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Technical chart analysis: Spot patterns like pros

By RAIN EDITORIAL TEAM - May 15, 7:00 PM

Crypto trading is not just about intuition and fundamentals, if one knows where to look. In fact, most professional traders don’t even consider their traded assets goals, vision, and achievements; all they analyze is their price action, and the patterns their charts form. Today, we’ll take a look at the most popular technical price chart patterns, and show you how to use them to your advantage.

What are price patterns, and why do they matter?

Price patterns are formations that are usually followed by a certain price action. The formations are normally drawn using trend lines on candlestick charts, which is a type of price chart that most technical traders use. Because these patterns can basically predict what’s ahead relatively reliably, they are immensely popular among traders of all kinds. 

Trend lines and candlesticks: two major components of patterns

Trend lines and candlesticks are essential parts of technical chart analysis and pattern spotting, so let’s take a brief look at what they really are. Trend lines often connect the lows with lows and highs with highs on charts, and can be straight, curved, or any shape for that matter. Candlesticks, on the other hand, are the actual components of charts that display various information for traders, such as opening price, closing price, and trading range, all in a given time frame. Now that the basics are out of the way, let’s look at specific patterns and their types.

Reversal patterns: Double Tops, Heads and Shoulders, Double Bottoms

Reversal patterns are those that are usually followed by a price direction turn, meaning that if prices were going down, and there’s a certain reversal pattern spotted, it’s possible that the values will bounce back and start rising, and vice-versa. There are many reversal patterns out there, but we’ll look at the most popular ones today to demonstrate their effects, namely double tops, heads and shoulders, and double bottoms.

Double Tops

Double tops are really powerful, yet one of the easiest patterns to recognize during chart analysis. That’s because all you have to look for is a capital “M” shaped pattern, that has around equal sizes of legs. If you spot one, however, and you have long (bullish) positions in the respective asset, you could consider selling, as a double top generally means a reversal in an uptrend and turning to a downtrend. 

Heads and Shoulders

The heads and shoulders pattern is an interesting one, as it’s characterized by a local peak (head) and a few, around equally sized smaller peeks (shoulders) right next. A normal heads and shoulders is generally the sign of an uptrend turning into a downtrend after the shoulders, however, an upside down heads and shoulders can mean that positive price action is ahead.

Double Bottoms

Similar to double tops, double bottoms is a pattern that can be spotted via its distinctive “W” shape. While a double tops pattern means that the price failed to break resistance levels twice, a double bottoms shape signals that the momentum was stopped by resistance two times after one another, which indicates a bullish uptrend ahead.

Continuation patterns: Wedges, Triangles, Flags

Continuation patterns are not as exciting as reversal patterns, as they don’t signal incredible bounce backs and completely different price action, but that the price’s momentum will likely continue following its previous direction. Nonetheless, continuation patterns are important to reinstate confidence or spot entry and exit opportunities, so let’s look at the most widely known examples.

Wedges

Wedges are formed out of two trend lines that point towards each other but move in the same direction. This means that despite the fact the upper trend line of a wedge would eventually cross paths with the bottom trend line, they both point up or down overall. Upward angled wedges typically signal a break in a bear market, while downward facing wedges indicate a pause in a bull market.

Triangles

Triangles are similar to wedges in their shape, but feature significant differences. The most notable one is that while wedges’ trend lines point towards the same direction, most triangles' trend lines don’t. This means that in a regular triangle, either the top, or bottom trend line is flat, which signal a bullish breakout, and a bearish breakdown, respectively. If a triangle is symmetrical, there is a significant price action expected, the direction of which is unknown.

Flags

Flags are also popular patterns that are relatively easy to spot, as they are formed by two parallel trend lines that either point somewhat sharply up or down. If a flag pattern is facing down, the prices are expected to break out after the pattern is broken, while if it’s facing up, prices will likely drop after the flag’s broken.

Technical chart analysis is a popular way of trading crypto assets, and spotting patterns is an essential part of the process. These were the most popularly used examples, but there are countless other types that all aim to help traders reliably predict the next move of prices. In any case, try out your knowledge on Rain, and start your crypto journey today.

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