Crypto traders use charts to analyze trends and trading opportunities. While there are various chart patterns available, some are more useful than others.
An inverted head and shoulders pattern is a bullish formation that indicates an uptrend could continue, while double tops can signal bearish reversals.
Head and Shoulders
The Head and Shoulders Pattern belongs to Western technical analysis approach and serves as a reversal chart pattern. Consisting of two shoulder areas connected by an “H” where price moves through, signalling market reversal.
This pattern looks like a baseline with three peaks: left shoulder, right shoulder and head – wherein the middle peak is lower than its counterparts. An ideal neckline formed by lows of two troughs should ideally sloping or horizontal; otherwise it indicates an imminent change. A downward-angled neckline signals greater impending reversals.
Care should be taken when trading Head and Shoulders patterns as the market can quickly change conditions. Therefore, traders should wait for the neckline to break before placing any trades and set entry, stop and profit targets ahead of time so as to adjust their trading plans as needed. Traders can also leverage shared scans that detect these patterns.
Double Top
Double Top is a bearish pattern that may form at the end of an upward trend and indicates imminent downward movement, so traders and investors should pay close attention when it appears.
A double top pattern looks like an “M” and features two highs at approximately equal resistance levels separated by an intermediate valley or trough; usually with one peak slightly higher than its predecessor.
After the second peak, bulls lose control and sellers take over to drive prices downward. Bears can then break through the support level established by the first peak to initiate a strong downtrend that traders can use to identify a potential trend reversal and open short positions with an eye toward making a profit from bearish downtrend. A breakdown below the neckline with significant volume may confirm this pattern and present traders with an opportunity for short trades.
Triple Bottom
The Triple Bottom Chart Pattern Signals Potential Bullish Trend Reversal | Three consecutive lows in a downtrend followed by a breakout above resistance necklines are often taken as signs that an uptrend could soon begin, drawing investors and traders in eagerly. Furthermore, it helps traders identify strong support levels allowing for easier entry of long positions.
Triple bottoms occur when an instrument tests key support levels and buyers begin outnumbering sellers, with buyers eventually outnumbering sellers at each test point – such as round numbers or previous lows. As prices rebound after each test point, buyer conviction increases, increasing the probability of an upward breakout point. While triple bottoms can provide valuable signals, investors must seek additional confirmation such as volume divergence which could indicate that buying pressure may not be as strong and thus, trend reversal might not occur as anticipated.
Declining Triangle
A descending triangle, more commonly referred to as a falling triangle, is a chart pattern commonly observed during downtrends. It forms when prices form successive lower highs along an upper descending trend line while horizontal support acts as a floor, creating the shape of a triangular figure. This shows sellers becoming increasingly aggressive while buyers are intervening to prevent its breakdown.
Traders can easily identify this pattern by looking for lower highs and lows on the chart and noting a decrease in trading volume as it emerges.
As traders can expect when price passes through a horizontal resistance line and crosses over to cross the upper trendline of a descending triangle pattern, traders can anticipate its breakout when price breaks through either of its horizontal resistance lines and crosses the upper trendline of said pattern. Note, though, that breakouts could occur either direction with downward breakouts occurring more frequently. An AI-powered technical analysis tool like FinViz which offers automated alerts, backtesting capabilities and real-time market data provides traders with easy ways to spot and take advantage of such patterns quickly when they appear.
