Are you new to the world of crypto? If yes, terminologies and jargon like a rising wedge, head, and shoulders, bullish flag, etc are probably making you feel quite lost. Read on to learn about chart patterns and how you can navigate through these seemingly incomprehensible patterns.
What are chart patterns?
To track the movements of an asset’s rates, a price chart is used on which the cryptocurrency chart patterns indicate the flow. The chart pattern essentially helps in deciding the next possible move through technical analysis. Using this, crypto traders could be in a better and a more informed position to make the right trading decisions.
Chart patterns are not unique to the cryptocurrency market. They’ve been used across different financial trading markets to improve the accuracy of price predictions on the basis of how an asset performed in the past. What you’re going to read in the course of this article will help you understand how the same metrics have been shaping trade decisions since the early twentieth century. You may find it interesting to note that chart patterns are used in stock as well as in the forex markets.
For the ease of comprehension, let us start by broadly categorizing the chart patterns into four segments:
- Triangle Chart Patterns
- Rectangle Chart Patterns
- Pole Chart Patterns
- Exotic Chart Patterns
Triangle Chart Patterns
The framework of triangle patterns there six different patterns. About 50% of these are simply inversions of their counterparts.
When the markets are performing well and are showing a ‘bullish’ trend, an ascending triangle is formed. Typically, it is considered to be a key indicator of an upward market trend.
An inversion of the ascending triangle, the descending triangle crypto chart pattern is probably what you would see now. It is an indicator of a downward trend and shows that the market is on a bear run.
Bullish Symmetrical Triangle
This one, like the ascending triangle, is a crypto chart pattern that indicates an upward movement in the market. Typically found in bullish markets.
Bearish Symmetrical Triangle
Yet again, similar to the descending triangle, you will find this crypto chart pattern in bearish markets representing a downward trend.
The rising wedge is something you wouldn’t really see often. Though this crypto chart pattern represents the market’s bearish mood, it can be witnessed in both upward and well as downward trends.
This is an inversion of the rising wedge that indicates the market’s bullish mood. Again this is not a common pattern and can be found in both upward as well as downward trends.
Rectangle Chart Patterns
Like the triangle chart patterns, rectangle patterns can also be further broken down into six sub-patterns along with their inversions.
Bullish rectangles always indicate that an upward trend is ongoing.
The bearish rectangle is an inversion of the bullish rectangle that represents a downward trend of the market.
A double top would help investors notice a reversal in price direction. This crypto chart pattern can be seen very often.
A double bottom is also used to represent price direction reversals. These are as common as their inversions, the double top rectangle.
Yet another indicator of price reversal, triple top crypto chart patterns represent bearish trends and are rather uncommon.
Triple bottom indicates price reversal but is an uncommon chart pattern. If you spot this, it usually is a good sign as it represents the bullish mood of the market.
Pole Chart Patterns
You will find four patterns that can be broken down into sub-patterns and inversions in this category
Bullish flags are again common and synonymous with bullish market trends. It depicts the short increments of price reversal because of which the chart pattern resembles a flag. Typically, when you see the ‘flag’, the market undergoes a lot of highs and lows until it’s stable again
The bearish flag is also very common and is an inversion of the bullish flag. This one indicates short increments of a price reversal and forms a flag-like pattern when the market goes for a bear run. The highs and lows continue until the highest resistance level is met.
Bullish pennant is again common and synonymous with bullish market trends. It depicts the short increments of price reversal because of which the chart pattern resembles a pennant. Typically, when you see the ‘pennant’, the market undergoes a lot of highs and lows until it’s stable again
The bearish pennant is also very common and is an inversion of the bullish pennant. This one indicates short increments of a price reversal and forms a pennant-like pattern when the market goes for a bear run. The highs and lows continue until the highest resistance level is met.
Exotic Chart Patterns
This category contains some unique chart patterns that are uncommon and cannot be put into any of the above categories.
Head & Shoulders
This is a typical bearish indicator that represents direction reversal. This is formed in three steps, the first two in an uptrend and then in a downtrend. When the price hits the first resistance, it leads to the left shoulder of the pattern. When the price reverses, generally in a short increment, the formation completes as soon as the price finds its first support level.
While moving upward if the price finds its second resistance, it starts to form a head. However, for this to happen, the second resistance has to be higher than the first one. Then when the price moves down after a reversal to come at the second support, the head formation is completed.
There is also an inverted version of this crypto chart pattern where the inverse of this happens. As for the head and shoulder pattern, the inversion is also not common.
Cup & Handle
The cup and handle pattern shows an indication of a continuous pattern and is a bullish indicator. It is not a very common pattern.
In an uptrend, the price finds its first resistance which forms the edge of the cup pattern. The price reverses direction and in short increments and price reversals, finds its support, the lowest point in the pattern and forming the bottom of the cup.
The price direction reverses, moving upward in short increments until it finds the second resistance, which is at a similar level to the first level of resistance, completing the cup formation.
When the market is doing well, the cup and handle pattern shapes up to show the bull run. During an upward trend when the price meets its first resistance, it gives the body to the edge of the cup pattern. After reversal when the price finds support, the bottom of the cup is formed.
The cup formation completes when the price reverses again to go up and find another point of resistance near the last level.