterns are combined with technical analysis, they can be more effective in making trading decisions.
Most Reliable Chart Patterns for Cryptocurrency Traders
Most chart patterns are created using trend lines, connecting higher highs or lower lows to build psychological barriers of support or resistance. Because chart patterns are subjective, they are over a hundred patterns identified by traders. Even so, only a handful of these patterns have survived the test of time. But still, a trader will use them depending on whether they work best for them.
For those chart patterns that survived the test of time, these are the best chart patterns for crypto:
Rectangle patterns are continuation patterns forming when prices are rallying or crashing. In either case, when the primary trend slows down resulting in a horizontal consolidation, connecting highs and lows forms a rectangle.
The rectangle pattern is marked by perfectly horizontal price formation where resistance and support levels are parallel. If the sideways movement is an accumulation, prices will break above the resistance level to continue the main trend. On the flip side, if sellers are in control and the sideways movement forces crypto prices lower, then the rectangle would be a distribution.
How to Trade Rectangle Pattern?
A trader should wait for a breakout, preferably in the direction of the previous trend. Once the breakout occurs, a trader should buy (or take a short position, in a case if the price drops below the lower boundary). The height of the rectangle should be used as our target. Stop-loss can be placed just behind the line, with some additional space that will allow your trade to breathe.
2. Ascending or Descending Price Channels
Channels form by connecting higher highs using trend lines to create psychological resistance and lower lows on the other end to create support.
In an uptrend when crypto prices are expanding, the reaction at resistance and support levels could shape the coin’s trajectory. A break below the support trend line could indicate weakness and possibly a correction deeper.
On the other hand, an upsurge above the resistance level may indicate strength and possibly more room for upsides in upcoming sessions in a descending channel.
How to Trade Channels?
Once the price breaks above or below one of the trendlines, we can take a position in the direction of the breakout. Stop-loss can be placed just below the trendline and channel height should be used as a target.
3. Ascending, Descending, and Symmetrical Triangles
In cryptocurrency charts, triangle patterns form by connecting tapering lows or highs using trend lines depending on the dominant trend. Joining the two trend lines form a triangle capping the coin’s price action. Depending on the breakout direction, crypto prices may trend higher in continuation of the main trend or dip in a counter move.
An ascending triangle can be a bull flag—or a pennant. Meanwhile, in a bear run, a descending triangle forms, registering a bear flag.
Either way, traders anticipating breakouts in anticipation of trend continuation can place targets at the height of the triangle.
On the other hand, a symmetrical triangle pattern forms when the connecting trend lines marking psychological resistance and support levels converge. Depending on the state of the market, a symmetrical triangle can be bullish or bearish.
However, note that a symmetrical triangle is usually a continuation formation. Accordingly, if the crypto run was bullish and a symmetrical triangle forms, it is highly likely that prices will continue trending higher.
But this doesn’t work at all times especially in a choppy market. In that case, the primary trend might reverse, favoring the counter move. This is why chartists use a symmetrical triangle as a bilateral chart formation useful in a volatile market.
How to Trade Triangles
Trading triangles is easier. All a technical analyst needs to know is the primary trend. Ascending and descending triangles form in bullish and bearish runs, respectively. Once this dominant trend is identified, a trader needs to establish support—in an ascending triangle—and resistance—in a descending triangle.
A high volume close above resistance (support) invalidates the downtrend (uptrend), swinging to favor buyers (sellers). However, suppose there is a close below the support (resistance) trend line with equally high trading volumes. In that case, sellers (buyers) stand to be in control. In that case, every high (low) may offer entries in a bear (bull) trend continuation pattern.
Meanwhile, symmetrical triangles can form in a buy or bear trend. Typically, breakouts tend to happen in the third section of the triangle near the apex. If the breakout has notably high trading volumes, the dominant trend will continue if the new trajectory aligns with the previous defining trend. On the flip side, the primary trend would be invalidated if the breakout counters the former.
Depending on the breakout direction, traders can align their positions accordingly to ride the trend. In all, a trader needs to incorporate a technical indicator to weed out false signals. If the breakout above or below the triangle syncs with the technical indicator, the probability of continuation in the newfound direction is often high.
Often, the target for traders will be the height of the triangle measured from the breakout level.
4. Double Top and Double Bottom Patterns
This is a bear reversal chart pattern that traders can use to pick out peaks, marking the end of a bull run.
A double top forms when the price expands to a higher point, pulling back to the initial support line—the base of the previous rally—before rising back to around the previous high and retracing. Only that the second retracement is more permanent, forcing crypto prices below the primary support—the neckline.
Still, a trader shouldn’t commit to selling once the neckline breaks. Ideally, the break below should be with high trading volumes. In that case, the bear target would equal the height between the neckline and the registered double-peak.
A double bottom is the opposite of a double top and is a bullish reversal formation, forcing at the end of the bear run.
A close above the neckline—in this case, the resistance line above the bottoms—will signal strength, driving demand and therefore lifting crypto prices higher.
Like a double top, the break above should be with high trading volumes indicating demand and participation from the wider trading community.
How to Trade Double Top and Bottom
In this formation, all a trader has to do is watch whether the neckline holds. If prices expand beyond the identified resistance (support) neckline in a double top (bottom), the technical pattern is invalid and buyers (sellers) are in a commanding position.
