How to read chart patterns while trading crypto
The popularity of crypto trading has been driven by several factors, including its transparency, safety, and speed of transactions. As more of the market is becoming increasingly interested in crypto trading, it is crucial for traders to be able to read crypto charts so that they can predict price moves and make informed decisions. In light of cryptocurrency's highly volatile nature, it is all the more crucial that you learn how to read charts, especially if you’re a beginner.
For the uninitiated, chart patterns consist of trendlines and curves, which indicate impending price movements. The prices of cryptocurrencies often go up and down due to various factors. In addition to this, trading efficiently is not possible when several factors are out of sight. In such a situation, charts are always the best idea. The use of trading charts is unquestionably useful in technical analysis. The future market movement can be predicted based on historical and current data.
But how do you actually interpret these charts? Exactly that is what you will discover in this guide, which explains important chart patterns, including both bullish and bearish signals.
Candlestick charts: How to read a candle?
Candlestick charts are among the most common types of graphs used by crypto traders for technical analysis. The name candlestick is derived since each plot point on the graph resembles a candlestick. They're red (or pink) or green rectangles with a line going out of the top or bottom, similar to a candle's wick. The size, line, and color of the candlestick all reveal essential information.
The opening and closing prices of the cryptocurrency for that day are at the top and bottom of the main rectangle of the candlestick. When a candle is red, it indicates that the closing price was lower than the opening price, implying that the asset's price fell throughout the trading session. However, if a candle turns green, it implies that the asset's price climbed and the closing price was higher than the initial price. The wicks reveal the highest and lowest price of an asset within the candlestick period. If there is no wick, the opening and closing prices are the lowest and highest, respectively.
Let’s further break down the above figure as follows:
- Body: The body represents the difference between closing and opening prices.
- Wicks: Also referred to as shadows or tails, wicks can come out on either end of a candle and show the highest price and lowest price that the cryptocurrency reached within the same period. Furthermore, the wicks also reveal the current volatility of the market.
- Highest Price: The highest traded price is shown by the top of the upper wick.
- Lowest Price: The lowest price is shown by the bottom of the upper wick.
- Opening price: The opening price is the price at which the first trade occurred. When the price rises, the candle turns green, and when the price falls, the candle turns red.
- Closing price: The closing price is the last price that was traded during the candle formation period. The candle will be green if the price is higher than the opening price, else it will be red.
Key Crypto Trading Patterns
Price patterns are formed when traders buy and sell at specific levels, causing prices to swing between these levels, resulting in chart patterns. When a price finally breaks out of a pricing pattern, it might signal a major shift in sentiment. Patterns that evolve over a longer period of time are generally more trustworthy, with bigger price changes ensuing once the pattern is broken.
As a result, a pattern that develops on a daily chart is likely to produce a larger move than a pattern that develops on an intraday chart, such as a one-minute chart. While there are several chart patterns that can be interpreted, in this guide, we will be exploring primarily two patterns: continuations patterns and reversal patterns.
Continuation patterns are a type of indicator that traders seek to indicate that a price trend will likely continue. These patterns appear in the middle of a trend and indicate that the trend will most likely resume once the pattern is completed. Technical analysts utilize a variety of continuation patterns to indicate that the price may continue to trend. Triangles, flags, pennants, and rectangles are the most common examples of continuation patterns.
- Bullish and bearish flag
Appearance: There are two types of flag patterns: upward trending (bullish flag) and downward trending (bearish flag) (bearish flag). Bullish and bearish flags are usually represented by a small rectangle trading range between diagonal parallel lines. It moves in the opposite direction of the longer-term price trend on a price chart. Flags are formed after a rapid gain or decline, and they usually suggest a small change in direction before the old trend returns.
Indications: If the breakout is in the same direction as the prevailing trend, a trade is initiated. Traders like a breakout with an increase in volume with bullish flag patterns, although it isn't required. When it comes to bearish flag formations, the breakout volume may be similar to the volume preceding it.
2. Bullish and bearish pennant
Appearance: The pennant is structured like a small converging symmetrical triangle and is formed when a rapid rise (bullish) or decrease (bearish) occurs, followed by a brief triangular-shaped price consolidation (a slight shift in direction) before the preceding uptrend (bullish) or downtrend (bearish) resumes.
