Learning and recognizing patterns on price charts can help you make sense of wild crypto price fluctuations. Below are three common patterns to get you started.
In technical analysis, chart patterns are a set of recurring shapes that can be drawn on an asset’s chart by connecting price highs and lows. These formations, or “setups,” usually appear around key support and resistance levels (points where prices stopped falling or rising further, respectively) and signal a new price trend is likely to begin.
While there is much debate over why these setups form and whether they are self-fulfilling – where traders intentionally create them based on the preceding expectation they will form – chart patterns can be a reliable tool for foreshadowing one of two things:
- A continuation: When a crypto asset’s price will likely continue to follow the same trajectory following a brief period of consolidation or correction.
- A reversal: When a crypto asset’s price will likely reverse and move off in the opposite direction of the prevailing price trend.
The good news is you don’t necessarily need to have a great deal of crypto trading experience to be able to spot these patterns. In fact, there are a number of easy-to-plot chart patterns that are widely used by traders of all levels to identify where prices might be heading next.
1. Triple & double tops and bottoms
Triple or double top and bottom chart patterns are exactly what they sound like; when prices ricochet off the same resistance (top) or support level (bottom) two or three times consecutively.
Both triple and double patterns are reversal setups and typically signal prices are about to head in the opposite direction. A double top, for instance, is when a crypto asset is in an uptrend and prices meet a strong resistance area. During the first visit, prices bounce off it and break lower temporarily before quickly rising back up. Upon the second visit to the same resistance level, prices are forced down much stronger than before and a new downtrend begins.
If prices break above the resistance or below the support at any point, the pattern is considered negated and a price continuation will likely occur instead of a reversal.
While double tops and bottoms are far more common than triple patterns, it’s often the case that triple patterns deliver stronger reversals.
2. Ascending/descending triangles
Ascending and descending triangles are known as continuation chart patterns (bullish and bearish, respectively). An ascending triangle, for example, consists of a flat line connecting the recent price highs and a diagonal line connecting the higher price lows.
These appear when bullish traders get rejected at the same resistance level on multiple occasions but retreat less after each attempt until eventually, the price breaks through. The same goes for descending patterns, where sellers eventually overcome a base support after a number of pushbacks and prices continue lower.
3. Head and shoulders/inverse
Head and shoulder setups are another type of reversal chart pattern characterized by three sequential price peaks. Two smaller peaks (called "shoulders') sit on either side of a much larger, middle peak (called the "head"). The lower lows of each peak can usually be connected by a flat line, known as the "neckline."
Once the last shoulder forms and returns back to the neckline, the price breaks out. When all three peaks point upward, the pattern signals a bearish reversal is likely to happen. When all three peaks point downward, it's known as a bullish inverse head and shoulders pattern and suggests a new uptrend is about to begin.
Chart patterns tend to form more frequently in volatile markets when crypto trading activity is high.
“Higher volatility coincides with the early stages of chart pattern development,” technical analyst Daniel Chesler said. “A more active market attracts and supports more participants, and hence more gross supply and demand – or total investor interest – than does a less active market.”
It is worth noting even during busy trading periods, no chart pattern is 100% reliable. Seemingly perfect setups can often get rejected and move in the opposite direction or push sideways when volatility is low, which is why many traders recommend waiting for confirmation of a breakout or breakdown first (at least two consecutive closes above or below) or placing stop-loss orders to mitigate this risk.