Cryptocurrency trading has been one of the most lucrative activities on the internet. The nature of this activity has created the impression that trading in these digital assets requires 100% luck to be successful. To many, the prices are random products of unpredicted circumstances in the market. The truth is that short term cryptocurrency prices are very predictable, and using what we call “chart patterns” in technical analysis increases the chance of predicting the next direction of the price movement of an asset. Chart pattern deals with patterns in price charts that provide the bigger picture of what may happen to the market price of an underlying asset within some time. Knowing these can help to reduce losses and create successful and better traders. There are many types of crypto chart patterns, but this article will focus on four of the traditional chart patterns which are common and dominant in the various price histories.
1) Triangle Chart Pattern
The triangle chart pattern gives a strong indication of a potential continuation of a bull run or bear run. The formation of this pattern usually means there is a decline of interest from the side of both the buyer and the seller. This pattern usually starts from the broadest point, and after the price of an underlying asset had traded sideways for a while, it becomes narrow at the range, and this completes the formation. There are three types of triangle pattern namely: Ascending triangle, Descending triangle, and Symmetric triangle.
1a) Ascending Triangle
Many traders use the ascending triangle as it provides a more precise entry point, profit target and stop level. This pattern is a continuation pattern that signifies a potential breakout price usually to the same direction as the trend before the formation of this triangle. With the ascending triangle, profit can be calculated by taking note of the thickest peak or height and subtracting or adding it to the breakout point of the formation. It is formed by assuming or drawing a horizontal line along the swing high and a trendline along the swing low. When the price breakout from the swing high, long trade is more suitable to be engaged. Contrary, when a breakout is made from below the lower trendline, short trade is considered.
1b) Descending Triangle
This pattern is a complete opposite of the Ascending triangle. The descending triangle formation sends a signal to the trader that the price may continue its bearish run in a descending trend. It forms at the downtrend as a continuation pattern. The formation of this triangle means the demand for an asset has sharply declined. When the price breaks the lower support, it signifies that the bearish run will likely continue or become stronger. Two trendlines form the formation. One of the trendlines is a descending price line while the other is a horizontal price line. These converge at a lower point to form a right angle triangle.
1c) Symmetric Triangle
The Symmetric triangle is the last type of triangle chart patterns. Unlike the Ascending triangle and descending triangle, the symmetric triangle shows a simultaneous uptrend and downtrend lines. This nature makes it very difficult to predict. Usually, this pattern is formed when the demand and supply reach equilibrium. In this case, the price can go either side before reaching the peak of the triangle.
Apart from the above-discussed Triangle patterns, there are many other patterns such as Triple Top and Triple Down, Rounding Bottom Pattern and also, Cup and Handle Pattern explained below.
2) Triple Top And Triple Bottom
This pattern is infrequent but very interesting and predictable. The Triple Top Pattern is formed when a price tests the resistance level on three consecutive times but unable to break through. The volume in the second rally is usually lesser than the first, and the volume of the third is lesser than the second. The consecutive attempts to break through the resistance level leave it with three peaks at the top and three peaks at the bottom. The base of this formation is a three separate break at the support area with each break not necessarily being at the same price level. From the triple bottom, the profit target can be found by adding the price height to the breakout point. This type of chart pattern is not prevalent but can be a strong notice of an upcoming reversal. It also provides a good point of setting profit target, entry point, and stop level.
3) Rounding Bottom Pattern
This pattern signifies a reversal of a long term price, and it is usually found at the end of an extended downward trend of price movement. Rounding pattern is known by its “U” shape appearance at the bottom after series of price movement. This type of pattern is sometimes referred to as the saucer pattern. It starts with a higher volume, and then falls back to a lower volume as the underlying asset consolidates in a range before regaining its form to bounce back to the top of the price curve.
One interesting thing to note is that this pattern also provides a good entry point and profit target for investors. Soon after the pattern formation is formed, the price of the asset is expected to pull a bullish run. A more specific observation shows that the lasting period of the bullish run is usually assumed to equal to the size or period of the round bottom. Under this type of chart pattern, the breakout point is typically the neckline. Traders who expect to make some profit should check whether the price is breaking through the neckline with massive strength in the form of price expansion and increase in volume. The neckline is the entry point of this pattern.
4) Cup and Handle Pattern
The cup and handle pattern is very similar to the Round Bottom pattern, and this makes people confuse the two. Similarly, the Cup and handle pattern is known by its sharp decline in price, trading horizontally at the bottom for a period before rising back to the original height forming a “U” shape. The difference between the Round Bottom and the Cup and Handle is the point of breakout. Though they all breakout after completing the “U” shape feature, the cup and handle pattern takes a small fall in price before embarking on the bull run. Unlike the cup and the handle, the Round Bottom do not fall in price after completing the “U” shape. It breaks out from there.
The cup and handle is a reverse and continuation pattern. The reverse comes into play after the price has fallen deep down the price curve, and reverting to the top. After forming the “U” shape, the price takes a little fall and then bounces back to trade higher. This kind of movement makes it a continuation pattern as well.