In this case, the trader would better trade with the dominant trend, using previous resistance—in a double top—or support—in a double bottom—as stop levels.
However, if the pattern turns out to be accurate, rejection from resistance or support would provide entries. To manage risk, the tops and bottoms would be stop-loss levels which, if retested, invalidates the candlestick formation.
For risk management and planning, the take profit level should be equal to the depth or height of the formation measured from the neckline from resistance (in a double top) or support (in a double bottom) on the breakout.
5. Cup-and-Handle Pattern
This is one of the best chart patterns for crypto technical analysts. Shortened for C&H, this is a bullish continuation patterns.
The cup forms during periods of indecision when the market stalls in its uptrend. The deeper the “cup”—which is a rounded bottom formation, the stronger the expected breakout, translating to higher price targets.
Often, when crypto prices pick up from the cup, it enters a brief period of a retracement where prices trend lower inside a descending channel forming the “handle”. Afterward, crypto prices tend to expand rapidly above the descending channel and the resistance line—the neck—in continuing the primary trend.
Traders can take advantage of the breakout formation. There, they can load on dips especially if the defining bar has high trading volumes. Often the price target will equal the depth of the cup—which is the distance from the neckline to the depth of the cup.
How to Trade Cup-and-Handle Pattern
A trader should first pick out the pattern to successfully trade this rather complex formation. Since it is only valid in a bullish formation, timing is essential. The neckline (resistance) is the all-important level.
If this line is broken with a bull bar with considerably high trading volumes relative to other recent bars, a trader can place long positions with a stop loss below the former resistance–now support. If, however, the trader misses the breakout, they can wait for a retest.
Often, prices would cool off, only to rebound from the newfound support levels. In this case, the trader can stack longs in the direction first defined by the original breakout bull bar, which had high trading volumes.
To stay safe, a fitting stop loss should be at the lows of the breakout bar. If prices break below the support and the breakout bar’s lows, the cup-and-handle formation is immediately nullified. Meanwhile, the trader’s target should be the size of the depth of the cup measured from the breakout (resistance) level.
6. Head-and-Shoulder Formation: Top, Bottom, and Continuation
The Head-and-Shoulder pattern is also abbreviated as H&S. It is one of the most used chart patterns for crypto by chartists. If anything, this is an extension of the double top/bottom and is a variant of the triple top/bottom formation depending on the primary trend.
The H&S formation has a pronounced middle peak—forming the head—and winging peaks on either side forming the shoulders. Marking peaks in an extended strong uptrend, a price will rise to form the first peak (shoulder), retrace back to the neckline, expand to register a higher peak (head) before falling to retest the neckline. Bulls will then flow back one more time to force the coin towards a peak whose height is roughly equal to the first peak—forming the second shoulder), before dropping, crashing below the neckline as bears take charge.
Technical analysts always consider the H&S formation as a reliable crypto chart formation. If prices fall below the neckline—the shared support, then it forms a top. In a bear run, an inverse H&S formation prints. Therefore, if prices break above the neckline—the resistance level—then the bear run would be over. Subsequently, this would mark the entry of buyers.
In some instances, H&S formation prints in a consolidating market mostly in lower time frames before the main trend resumes. In this case, the H&S formation can be used to identify trend continuation. Traders can use the depth or the height of the head from the neckline as price targets on the breakout.
How to Trade Head-and-Shoulder Pattern
The gist when trading this pattern is to pick out the neckline. Fortunately, all variants of the head-and-shoulder formations take the shape of M-when prices are peaking—or W-when prices are bottoming up.
In reversal after the bear-run–and whenever there is an identified inverted H&S, the target can be the depth of the bottoms and vice-versa in a typical H&S formation. Either way, a close above or below the neckline validates the pattern, allowing traders to place long or short positions in the direction of the newfound trend, invalidating the original trajectory.
The probability of the new trend continuing is also directly proportional to the rapidity of the breakout. Thus, the higher the trading volumes, the stronger the momentum and the higher the chance of continuity.
To place targets, the take profit level should be equal to the depth of the W or M-formation depending on the breakout direction.
Efficacy of Best Chart Patterns for Crypto: The Results are Out
They say numbers don’t lie and in crypto, prices don’t lie.
When Bitcoin and ETH raced to all-time highs, some traders, applying different strategies, made a fortune with others burning their fingers.
Combining technical analysis and the best chart patterns can yield impressive results. And based on data collected and analyzed over the past five years from 2017 to November 2021, the Head-and-Shoulder formation seems to be the most reliable pattern. Most of this formation’s signals went to hit targets as data shows.
The second and the most frequent form is the rectangle pattern which formed 422 times with take-profit targets at a rate of 65.9 percent.
Other reliable chart patterns for crypto trading include triangles–descending, ascending, and Symmetrical–posting a success rate of about 58 percent.
Meanwhile, the cup-and-handle formation has a success rate of 55.3 percent.
Traders can choose to use any crypto strategies to pick out long or short signals.
However, technical analysis has proven to be one of the most used. In that case, having a thorough understanding of the importance of the above best chart patterns for crypto trading is useful as statics show.
Picking these patterns from the “mess” of fast-moving crypto prices would be a useful skill in creating strategies and even for risk management when trading.
In combination with fundamental or sentimental analysis, any of the above best chart patterns can be useful for your cryptocurrency trading, positively impacting profitability and risk mitigation.
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