Picture this: traders on the hunt for profitable opportunities in the crypto market have two main weapons in their arsenal - technical indicators and chart patterns. The former employs cutting-edge statistics to analyze market momentum, while the latter delves into the market's psychology through price action. But beware crypto trading chart patterns are a slippery slope - their subjective nature can make them a challenging skill to acquire for active traders.
Fret not, for we have got you covered! Let's dive into the seven most sought-after crypto chart patterns and explore how you can utilize them to your advantage. But wait, that's not all - we'll also equip you with some best practices to keep in mind while interpreting these patterns, so you can make the most informed decisions and stay ahead of the curve.
What Are Chart Patterns?
Chart patterns are the art of reading the language of price movements on a chart. At first glance, these movements may seem erratic and random, but traders know that they can reveal valuable insights into market sentiment. To make trading decisions, traders combine these insights with other forms of technical analysis, such as technical indicators or candlestick patterns.
Most crypto trading chart patterns are built using trend lines, which connect a series of highs or lows. These trend lines are crucial as the price often reacts to them as psychological barriers. This is especially true if the price has interacted with them multiple times in the past or if there is a high trading volume when the price approaches these trend lines. In essence, chart patterns are a key tool in a trader's arsenal, enabling them to interpret price movements and make more informed trading decisions.
Top 7 Cryptocurrency Chart Patterns
There are hundreds of different crypto trading patterns out there, but a handful of them have survived the test of time. Since chart patterns are so subjective, there aren’t any “proven” patterns that work better than others, as is the case with less subjective analytical tools. Most traders identify a handful of chart patterns that work best for them.
- Price Channels Crypto Chart Patterns
- Ascending Triangle & Descending Triangle Cryptocurrency Chart Patterns
- Head & Shoulders Crypto Chart Patterns
- Triple & Double Top & Bottom Cryptocurrency Chart Patterns
- Rising Wedge & Falling Wedge Crypto Graph Patterns
- Channel Down & Channel Up Crypto Graph Patterns
- Bullish and Bearish Flag Crypto Graph Patterns
#1. Price Channels Crypto Chart Patterns
Price channels are built by creating two ascending, descending, or horizontal parallel lines that connect a series of highs and lows. These are areas of support (lower) and resistance (higher) and prices tend to bounce between them. Most traders buy toward the bottom and sell toward the top, while breakouts or breakdowns can be significant moves.
In the example above, there’s a descending price channel that the price remains in over the course of two months — except for a false breakdown in late May. Traders would have bought low and sold high throughout this period to realize small gains or maintained a bearish position until the breakout from the pattern in mid-July.
#2. Ascending Triangle & Descending Triangle Cryptocurrency Chart Patterns
Ascending and descending triangles are created with one horizontal trend line connecting highs or lows and a second sloped trend line connecting rising highs or falling lows. The resulting right triangle leads up to a decision point where the price tends to break out or break down from the horizontal line in the direction of the sloped line.
In the example above, there’s an ascending triangle followed by a breakout on high volume. Traders would have entered into a long position following the breakout from the upper trend line with a price target equal to the height of the triangle applied to the upper trend line. In this case, the high volume during the breakout provides great confirmation.
#3. Head & Shoulders Crypto Chart Patterns
The Head and Shoulder is a slightly more advanced chart pattern that's characterized by a temporary high or low, followed by an even bigger move higher or lower, followed by a third move higher or lower that's equal to the first move. The pattern resembles a head with two shoulders that are either right-side-up (bearish) or upside-down (bullish).
In the example above, there’s a bearish head and shoulders pattern that predicts the subsequent sharp decline. Traders would have entered into a short position after the price broke down from the shoulder line (the horizontal trend line) with a price target equal to the distance between the shoulder line and head.
#4. Triple & Double Top & Bottom Cryptocurrency Chart Patterns
When markets bounce off the same resistance (top) or support (bottom) level two or three times in a row, this is known as a triple or double top and bottom chart pattern.
A bullish indication is regarded as a double bottom, while a bearish signal is considered a double top. Both the triple and double patterns are reversal settings, indicating that prices are poised to change direction.
Although double tops and bottoms are significantly more prevalent crypto graph patterns, triple patterns frequently produce greater reversals.
In the example above, there’s a bearish double-top pattern that predicts a decline. Traders would have entered into a bearish position after the price broke down from the prior reaction low in early July. In this case, it’s worth noting that the bearish volume was light compared to the high bullish volume, suggesting that it was a weak pattern.
#5. Rising Wedge & Falling Wedge Crypto Graph Patterns
Rising and falling wedges are similar to ascending and descending triangles, except both the upper and lower lines are sloped in the same direction (but are still converging). Unlike the ascending and descending triangle, rising and falling wedges are reversal patterns. A falling wedge and rising wedges are bullish signals and bearish signals respectively. These signals are also called bullish reversal and bearish reversal patterns as well.
In the example above, there’s a bearish rising wedge pattern that predicts a short-term decline in price amid the longer-term uptrend. Traders would have entered a short position following the breakdown from the lower trend line and realized a modest profit before the uptrend resumed over the following days.
#6. Channel Down & Channel Up Crypto Graph Patterns
The channel down and channel up crypto trading patterns are diagonal parallel lines of exchange range. It develops when parallel support and resistance lines are crossed by an uptrend or decline. It implies either a potential trend reversal or a change in the present trend's slope.
First, using emerging patterns, traders can start trading when the price swings inside the trendlines of their channel if they think the price is likely to stay there. Initiate a trade when the price crosses the channel's trendlines, either on the upper or lower side, with complete patterns (i.e., a breakout). When this occurs, the price may surge in the breakout's direction.
#7. Bullish and Bearish Flag Crypto Graph Patterns
These crypto patterns are expressed by small rectangular trading ranges within diagonal parallel lines for shorter periods of time. It moves against the dominant price trend over a longer time period. It often develops after a rapid gain or collapse and frequently denotes a slight change in trend (or areas of consolidation) prior to the return of the prior trend.
Bullish flags and bearish flags are both examples of flag patterns because it creates a backdrop for entering an established trend that is prepared to continue, the flag pattern is one of the most trustworthy continuity patterns used by traders.
Best Practices to Keep in Mind
Chart patterns are helpful for assessing market psychology, but they are more subjective than technical indicators. In other words, there is no standard definition of “how parallel the shoulders need to be on a head and shoulders pattern” or “when the price might break out from an ascending triangle.” It’s up to each individual trader to define their own shapes.
- Always Seek Confirmation: Chart patterns provide hints into market sentiment, but they shouldn't be the only basis for a trade — you should look for confirmations elsewhere.
- Look at the Volume: Volume plays an important role in analyzing crypto trend patterns. If a breakout occurs on low volume, there's a risk that it could be a head fake or false breakout.
- Set a Stop Loss: Chart patterns can be helpful for setting stop-loss levels. For instance, a good stop loss for an ascending triangle breakout is the lower trend line.
- Try It Out First: Consider paper trading to get comfortable with crypto trend patterns before committing actual capital to trading ideas that incorporate them.
The Bottom Line
Crypto patterns provide traders with insights into market psychology, but they shouldn't be the only tool in a trader's tool belt. It's important to understand technical indicators and other market dynamics to achieve the best results. If you're an active crypto trader, it's equally important to ensure that your taxes are accurate.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
ZenLedger can help you easily calculate your crypto taxes, and also find opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!