On the most fundamental level, traders use visualization as a crucial element to technical analysis. Patterns showcase the unique ability of our brains to locate patterns and build models by comparing price charts to separate historical price movements.
These price formations tend to correspond to similar historical price movements, due to the fact that crowds tend to react to similar situations in similar ways.
View a chart as a “log” of crowd behavior, in order to better understand why price history can help us gauge the current state of the market. Price history not only allows us to spot the current mood of participants, but most importantly, the balance between buyers and sellers.
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On the other hand, your mind can play tricks on you as well. Traders tend to see patterns that aren’t necessarily there and confirm these subconsciously. Psychologists call this “confirmation bias”. It is the most notorious enemy of traders and investors alike.
While visualization is an important and necessary tool for traders, especially experienced ones, never treat a chart or pattern as the end-all be-all. They aren’t magical tools, however in experienced hands, they can boost your returns and help you find great trading opportunities, while protecting your investment.
Support and resistance levels can be seen as the most basic (sometimes most reliable) chart patterns. As a general rule, simplicity is extremely helpful when formulating your trading strategy. Over complicating your charts with a plethora of charting tools and indicators will only lead to confusion. You can certainly find some confirmation on complicated charts; however it typically won’t give you any more direction than simple ones.
The patterns we’ll discuss below aren’t necessarily the Holy Grail of chart patterns. They are simply the best tools we can use to trade the cryptocurrency markets with at a surprising degree of accuracy.
For example, many traders like the head and shoulders pattern as it has an accuracy of over 80% when it’s fully complete. Not too many other patterns can match that.
Within this guide, I’ll go over 4 of the best and most widely used chart patterns in cryptocurrency trading. Follow the instructions and practice on a live chart. Teach yourself how to spot these patterns and trade them appropriately.
Head & Shoulders Pattern
Let’s start off with the classic head and shoulders chart pattern which most people have heard of and know what it resembles.
This pattern generally signals a reversal in the market and means that there is a failed attempt of the trend to move any higher. An uptrend can be easily defined as a series of higher highs and higher lows. In the case of the head and shoulders pattern, the last trend (right shoulder) fails to make a higher high and higher low. Soon thereafter, a new downtrend is initiated.
Turn the pattern upside down, and we have an inverse head and shoulders pattern. This signals a shift from a downtrend to an uptrend.
The head and shoulders pattern is considered to be the most reliable patterning trade. It can often be easier to spot on a chart and can help you filter through all the clutter.
Bull Flag (or Pennant) Pattern
This is what is known as a continuation pattern. It’s considered one of the most reliable bullish patterns in trading. Also referred to as a pennant or wedge, the bull flag is often formed when the price enters a consolidation phase following a strong uptrend.
The consolidation phase shows that the market is gathering momentum for the next rally up. It’s a very natural part of a trend where those who were at the beginning of the trend are starting to take some of their profits. On the other hand, new traders are entering the market and taking positions for the next run-up in price.
Cup & Handle Pattern
This pattern is a bullish one that’s very well known in the stock market and also appears in in the crypto market just as often.
As you can see from the image below, the pattern forms a cup like shape before a dip on the right corner of the cup, leading to another significant rise in price. In order to confirm the pattern, you would want to look out for a significant increase in trading volume near the end of the handle. A buy order should be entered when the price breaks above the right corner of the cup.
The logic behind this trading pattern is that the cup represents the bottom of the market and the handle creates a higher low which by definition means that an uptrend will begin.
This pattern is very similar to the bull flag, where price appears to be stuck between a support and resistance. The more touches there are between the support and resistance the more reliable the pattern is considered to be.
The rectangle pattern is a trend continuation pattern and is often a waiting game for traders as it’s difficult to tell exactly when the price is going to break out. Depending on the direction of the preceding trend, the rectangle can be either bullish or bearish.
This pattern can be traded into ways. One method would be by placing an order at the lower end of the rectangle and placing a stop loss right under. The second method would be placing a buy order just above the upper end of the rectangle in hopes of catching the breakout.
The problem with this last option is that a price spike can happen quickly and then subsequently dip back down through the rectangle pattern. This is called a “fake out” and occurs quite frequently. As with anything you do in trading, taking the slightly more conservative approach should serve you better in the long run.
Now head on over to TradingView, and practice spotting all four of these popular trading patterns. Once you think you’ve got a handle on things, open a demo account or paper trade (fake money) on TradingView.
The last step will be to start trading with a very small amount of cryptocurrency within an exchange. See how well you can stick to these charting patterns, with money on the line. That’s a whole lesson in itself, that no trading guide will ever be able to teach you.
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