Chart patterns are one of the main assets in every trader’s toolkit, providing a straightforward window into technical analysis. With the rise of cryptocurrencies such as Bitcoin and Ethereum, crypto patterns have gained considerable traction in the past decade.
Getting to know crypto chart patterns offers a variety of advantages to traders, including but not limited to having a visual and intuitive way of reading the market, gaining predictive power, improving your risk management, confirming trends more accurately, and benefiting from the high versatility of these patterns.
But which of these patterns are worth your time? Which crypto trading patterns should you pick as your top 10 to boost your trades? Stay tuned to find out!
A Quick Brief of Chart Patterns
Crypto chart patterns are visual representations of the market’s psychology. These essential technical analysis tools help traders interpret price action and make informed trading decisions. They are formed due to price movements and trader sentiment.
Chart patterns are divided into 3 major categories. First, reversal patterns indicate a change in the pre-existing trend’s direction. Then, there are continuation patterns, which suggests the current trend will continue. Lastly, neutral patterns can break out in either direction, requiring additional confirmation.
Due to the high volatility of the crypto market, it’s crucial for investors and traders to understand and apply chart patterns correctly. They should allocate adequate time to familiarize themselves with crypto chart patterns.
Crypto patterns can help traders spot buying and selling opportunities and provide a structured way to interpret price action instead of trading on guesswork. It’s also worth noting that these patterns work best when combined with volume analysis and other technical indicators.
The Best Crypto Trading Chart Patterns
Now, it’s time to get to know 10 of the best and most reliable crypto chart patterns in the market. These are time-tested formations that traders use to analyze potential price movements, with each pattern representing a specific market structure, indicating accumulation, distribution, continuation, or trend reversals. It goes without saying that learning to recognize and trade these patterns improves your ability to anticipate market movements.
1- Head and Shoulders
The head and shoulders crypto pattern is one of the most reliable bearish reversal patterns in the market, signalling the end of an uptrend. The pattern usually forms at the end of an uptrend and consists of four major parts: left shoulder, head, right shoulder, and neckline.
First, the left shoulder of the head and shoulders pattern forms when the price continues to increase before meeting resistance and declining. Then, there is a second, higher peak, which forms the head but still meets resistance and declines. After that, you can wait for another lower peak that officially signals the weakening of the bullish momentum.
By connecting the valleys created by the two shoulders, you can draw a neckline, which acts as a key support level. If the pattern breaks below this neckline, then it’s confirmed.
To trade the head and shoulders crypto trading pattern, you can enter a short position after the neckline breaks. Place your stop loss above the right shoulder for better risk management. Also set your target profit level according to the distance between the head and the neckline, but projected downward.
There are also triple top and bottom patterns, which can be interpreted with the same mentality of double tops/bottoms.
2- Inverse Head and Shoulders
The inverse head and shoulders crypto graph patterns are the upside down, bullish reversal versions of the normal head and shoulders. They appear after a strong and prolonged downtrend, signalling a shift to bullish momentum. While the pattern has the same structure as a normal head and shoulder crypto pattern, it is interpreted slightly differently.
For starters, the left shoulder forms when the price continues to decline, only to meet support and bounce back up. Then, the head creates a lower low, indicating the last phase of selling pressure. Right after that, the right shoulder creates a higher low that is virtually at the same level as the left shoulder. It shows how the bulls are starting to step in. The neckline in this one represents a resistance level that must be broken for pattern confirmation.
To take advantage of the inverse head and shoulders chart patterns in crypto, you should buy after the neckline breaks with strong volume. Your stop-loss level should be placed just below the right shoulder, and your target profit is determined by calculating the distance from the head to the neckline and projecting it upward.
3- Double Top/Double Bottom
The double top crypto chart pattern is a bearish reversal signal with two peaks at resistance, signalling an inability to break any higher. The pattern forms when the price attempts to move higher in an uptrend but fails as it meets resistance.
After the initial setback, the price starts to increase again but meets resistance at the same virtual level, creating the second peak (top). If the crypto pattern breaks down below the confirmation level (support), it triggers a sell-off.
To trade the double top bearish reversal crypto pattern, you need to go short after the support breaks. Your stop loss should be above the recent highs, and your target profit is measured by the distance between the peaks and the support.
There is also the double bottom crypto pattern, which acts as a bearish reversal signal. With the same mentality of the double top, the double bottom pattern creates two lows at support, indicating buying strength. At the same time, if it breaks out above resistance, the trend is confirmed.
The trading strategies of these two patterns are similar but not quite the same. So, for a double bottom, when the price clears resistance, you can enter a long position and set your stop-loss level below the recent lows. Then, measure the distance between the bottoms of the pattern and its resistance level, project it upwards, and you’ll have your target profit.
4- Ascending Triangle
The crypto triangle pattern is one of the most reliable technical tools in any market. In this article, we will go over its three types: ascending, descending, and symmetrical triangles.
Starting with the ascending triangle, it shows an increasing buying pressure. The pattern forms when higher lows form an uptrend line all the while resistance remains constant. So it looks like a flat line on the top, connected to an ascending lower line and creating a triangle.
One of the most common ways to trade an ascending triangle is to buy when the price breaks above resistance with volume. Set your stop loss below the last higher low. As for your target profit, it’s equivalent to the triangles base size, but projected upwards.
5- Descending Triangle
The descending triangle crypto pattern is an indication of bearish continuation, which is the opposite of the ascending triangle. On a visual basis, the pattern consists of a flat lower line, aka support, and a descending top line, which is created by lower and lower highs. These descending highs show weakening in the buying pressure while support holds steady.
Trading the descending triangle is not super complicated. You can go short after the price breaks down below the flat support level and set your stop loss above the last lower high. At the same time, if you measure the base of the triangle and go the same length below your entry point, you have successfully found yourself a decent target profit.
6- Symmetrical Triangle
Lastly, the symmetrical triangle is a neutral pattern where price forms lower highs and higher lows at the same time, converging into a triangle. The direction in which the triangle breaks out depends on the volume of the market and the trend’s strength.
Trading the symmetrical triangle could be a little bit trickier. You need to wait for a breakout first. Buy if the price breaks upward and go short if it breaks downward. Your target profit should be the widest part of the triangle projected in the breakout’s direction.
7- Falling Wedge
Next on our list of crypto patterns is the falling wedge. It’s a bullish pattern that can appear as a reversal or continuation signal.
Regarding its formation, the falling wedge is created by prices that make lower highs and lower lows within a narrowing wedge, which is why the pattern is named the way it is.
Trading the following wedge pattern consists of buying after a breakout above the wedge’s resistance. Then, your stop loss should be set below the recent swing low, and your target profit should be the upward projection of the widest part of the wedge.
8- Bull Flag/Bear Flag
Like many other crypto patterns, the flag pattern also comes in 2 bullish and bearish variations. However since the interpretation of the 2 patterns and their trading strategies are not that different, we consider the flag pattern as a single placeholder in our list of top patterns in crypto.
Starting with the bull flag, it forms after a strong uptrend, forming a small downward consolidation before the next push higher. At the same time, the bear flag appears in downtrends and shows a small upward consolidation before further decline.
To trade the bullish and bearish crypto patterns, you need to start after the breakout is confirmed. If you’re dealing with a bull flat flag, you need to go long. However, if you have a bear flag at hand, selling may be a good idea. Your stop loss should also be outside of the flag structure, no matter the kind of pattern you’re dealing with. Lastly, your target profit should be the projection of the flag pole’s height in the direction of the breakout.
9- Engulfing Pattern
Now if you’re looking for the best crypto candlestick patterns, you cannot miss the engulfing pattern. The pattern indicates strong momentum shifts and comes in two bullish and bearish variations.
The bullish engulfing pattern consists of a large green candle that completely engulfs the previous red candle, signalling a potential uptrend. At the same time, the bearish engulfing is formed by a smaller green candle that is fully covered (or engulfed) by its next larger red candle.
To trade either of the engulfing crypto candlesticks patterns we went over, you can enter a trade after you’ve confirmed the pattern with volume. Set your stop-loss level below (bullish) or above (bearish) the engulfing candle and make sure your target profit adheres to the next support or resistance level.
10- Rectangle
Last but not least, the rectangle is a consolidation crypto pattern where the price moves sideways within a horizontal range. The breakout direction in this pattern might signal a trend continuation or reversal.
Trading the rectangle pattern could involve a few scenarios. If the price breaks above resistance, you need to buy it, and if it breaks below support, you may want to go short. Then, set your stop loss inside the range. Your target profit is the projection of the range size in the breakout direction.
Additional Considerations
Despite the high reliability of the crypto patterns listed within this article, there are some additional factors you need to consider to boost your analysis accuracy even further.
- Volume confirmation: Breakouts with high volume are more reliable.
- Timeframe importance: Patterns are more accurate on higher timeframes.
- False breakouts: Use confirmations (candlestick closes, retests, or indicators) to ensure you’re not falling for a false breakout.
- Combining with indicators: Use RSI, MACD, and moving averages for better signals.
Also, remember that using the best crypto chart patterns doesn’t get you anywhere if you don’t choose the right broker to trade crypto!
Also, remember that using the best crypto chart patterns doesn’t get you anywhere if you don’t choose the right broker to trade crypto!
Final Thoughts
Crypto patterns are powerful tools that can help traders spot entry and exit opportunities and assist them with risk management. However, they should be used alongside other forms of analysis to maximize accuracy.
This blog provided a basic overview of the top 10 crypto chart patterns to help traders make informed and strategic decisions. To use these patterns to their full potential, you not only need to use other charting tools for better analysis but also take the appropriate risk management measures. We also invite you to learn more about each of these crypto trading patterns on the ITBFX blog.
Yes, but they work best when combined with volume and indicators.
Head and shoulders, double top/bottom, and triangles are highly reliable.
Yes! Start with simple patterns like double tops and triangles before moving to complex ones.
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