Crypto traders utilize chart patterns to anticipate future price movements based on past behavior. Recognizing such patterns can help take advantage of trading opportunities.
One such pattern is the Head and Shoulders pattern, which comprises three peaks with the highest peak overshadowing the two lower ones (called shoulders). This bearish signal suggests that an asset’s price may continue to drop.
Head and Shoulders
The head and shoulders pattern is a chart formation which predicts a bullish-to-bearish trend reversal, typically marked by three peaks separated by an equal distance from each other on an ascending trend line. Market analysts consider it one of the most reliable trend reversal patterns. To be effective, however, this requires strong uptrend leading up to it for it to be profitable; so keep trading volume under close observation when your pattern appears.
The first shoulder occurs when price declines into a trough and then rebounding to form an increase, producing the head. The head can either be higher or lower than the first shoulder; when combined, these two areas form a neckline which acts as an early market reversal signal post breakdown from this neckline with heavy volume associated with it. Traders can measure vertical distance between head and neckline to identify their target price for trade.
Rounded Bottom and Top
Rounded bottom and top chart patterns signal the end of a downtrend and start of an uptrend, similar to an inverted U shape on the price chart and often accompany by similar volumes patterns.
A rounded bottom pattern requires that an existing trend already exist before its formation can occur. After this phase, there will be a consolidation period during which prices move sideways or lower for some time before beginning their upward journey again. When the neckline of this consolidation area breaks away traders can place buy orders.
The rounded top stock pattern indicates that buyers are losing interest in an asset and it’s time for sellers to step in. Once prices break through the support trendline or neckline, prices begin a new downtrend; for this pattern to work successfully there must also be an initial uptrend already present.
Triangle
Triangle patterns are pauses in price movement where price oscillates sideways between parallel support and resistance zones, providing traders with an excellent trading opportunity. They should ideally be used by buying at support and selling at resistance before waiting for a breakout either up or down in their original direction of trend.
Ascending and descending triangles are popular patterns used to help predict momentum or reversals. They consist of one horizontal line covering highs that range between levels and another sloped trendline that connects rising or falling lows; when price breaks above or below either horizontal resistance level in an ascending triangle it signals bullish sentiment; similarly with its opposite in a descending triangle.
The Hammer Pattern, another popular crypto chart pattern, features three roughly equal peaks arranged in a triangle formation and often forms after a downtrend to signal a potential bullish reversal. Traders should pay close attention to volume trends for confirmation of its strength.
Triple Top
The Triple Top chart pattern represents a shift from buyers to sellers and can signal an end of an uptrend and subsequent downturn in price trends.
To identify a Triple Top rally, look out for rallies with three successive peaks at roughly equal levels and moderate-low volume levels between each peak.
Traders should take short positions as soon as the price closes below the lowest valley of a Triple Top pattern and an increase in selling volume confirms this support level has been breached, which should cause further price declines to follow. Triple Tops are powerful reversal patterns which appear across timeframes; however, to reduce risks to their capital investors must develop and adhere to an effective risk management strategy to reduce losses as much as possible.
