Crypto trading is a popular and exciting way to invest in digital assets transforming the world.
Crypto chart trading patterns are based on technical analysis, which is a method of studying the past and present behavior of the market using mathematical indicators, statistics, and patterns.
Here, we will learn about five of the best chart patterns for crypto trading in 2023, which are:
- Head and Shoulders
- Double Top and Double Bottom
- Wedges
- Cup and Handle
- Triangles
We will explain each pattern, how to recognize it on the chart, and how to trade it effectively.
Also read, 10 best trading indicators.
Head and Shoulders
This dynamic trading pattern is one of the technical analysis’s most reliable and well-known chart trading patterns. It’s a reversal pattern that signals a change in the trend from bullish (upward) to bearish (downward) or vice versa. The pattern consists of three peaks or troughs on the chart, with the middle one being higher or lower than the other two. The pattern is named after it resembles a human head with two shoulders on either side.
The head and shoulders pattern can be either bullish or bearish, depending on it appearing at the end of an uptrend or a downtrend. A bullish head and shoulders pattern forms at the bottom of a downtrend, indicating a potential upside reversal. A bearish head and shoulders pattern forms at the top of an uptrend, suggesting a possible downside reversal.
For trading the head and shoulders pattern, traders must identify two basic levels on the chart: the neckline and the target. The neckline is a horizontal line that connects the two shoulders’ lows or highs. The target is calculated by measuring the distance from the neckline to the top or bottom of the head and projecting it from the neckline in the opposite direction of the breakout.
Traders must ideally wait for a confirmation of the pattern before entering a trade. A confirmation occurs when the price breaks below or above the neckline with a substantial volume. Traders can then enter a short or long position accordingly and set their stop-loss above or below the neckline. Finally, traders can exit their position when they reach their target or see signs of a reversal.
Double Top and Double Bottom
The double top and double bottom patterns are also reversal patterns that indicate a change in the trend from bullish to bearish or vice versa. The patterns consist of two peaks or troughs on the chart that are roughly equal in height or depth. The patterns are named after they resemble two mountains or valleys.
The double-top pattern forms at the end of an uptrend and signals a potential reversal to the downside. The double bottom pattern forms at the end of a downtrend and signals a possible reversal to the upside.
To trade these patterns, traders must identify two crucial levels on the chart: support and resistance. The support level is a horizontal line connecting both troughs’ lows. The resistance level is a horizontal line connecting both peaks’ highs.
Traders should wait for a confirmation of these patterns before entering a trade. A confirmation occurs when the price breaks below or above the support or resistance level with a substantial volume. Traders can then enter a short or long position and set their stop-loss above or below the support or resistance level. Finally, traders can exit their position when they reach their target or see signs of a reversal.
The target for these patterns is calculated by measuring the distance from the support or resistance level to the highest or lowest point of the pattern and projecting it from the breakout point in the opposite direction.
Wedges
Wedges are another type of chart pattern that can be either reversal or continuation patterns, depending on whether they appear within an existing trend or at its end. Wedges are formed by two converging trend lines that slope in the same direction as the prevailing trend. The pattern shows that the price movement is narrowing as the market becomes indecisive.
Wedges can rise or fall, depending on whether they slope upward or downward. A rising wedge forms within an uptrend and indicates a potential reversal to the downside. A falling wedge forms within a downtrend and suggests a possible reversal to the upside.
To trade wedges, traders must identify two crucial levels on the chart: the upper and lower trend lines. The upper trend line connects the highs of the price action, while the lower trend line connects the lows.
Traders should wait for a confirmation of these patterns before entering a trade. A confirmation occurs when the price breaks below or above the upper or lower trend line with a substantial volume. Traders can then enter a short or long position accordingly and set their stop-loss above or below the trend line. Finally, traders can exit their position when they reach their target or see signs of a reversal.
The target for these patterns is calculated by measuring the most comprehensive distance between the top and botto trend lines at the beginning of the pattern and projecting it from the breakout point in opposite direction of the prevailing trend.
Cup and Handle
The cup and handle trading pattern is one of the technical analysis’s most bullish chart patterns. A continuation pattern indicates a pause in an existing uptrend before resuming its upward movement. The pattern consists of a cup-shaped formation followed by a handle-shaped formation.
The cup-shaped formation is formed by a rounded bottom that resembles a bowl or saucer. It shows that the price declines gradually until it reaches a low point where it finds support, then rises gradually until it reaches a high point where it faces resistance. The cup-shaped formation can last from several weeks to several months, depending on the time frame.
The handle-shaped formation is formed by a downward-sloping consolidation that resembles a flag or pennant. It shows that the price pulls back slightly after reaching the cup’s high point, then consolidates within a narrow range before breaking out. The handle-shaped formation usually lasts several days to several weeks, depending on the time frame.
To trade this pattern, traders must identify two important levels on the chart: the resistance and breakout points. The resistance level is a horizontal line that connects the high points of both sides of the cup. The price breaks above the resistance level with a substantial volume at the breakout point.
Traders should wait for a confirmation of this pattern before entering a trade. Confirmation occurs when the price closes above the resistance level with a strong volume. Traders can then enter a long position accordingly and set their stop-loss below the low point of the handle. Finally, traders can exit their position when they reach their target or see signs of a reversal.
The target for this pattern is calculated by measuring the depth of the cup from its high point to its low point and adding it to the breakout point.
Triangles
Triangles are another type of chart pattern that can be either reversal or continuation patterns, depending on whether they appear within an existing trend or at its end. Triangles are formed by two converging trend lines that slope in opposite directions, creating a triangular shape on the chart. The pattern shows that the price movement is narrowing as the market becomes indecisive.
Triangles can be ascending, descending, symmetrical, or expanding, depending on whether they slope upward, downward, sideways, or outward. An ascending triangle forms within an uptrend and indicates a potential continuation to the upside. A descending triangle forms within a downtrend and indicates a potential continuation to the downside. A symmetrical triangle forms within an uncertain trend, indicating a potential breakout in either direction. An expanding triangle forms within an unstable trend and indicates a potential reversal in either direction.
To trade triangles, traders must identify two essential levels on the chart: the upper and lower trend lines. The upper trend line connects the lower highs of the price action, while the lower trend line connects the higher lows.
Traders should wait for a confirmation of these patterns before entering a trade. A confirmation occurs when the price breaks below or above the upper or lower trend line with a strong volume. Traders can then enter a short or long position accordingly and set their stop-loss above or below the trend line. Finally, traders can exit their position when they reach their target or see signs of a reversal.
The target for these patterns is calculated by measuring the widest distance between the upper and lower trend lines at the beginning of the pattern and projecting it from the breakout point in the direction of the breakout.
Conclusion
Crypto chart patterns are powerful tools that can help traders to analyze the market and make informed decisions. By learning how to identify and trade these patterns, traders can gain an edge over the market and increase their chances of success. However, traders must be aware of the limitations and risks of using chart patterns, such as false breakouts, market manipulation, and human error.
Therefore, traders should always use other trading indicators, such as volume, momentum, and support and resistance levels, to confirm their signals and manage their risk.
Join our telegram for trading education and on-demand analysis of any cryptocurrency.
Top 10 Free Indicators for Trading CryptoTOP 6 Play to Earn Crypto GamesTop 18 Crypto & NFT Marketing AgenciesTOP 5 Axie Infinity Staking Platforms: Earn Massive Rewards