Certain chart patterns that emerge when performing technical analysis can give traders and investors insights into price movements and momentum in crypto markets. Learning the most popular chart patterns is a perfect introduction into this important aspect of crypto trading.
What are trading chart patterns?
A chart pattern is a shape or pattern that forms in relation to past price movements of a cryptocurrency as shown on a chart. Trading patterns are identified by a price line, for instance, by tracking daily closing price or highs or lows within a specific time frame. The shape that becomes defined by the pricing history helps investors envision what the price will do next.
Now it’s time for an introduction to each of the 10 most popular chart patterns in crypto.
Continuation patterns signal that an ongoing trend is likely to continue. Sometimes referred to as “consolidation patterns”, they may indicate a temporary period of consolidation or sideways movement prior to continuing in the trend’s direction.
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Examples of continuous chart patterns include Triangles, Cup & Handle, and Flags:
1 Ascending triangle - Bullish
How to spot: The ascending triangle pattern emerges during a trend to signal a continuation of that trend. The pattern is made up of 2 converging trendlines, a flat upper trendline, and a rising lower trendline.
Indications: As the price moves sideways, traders look for a breakout to enter a trade.
2 Descending Triangle - Bearish
How to spot: Opposite to the ascending triangle, the descending triangle also occurs mid-trend and signals the continuation of a downtrend. The pattern is formed by drawing 2 converging trend lines that are moving in a sideways motion.
Indications: Traders use the descending triangle to look for a breakout as a signal that demand is weakening and downside momentum will likely continue.
3 Symmetrical Triangle - Bullish / Bearish
How to spot: The symmetrical triangle chart is easy to spot by its pattern of multiple lower highs and higher lows. When the points connect, the trend lines converge to create the symmetrical triangle pattern.
Indications: Traders look for a breakout in either direction for a bull or bear signal to sell or buy.
4 Cup & Handle - Bullish
How to spot: The cup and handle chart pattern is a bullish continuation pattern that resembles a tea cup, with the cup signifying a change in price direction from bullish to bearish.
Indications: Crypto traders look for when a high forms on the right side of the cup, where a pullback occurs forming the handle. Cup and handle charts generally occur when a price is trending downward followed by a period of stabilization and provides traders with clear entry and risk levels.
5 Bullish Flag - Bullish
How to spot: A bullish flag emerges when a market consolidates into a narrow range following a sharp price move. The flag’s ‘pole’ is the vertical rise in price that follows a period of consolidation. The flag appears as a small rectangle (the consolidation) connected to the pole.
Indications: Technical analysts look to enter a trade when the price breaks out above or below the flag’s upper or lower trend line.
6 Bearish Flag - Bearish
How to spot: The bear flag continuous chart pattern signals an extended downtrend after a temporary pause. The pattern is activated when the support line is broken as price action continues its downward trend.
Indications: Traders typically will place stop-loss orders above the resistance line of the flag.
A reversal pattern indicates a change in direction, either from a rising to a falling market or vice versa. Traders use reversal patterns to detect instances of a bull or bear market losing control, signaling a change in direction. Generally, the current trend tends to pause before moving in a new direction.
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7 Normal Head & Shoulders - Bearish
How to spot: A head and shoulders chart pattern helps traders identify when an uptrend has reached its end and a price reversal may be getting underway.
Indications: When trading the head and shoulders chart, traders watch for the price action to fall below the neckline, determine a profit target by measuring the pattern’s height from the peak to the head, and may open a short position.
8 Inverted Head & Shoulders - Bullish
How to spot: The inverted head and shoulders is simply the inverse of the bearish head and shoulders chart pattern. It signals a market reversal and change in trend from bearish to bullish.
Indications: When a trader expects the price line to move above the neckline, they can calculate the difference between the high and low price point, determine a profit target, then enter a long position when the price breaks above the neckline.
9 Double top - Bearish
How to spot: The double top reversal chart pattern forms when a crypto attains a high price twice consecutively with a moderate price drop between the two highs. Once the crypto price falls below a support level equal to the low between the 2 highs, the double top is indicated.
Indications: The double top signals that buying pressure is almost finished and a reversal is soon going to occur, indicating short positions for traders.
10 Double bottom - Bullish
How to spot: The double bottom is a reversal chart pattern involving two similarly low price points that form around a similar horizontal level with a moderate peak in between them.
Indications: The double bottom signals that a downtrend has bottomed out and a reversal may soon occur, indicating long positions for crypto traders.
Crypto markets require that traders and investors DYOR as a way to manage risk and stay ahead of the game. Learning the most used chart patterns in technical analysis helps to keep traders “in the know” when it comes to price movements, momentum, and trends.
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Disclaimer: The content of this article is for general market education and commentary and is not intended to serve as financial, investment, or any other type of advice.