Three Common Crypto Trading Patterns - Reading time: about 4 minutes
Aspiring world-class crypto traders may have come across the term ‘trading patterns’. These trading models come in many shapes and forms, giving crypto traders key indicators relating to future price action and market direction. In this article, we’ll explain what trading patterns are, why they are important, and three common crypto trading patterns to look out for.
What are trading chart patterns?
Trading patterns are models created by the movements of token prices on a trading chart. These patterns are created by connecting trend lines across common price points–such as closing highs or lows–over a certain period.
Chart patterns can fall into one of three categories: continuation, reversal, or bilateral.
As the name implies, a continuation pattern suggests that the existing price pattern will continue on its current trajectory. Even once the pattern has played out, patterns in the continuation category suggest that the price trend will continue on the prevailing path.
In contrast to continuation, reversal patterns usually suggest a change in direction for a token’s price. Technical indicators such as moving averages or oscillators can help traders to spot reversal patterns on a trading chart. Bilateral patterns signal that a token’s price may move in either direction. Although bilateral trading patterns do not provide any clear indication whether a trend will continue or reverse, there are still ways for crypto traders to execute successful trades using this type of pattern.
Why are trading chart patterns important?
Trading chart patterns can give crypto traders insight into potential price movements based on previous trends and established market action. Crypto traders can use these chart patterns to make predictions about future price direction. Chart patterns can also be used to signal optimal entry and exit points.
Here are the three common patterns crypto traders’ use: Head and shoulders, wedges and triangles.
Three Common Crypto Trading Patterns
Head and shoulders
This type of chart pattern usually points to a downtrend in price action. It often goes from a bullish uptick in price movement to a marked drop-off. This makes it a very clear reversal pattern and, if spotted correctly, can be exploited thanks to the large upswings in price action that usually follow.
As the name suggests, this pattern consists of three peaks and two ‘troughs.’ The first peak comes after a period of bullish price action and then reverses to form a trough. A second price reversal signals another period of bullish price action to form a second high and another subsequent trough. The third and final peak usually only hits the highs of the first peak before the final price depression. The two troughs are known as the neckline, and usually, signify a selling point for most bearish traders.
An inverse head and shoulders trading pattern can also emerge. Following a mirror image of the conventional head and shoulders, it can signal a reversal from a bearish to a bullish, upward trend. The large upswings in price movement make the head and shoulders pattern a great tool for spotting profit opportunities, particularly as this pattern usually spans a longer timeframe. It might be tricky for novice traders to identify with this pattern, as it doesn’t always follow a clearly defined set of peaks and troughs.
Wedge patterns come in two forms: a rising and a falling wedge. These trading patterns indicate a contraction in price action as the trend lines follow the same direction and narrow along the swing highs and lows to converge.
More often than not, a rising wedge pattern signals a bearish reversal. Price movement has often been shown to break to the downside following a rising wedge. The falling wedge, on the other hand, is considered to be a bullish pattern as price action usually breaks out following the continued downtrend.
Wedge patterns are what we consider to be reversal patterns, given the tendency of ensuing price movement to contradict the prevailing trend lines. A wedge pattern forming on a trading chart means there is no single guarantee for price reversal, and price action could go either way.
Similar to wedges, the support and resistance trend lines for the triangle trading pattern converge in a common direction. What makes triangles different to wedges, however, is that the resistance line in this pattern is horizontal, unlike the wedge pattern, which is slanted. Triangles are also generally considered continuation patterns, as opposed to wedges which are usually reversal patterns.
The ascending triangle follows a bullish pattern, with price movements trending upwards to break out beyond the horizontal resistance trend line. The descending triangle is considered complete when the price breaks down past the horizontal support line.
A third variation of this trading pattern is the symmetrical triangle. Much like the ascending and descending triangle patterns, both of which indicate clear market sentiment, the symmetrical triangle is considered a continuation pattern. In these instances, the support and resistance trend lines converge for the price movement to either break out or down, depending on the prevailing price trend. A price movement breaking down from the support line signals the start of a bearish downtrend, while a price breakout from the resistance line means the start of a bullish uptrend.
Traders use chart patterns to make informed decisions about their crypto holdings. By plotting trading patterns using on-chain data, they identify the optimal points for executing crypto trades.
As a single element in a crypto trader’s toolbox, trading chart patterns should be used along with other instruments such as technical indicators and fundamental analysis for optimum results. ProBit Global trading chart offers trend line tools to easily spot trading patterns on your favorite crypto tokens. Use these insights to improve your trading skills and maximize your profits.