Indications: To profit from the increased momentum, traders should watch for a breakout over the pennant resistance (bullish) / support (bearish) line.
3. Ascending triangle
Appearance: The ascending triangle pattern appears in the form of two or more equal highs that form a horizontal line at the top, or two or more rising troughs which forms an ascending line that meets the horizontal line. This pattern typically appears in the middle of an upward trend (bullish) and gives an indication that the trend will continue.
Indication: Breakouts usually occur in the direction of the current trend. The price action usually breaks through the triangle's top line with increased volume, so most traders will typically choose to enter the trade when the price rises by the amount of the triangle's widest section.
4. Descending triangle
Appearance: The descending triangle pattern, which is usually formed in a downtrend (bearish), occurs as two or more equal lows that form a horizontal line at the bottom, or two or more declining peaks that form a descending line that meets the horizontal line. This pattern frequently appears in the middle of a downtrend and indicates that it will continue.
Indication: Usually, a breakout occurs in accordance with the current trend. In order to take a position, traders will typically wait for the price to break through the bottom trendline of the triangle with increased volume. This normally occurs when the price declines a value equal to the width of the triangle.
5. Bullish rectangle
Appearance: The rectangle pattern is defined as a trend halt in which price travels sideways between two parallel support and resistance zones. Typically, the pattern indicates a price consolidation before continuing in the existing trend's original path. It continues to move sideways, bouncing between the two parallel lines, forming a box shape that gives the pattern its name.
Indication: Traders might choose to trade within the range, trade the eventual breakout, or trade both.
6. Bearish rectangle
Appearance: The bearish rectangle pattern denotes a trend halt in which the price moves sideways between parallel support and resistance levels. The pattern usually indicates a price consolidation before continuing in the existing trend's original path.
Indication: Just like in the bullish rectangle pattern, this pattern also gives traders the opportunity to trade within the range, trade the breakout, or trade both.
Reversal patterns typically indicate that an ongoing trend is likely to alter. According to technical analysis, an uptrend will turn down after a reversal pattern and vice versa. As a result, if such a pattern is seen in a strong market, traders should establish Stop Losses or even close a portion of their open positions. A reversal figure that occurs under bearish conditions may also be a strong indicator of an impending rebound.
- Double bottoms
Appearance: This pattern looks like a giant letter W and consists of two successive, generally equal troughs with a moderate rise in between. It usually starts with a decline and ends with many rebounds.
After an extended decline, this powerful chart pattern generally signifies a reversal pattern, indicating a minor, if not long-term, movement from a downtrend to an uptrend (i.e. bullish).
Indications: Traders can buy above the middle top level once the price bounces from the support two times.
2. Head and Shoulders Tops
Appearance: The head and shoulders tops pattern, one of the most well-known and reliable reversal patterns, consists of one large peak and two smaller ones on either side of the main peak. To put it another way, the pattern will consist of three sequential peaks, with the centre peak being the tallest and the two outside peaks being smaller but roughly equal in height. This pattern is typically formed following an uptrend and often indicates an impending trend reversal (from bullish to bearish).
The inversed head and shoulders pattern also exists for bearish trends. The formation of this pattern usually occurs after a downward trend and indicates an upcoming trend reversal (from bearish to bullish).
Indications: Traders should hold off until the pattern is complete and the price has broken out. When a breakout occurs - the neckline is broken, and a SELL trade is taken – this is the most typical entry point.
3. Diamond bottoms
Appearance: The diamond bottoms pattern is quite similar to the head and shoulders tops pattern, with the exception of the V-shaped neckline. Diamond bottoms patterns nearly often appear during bullish markets and indicate the probability of a breakdown well before the head and shoulders pattern.
Indications: Trading recommendations for the diamond bottoms patterns are the same as that of the head and shoulders tops pattern, however, traders need to be skilled enough to identify this pattern.
Reading crypto candlestick charts is a valuable skill that all cryptocurrency traders should have in order to thrive in today's dynamic market. However, readers should be aware that even the greatest technical analysis may not be enough to shield you from losses in some cases. As a result, combining fundamental analysis with charts is equally critical.
Given that this guide only covers the fundamentals of technical analysis, users should aim to expand their knowledge and apply these tools to develop a successful crypto trading strategy.
Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. C-Trade, its affiliates, agents, directors, officers, or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same