7 Best Crypto Chart Patterns Every Trader Should Know

Chart patterns are a form of technical analysis which traders use to identify potential entry and exit positions. Some of the best traders in the world both past and present such as Jesse Livermore and Paul Tudor Jones employ chart patterns to make their fortunes in the financial markets. Chart patterns are patterns within a price chart that help indicate where prices might head next based on past examples.

 

7 Best Crypto Chart Patterns

  1. Bear Flag
  2. Bull Flag
  3. Cup With Handle
  4. Double Bottom
  5. Double Top
  6. Head And Shoulders
  7. Symmetrical Triangle

 

Before we take a look at the individual chart patterns, these are some of the things you need to know about chart patterns. 

 

Chart patterns fall broadly into two categories: continuation patterns and reversal patterns. A continuation pattern is a chart pattern that forms within a trend when prices pause and consolidate for a period of time before resuming in the direction of its trend. In contrast, reversal patterns are chart patterns that see prices reverse and move against the direction of the previous trend after a period of consolidation. 

 

Generally, the longer the period that the chart pattern occurs over, the more reliable the signal. For example, a cup and handle pattern on the weekly chart is more reliable than a cup and handle pattern on the 5-minute chart.

 

Chart patterns are rarely as perfectly shaped as the diagrams and images they are drawn in. There will always be minor differences between how these patterns look in theory compared to how they look on the actual price charts. 

 

Now that you know the basics of chart patterns, let’s take a look at the 7 top crypto chart patterns that every trader should know.

 

Bear Flag

The bear flag is a bearish continuation pattern where prices continue their existing downward trend. The bear flag consists of a “flagpole” and a “flag”. The “flagpole” is the downward price action where prices trade downwards and make lower highs and lower lows. The “flag” is where prices start to move up and trade within a parallel channel.

 

A sell signal is generated when prices break below the parallel channel (lower black line). There are three elements to pay attention to in any bear flag:

 

  1. The “flagpole” – prices trade downwards making lower highs and lower lows
  2. The “flag” – a consolidation or temporary pause where prices trade between two parallel lines
  3. The break below the parallel channel – a break below the parallel line provides a sell signal

 

Bull Flag

The bull flag is a bullish continuation pattern where prices continue their existing upward trend. The bull flag consists of a “flagpole” and a “flag”. The “flagpole” is the upward price action where prices trade upwards and make higher highs and higher lows. The “flag” is where prices trade downwards and move within a parallel channel.

 

A buy signal is generated when prices break above the parallel channel (upper black line). There are three elements to pay attention to in any bull flag:

 

  1. The “flagpole” – prices trade upwards making higher highs and higher lows
  2. The “flag” – a consolidation or temporary pause where prices trade between two parallel lines
  3. The break above the parallel channel – a break above the upper parallel line provides a buy signal

 

Cup And Handle

The cup with handle pattern is a bullish continuation pattern. The pattern is named after the item as its side profile looks like that of a cup. The cup with handle pattern was first popularised by William O’Neil in his book, How to Make Money in Stocks. 

 

As its name implies, there are two elements to the chart pattern: the cup and the handle. The cup or rounded bottom forms after prices advance. As prices form and complete the rounded bottom, it forms the handle. The handle is a trading range where prices either move sideways or trade downwards. The breakout from the handle area provides a buy signal. 

 

Double Bottom

The double bottom pattern is a bullish reversal pattern and the successful completion of the pattern indicates a change in the direction of the trend from a downtrend to an uptrend. The double bottom chart pattern resembles the letter “W”.

 

As prices move down and make lower highs and lower lows, prices find support at the first bottom. At the support level, prices rally up. This completes the left side of the “W”. The highest point that prices reach during the rally is called the “neckline”. The “neckline” is shown in the dotted black line in the image above. Prices decline from the “neckline” to form the second bottom. Ideally, the second bottom should be lower than the first bottom. After forming the second bottom, a buy signal is generated when prices rally and break above the “neckline”, completing the “W” shape of the double bottom pattern.

 

Double Top

The double top pattern is a bearish reversal pattern and the successful completion of the pattern indicates a change in the direction of the trend from an uptrend to a downtrend. The double top chart pattern resembles the letter “M”.

 

As prices move up and make higher highs and higher lows, prices find resistance at the first top. At the resistance level, prices decline. This completes the left side of the “M”. The lowest point that prices reach during the decline is called the “neckline”. The “neckline” is shown in the dotted black line in the image above. Prices rally from the “neckline” to form the second top. Ideally, the second top should be higher than the first top. After forming the second top, a sell signal is generated when prices decline and break below the “neckline”, completing the “M” shape of the double top pattern.

 

Head And Shoulders

The head and shoulders pattern is a bearish reversal pattern and is one of the most powerful chart patterns to signal a top in prices. The formation of the chart pattern usually indicates a reversal of an uptrend to a downtrend. The pattern resembles the upper body of a person where the first and third peaks are the shoulders and the second peak is the head.

 

The head and shoulders pattern consists of three main components: the first “shoulder”, the “head”, and the second “shoulder”. The first “shoulder” forms after prices moved up during the previous uptrend before declining. The lowest point of this decline forms the “neckline”. The “neckline” will serve as support for prices in the subsequent declines until prices break below the level after the right “shoulder” is formed. The “head” is then formed when prices rally back up from the “neckline”. The “head” is the highest point of the pattern. From this point, prices fall back to the “neckline” before rallying back to create the second “shoulder”. The break below the “neckline” completes the head and shoulders pattern and provides a sell signal. 

 

Symmetrical Triangle

The symmetrical triangle is characterized by two converging lines; one line connects to at least two lower highs and the other connects to at least two higher lows. The symmetrical triangle is a neutral chart pattern where it can either be a bullish or bearish pattern depending on where the breakout occurs. 

 

The left side of the image shows a bullish symmetrical triangle. The pattern forms after an uptrend when prices consolidate and trade sideways for a period of time. The converse is true for the bearish symmetrical triangle pattern on the right side of the image. Although the symmetrical triangle is a neutral chart pattern, the probability of the breakout is higher towards the direction of the prevailing trend. This means that if prices are in an uptrend previously, there is a higher probability of a breakout to the upside rather than to the downside. 

 

While chart patterns, like any other technical indicators, do not work all the time, they give traders a higher probability of success in the crypto markets. This is because chart patterns help identify areas of support (demand) and resistance (supply) which can help traders make more informed decisions.

 

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. 

 

Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.


Posted

in

by

Tags: