Recognising crypto price patterns - Technical analysis for beginners
Recognising price patterns can be a useful tool in determining the price. Do you want to learn to trade crypto profitably? Then you have come to the right place! Within the crypto market, trading is often based on technical analysis and especially on price patterns. There are a number of different types of price patterns: continuation patterns, reversal patterns and neutral patterns. As a trader it is important to be able to distinguish between these patterns.
Continuation patterns
Continuation patterns are patterns that indicate that the trend continues. This means that if a trend is bullish, it will remain bullish. When a trend is bearish, it will remain bearish after a continuation pattern with high probability. The most common continuation patterns are:
- Ascending triangle
- Descending triangle
- Bull flag
- Bear flag
- Bullish pennant
- Bearish pennant
- Falling wedge
- Rising wedge
Ascending triangle
An ascending triangle is a bullish continuation pattern which indicates with a high probability that the trend remains bullish. The condition is that the trend is already bullish. An ascending triangle as a continuation pattern takes place in a bullish trend in which the price pressure is mainly upward. The ascending triangle can be recognized by the fact that there are several highs at a certain price level (resistance). Also, an ascending triangle sets increasingly higher lows: a rectangular triangle is formed.
Volume
The volume profile usually decreases within the triangle and usually increases strongly during the break-out.
Entry point (long)
After the price has broken out of the ascending triangle at the top, often a retest of the resistance will take place. Because the resistance has been broken during the break-out, it often changes into support. This is called a support-resistance flip: a SR-flip. The retest after a break-out is a good entry moment.
Descending triangle
A descending triangle is a bearish continuation pattern. This means that when this pattern is reflected in a price, the price will probably remain in a bearish trend. The condition is that the trend is already bearish. A descending triangle occurs in a bearish trend in which the price pressure is mainly downward. The descending triangle can be recognized by the fact that several lows are formed at a certain level and at the same time lower highs are formed.
Volume
The volume profile usually decreases within the triangle and usually increases strongly during the break-out.
Entry Point (Short)
After the price has broken out of the descending triangle at the bottom, a retest of support often takes place. Because support has been broken during the break-out, support often changes into resistance. This is called a support-resistance flip: a SR-flip. The retest after a break-out is a good entry moment.
Bull flag
The bull flag is, as you might guess, a bullish continuation pattern. A bull flag consists of a flagpole and the flag itself. The flagpole is recognisable by the price rising sharply due to the increase in volume. After the flag pole the price falls slightly between two trend lines and volume decreases. This forms the flag. As soon as the price breaks out of the flag, i.e. the upper trend line, the volume also increases and the price rises sharply.
Entry moment (long)
You can take advantage of this pattern by going long. Again, the retest of the broken trendline is a sensible entry point.
Bear flag
The bear flag is a bearish continuation pattern. In other words, it arises from an upward trend. Like a bull flag, a bear flag consists of a flagpole and the flag itself. The flag pole is recognisable by the price falling sharply due to the increase in volume. After the flag pole, the price rises slightly upwards between two trend lines and volume decreases. This forms the flag. As soon as the price breaks out of the flag, i.e. the lower trend line, the volume also increases and the price rises sharply.
Entry moment (short)
You can capitalise on this pattern by going short. Again, the retest of the broken trendline is a good entry point.
Bullish pennant
A bullish pennant is similar to a bull flag. Both precede a flagpole in which the price rises with a lot of volume. The difference between the bull flag and the bullish pennant occurs after the flagpole. In a bullish pennant, the price consolidates and the volume decreases: a symmetrical triangle is formed. Since the bullish pennant is a continuation pattern, price is likely to break out at the top of the symmatrical triangle.
Volume Profile
The flag pole of the bullish pennant has a lot of volume. During the symmatrical triangle, the volume profile decreases. The breakout of the symmatrical triangle is accompanied by high volume.
Entry point (short)
You can play this pattern by going long on the lower trend line of the symmatrical triangle after it has formed. If you want to be on the safe side, you can also enter on the retest of the break-out.
Falling wedge
A falling wedge is a bullish pattern in which the price at the top of the wedge starts out wide and gets tighter as the price falls: price compression occurs. As a bullish continuation pattern, it is conditional upon the price being bullish before the pattern. On the breakout of this formation, at the bottom of the wedge, the price shoots up. This is often accompanied by high volume.
Entry moment (long)
With the falling wedge, you can enter at two moments. Firstly, you can enter at the apex. This is the point at which the two trendlines of the wedge cross (i.e. at the bottom of the wedge). Alternatively, you can wait for the retest of the break-out.
Rising wedge
A rising wedge is a bullish pattern in which the price at the top of the wedge starts out wide and gets tighter as the price rises: price compression occurs. As a bearish continuation pattern, it is conditional upon the price being bearish before the pattern. When this pattern breaks out, at the top of the wedge, the price shoots down. Often this is accompanied by high volume.
Entry point (short)
With the rising wedge, you can enter at two moments. Firstly, you can enter at the apex. This is the point at which the two trendlines of the wedge cross (i.e. at the top of the wedge). Alternatively, you can wait for the retest of the break-out.
Reversal patterns
Besides continuation patterns, there are also reversal patterns. Reversal patterns indicate when the trend is likely to reverse. This means that when a trend is bearish, the trend becomes bullish. When a trend is bullish, it will, with high probability, turn bearish after a reversal pattern.
The most common reversal patterns are:
- Head and shoulder
- Inverse head and shoulder
- Double top
- Double bottom
- Falling wedge
- Rising wedge
- Ascending triangle
- Descending triangle
Head and shoulders
A head and shoulders pattern is a bearish reversal pattern. This means that the trend prior to the head and shoulders was bullish and now reverses to a bearish trend. The pattern consists of three parts, namely the left shoulder, the head and the right shoulder. In fact the left shoulder sets a top, after which the head sets a higher high, but after that the right shoulder sets a lower high. The lows of this trend line are called the neckline.
Volume
Volume is an important factor in this pattern. In an ideal picture, the left shoulder has the most volume and the volume decreases during the formation of the head. If the volume increases during the descent after forming the head and decreases again during the formation of the top of the right shoulder, this gives even more certainty for a trend reversal. If the volume then increases again during the descent from the top of the right shoulder, you can say with high probability that the trend is going to reverse into a bearish trend.
Entry moment (short)
A good time to enter is on the retest of the trendline after the break-out of the neckline.
Inverse head and shoulders
An inverse head and shoulder is a bullish reversal pattern. Inverse literally means reversed. It means that the trend prior to the head and shoulders was bearish and now reverses into a bullish trend. Like the head and shoulders, the pattern consists of three parts, namely the left shoulder, the head and the right shoulder. The price action of an inverse head and shoulder thus sets up the reverse of a "normal" head and shoulders: three declines of which the first decline (the left shoulder) and the third decline (the right shoulder) are higher than the middle decline (the head).The highs of the shouders and the head are called the neckline.
Volume
Again, volume is an important factor in this pattern. In an ideal picture, the left shoulder has the most volume and the volume decreases during the formation of the head. If the volume increases during the rise after forming the head and decreases again during forming the low of the right shoulder, this gives even more certainty for a trend reversal. If the volume then increases again while rising from the low of the right shoulder, you can say with high probability that the trend is going to reverse into a bullish trend.
Entry moment (short)
A good time to enter is on the retest of the trendline after the break-out of the neckline.
Double top
The next reversal pattern is the double top. This is a bearish reversal pattern. This means that the trend changes from bullish to bearish. The double top consists of two rises which have a high at the same level. Before the first high there is a clear rise and between the two highs there is a clear drop. The bottom of this drop is called the neckline.
Volume
When a double top is formed, it is important that the volume increases strongly during the drop after the second high: more people want to sell.
Entry moment (short)
You can take advantage of this pattern by buying into the formation of the second top. In this case it's important to place a stoploss above this top, so that you'll be able to get out of the trade the moment the price is going further up. You can also play it safer by waiting for the retest of the broken neckline.
Double bottom
The next reversal pattern is the double bottom. This is a bullish reversal pattern. This means that the trend changes from bearish to bullish. The double top consists of two declines which have a low at the same level. Between the two highs there is a clear rise. The top of this drop is called the neckline.
Volume
When a double bottom is formed, it is important that the volume increases strongly during the rise after the second low: more people want to buy.
Entry moment (long)
You can take advantage of this pattern by buying at the formation of the second low. In this case it's important to set a stoploss below this low, so that you'll be able to exit the trade the moment the price is going to drop further. You can also play it safer by waiting for the retest of the broken neckline.
Falling wedge
A falling wedge can be a continuation pattern, but also a reversal pattern. In this case a falling trend precedes the formation and changes into a rising trend after the pattern. A falling wedge is a bullish pattern in which the price at the top of the wedge starts out wide and gets narrower as the price drops: price compression occurs. On the breakout of this pattern, at the bottom of the wedge, the price shoots up. This is often accompanied by high volume.
