Once we aggregate mathematical data and visualize it through the form of a chart, we can speculate the market by finding patterns. Some traders look at indicators to find patterns, some at candlesticks, and some look at crypto chart patterns. And if you want to master the basics of crypto trading, knowing how to spot chart patterns is an absolute must.
This article explains 4 basic crypto chart patterns that commonly occur in the market. I will also give you three tips on how to trade these patterns like a crypto pro.
What are Crypto Chart Patterns?
Investors trade assets by discovering setups and configurations within the scopes of patterns. Certain price action produces chart patterns which traders use to configure entries, stop losses, and take profit orders. Chart patterns are found in the forms of geometric shapes such as: triangles, wedges, pennants, flags, diamonds, etc.
Each pattern is made out of a series of trendlines and curves. They all follow the basis of support and resistance lines which you can use to determine how the pattern may play out. Patterns indicate reversals and continuations – AKA whether the price will continue trending or reverse its direction.
Chart patterns either point down or up. Ascending formations are defined by higher highs and higher lows while descending formations are defined by lower highs and lower lows. However, each formation still possesses its own special meaning and trading style.
Top 4 Basic Crypto Chart Patterns You Should Master
The following section explains four basic crypto chart patterns: triangles, wedges, pennants, and flags. I recommend you to memorize the patterns and attempt to find an example in the market after finishing this article.
Triangles are patterns formed by two trendlines that close in and form a corner at the end. The price converges and contracts inside this structure until the asset decisively breaks outside it.
Triangles can be either signs of continuation or reversal depending on whether the pattern is validated.
There are two types of triangles: ascending and descending triangles.
Ascending triangles have a horizontal trendline at the top (resistance) and a diagonal trendline at the bottom (support). This triangle plays out with the price breaking above resistance.
Descending triangles have a diagonal trendline at the top and a horizontal support line. The price should break below the support line for pattern validation to occur.
A wedge is a price formation defined by two converging trendlines – which mark the formation’s lows and highs. The formation is characterized by a fall in volume as price converges. It also signifies a reversal, which can be bullish or bearish.
Rising wedges indicate a bearish reversal while falling wedges indicate a bullish reversal. Since the price contracts to such a small level, you should place a stop loss the moment you spot the pattern because its distance from the final breakout will be large.
The pennant is a continuation pattern defined by a sharp uptick in price followed by price consolidating inside a wider structure, after which it breaks above the formation. A pennant is made out of three components: a flag pole, pennant, and a breakout.
The formation starts with the flag pole, a sharp uptick in price defined by large swaths of volume. Next, the price enters a pennant and consolidates during a long period of time. For a clear validation, the price must break out of the pennant and continue the trend.
Flags represent patterns where price moves opposite of the trend on a short-term basis before continuing the trend set by higher time frames.
For example, Bitcoin can engage in a LTF bullish trend that ends with the price rejecting from a higher high. The price will then consolidate in a tight range while spiraling downwards only to break above and continue the original bullish trend.
Such a flag is defined by four key traits:
a preceding bullish move
a consolidation price channel
surge in volume prior to break out
confirmation of breakout
Bearish flags mimic the same pattern, except that they are preceded by a bearish impulse. The price consolidates upwards in a tight channel before breaking below and continuing the original downwards movement.
3 Tips for Trading Crypto Chart Patterns
Knowing how to spot a chart pattern isn’t the same as trading one. You can conduct technical analysis day and night, but once you sit at your trading desk and prepare to execute a trade, you’ll realize that practice is different than theory. To help you out, I’m giving you three excellent tips on how to trade crypto chart patterns.
Always look for confirmation
You might have noticed that each pattern is made of multiple trendlines. One trendline acts as support, and the other as resistance. The pattern only plays out if the price respects the trendlines and moves between them.
The price will head up or down depending on whether the pattern is bullish or bearish. But how do you confirm whether the pattern will play out? I recommend looking for confirmation.
Confirmation is a term that describes whether a pattern is valid. If the price breaks out of a bullish flag, hits the resistance level, and bounces from it, then you have confirmation that the pattern played out. But if the price returns within the range, the pattern has failed and you should look to exit your position.
Rely on HTFs when trading patterns
I have said it hundreds of times: higher time frames take precedence over lower time frames. You can’t trade a bullish pattern on LTFs during a bear market and expect the whole market to reverse its course. You must realistically look at the market and set your expectations depending on whether the pattern formed at HTFs or LTFs.
I recommend beginners to always trade HTFs when trading patterns for the first time. They’re more reliable, look cleaner, and have a higher accuracy. Trading LTF patterns is risky because something as simple as a news event or tweet can destroy the pattern.
Apply risk management
Just because you’re trading a TA-based approach to crypto markets doesn’t mean that there’s no risk involved. Always apply risk management by setting stop loss and take profit orders on time. You shouldn’t trade before at least half of the pattern formed either.
Do your due diligence and protect your capital. Crypto chart patterns don’t always work and don’t expect them to have a 100% hit rate. Minimize risk and maximize profits, that’s the way you play the game.
Even the supposedly most basic patterns are difficult to master, which is exactly why I have prepared a special ebook for beginners interested in trading cryptocurrencies – and it’s 100% free. You’ll start with the very basics and eventually learn everything you need to become a veteran trader.
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.