Entry moment (long)
With the falling wedge, you can enter at two moments. Firstly, you can enter at the apex. This is the point at which the two trend lines of the wedge cross (i.e. at the bottom of the wedge). Alternatively, you can wait for the retest of the break-out.
Rising wedge
A rising wedge can be a continuation pattern, but also a reversal pattern. In this case a rising trend precedes the formation and changes into a falling trend after the pattern. A rising wedge is a bullish pattern in which the price starts out wide at the top of the wedge and gets tighter as the price rises: price compression occurs. On the breakout of this formation, at the top of the wedge, the price shoots down. This is often accompanied by high volume.
Entry moment (short)
With the rising wedge, you can enter at two moments. Firstly, you can enter at the apex. This is the point at which the two trendlines of the wedge cross (i.e. at the top of the wedge). Alternatively, you can wait for the retest of the break-out.
Ascending triangle
An ascending triangle can be a continuation pattern, but also a reversal pattern. The condition for this is that the trend is bearish. The ascending triangle can be recognized by the fact that there are several highs at a certain price level (resistance). An ascending triangle also sets increasingly higher lows: a rectangular triangle is formed.
Volume
The volume profile usually decreases within the triangle and usually increases strongly during the break-out.
Entry point (long)
After the price has broken out of the ascending triangle at the top, often a retest of the resistance will take place. Because the resistance has been broken during the break-out, it often changes into support. This is called a support-resistance flip: a SR-flip. The retest after a break-out is a good entry moment.
Descending triangle
A descending triangle can work as both a continuation pattern and a reversal pattern. As a reversal pattern, it is conditional upon the trend being bullish prior to the pattern. A descending triangle occurs in a bearish trend, in which the price pressure is mainly downward. The descending triangle can be recognized by the fact that several lows are formed at a certain level and at the same time lower highs are formed.
Volume
The volume profile usually decreases within the triangle and usually increases strongly during the break-out.
Entry point (Short)
After the price has broken out of the descending triangle at the bottom, a retest of support often takes place. Because support has been broken during the break-out, support often changes into resistance. This is called a support-resistance flip: a SR-flip. The retest after a break-out is a good entry moment.
Neutral patterns
Finally, there are also neutral patterns. These patterns do not help you to determine the direction of the price, because the chance that the price goes down, is as big as that the price goes up. Still, you can use these patterns to trade profitably. The most common neutral pattern is the symmetrical triangle.
Symmatrical triangle
A symmatrical triangle is a neutral pattern in which the price consolidates between two trendlines and moves increasingly closer together. We speak of a symmatrical triangle when the trendlines are at approximately the same angle to each other: the triangle is symmetrical. The longer the price moves between the two trend lines, and the closer the lows and highs are to each other, the more likely it is that the price will break out. The symmetrical triangle is a neutral pattern, so it is necessary to wait until the price breaks out of the triangle (above or below).
Volume
Volume always decreases as the symmetrical triangle narrows: price consolidates. Of course, the price does not consolidate forever. At some point the price will break out and usually the volume will increase a lot as well.
Entry moments
Although the symmatrical triangle does not indicate a direction, you can trade on it.
Long
First of all you can take a long position after the price has slowly broken out of the top of the triangle and closed two (small) 1 hour candle closes at the top of the trendline. So the price should not have risen that far yet!
You could also take a long position the moment the upper trendline is tested after a break-out.
Short
First of all you can take a short position when the price slowly breaks out of the bottom of the triangle and closes two (small) 1-hour candle closes at the bottom of the trendline. So the price should not have dropped that far yet!
Practice, practice, practice
Now that you know the theory behind the most used price patterns, it is important to test this theory in practice. Trading is not easy and purely based on theory you will not be able to trade profitably yet. That's why you should start practising by creating a free account on TradingView. Here you can start recognizing and drawing charts for free. TradingView is completely free of charge and by far the most popular platform among (crypto) traders. If you really want to start trading seriously, it might be necessary to get a paid account, but for the time being you don't necessarily need one.
Most traders trade out of emotion and are not able to recognize price patterns. So with this article you'll already have a head start on the rest! However this doesn't mean that you are already able to start trading in a profitable way. Therefore you'll have to practice a lot and this involves a lot of other technical skills and a lot of discipline. However, price patterns are the most important basis and a nice starting point to practice with.
I would like to hear from you what else you would like to have discussed regarding crypto trading. You can leave a comment here or in our Facebook group! Do you want to know more about trading? Check out this channel for more information about cryptocurrency trading.
