In this article, you will learn the basics of crypto technical analysis, and familiarize yourself with the most common bearish and bullish chart patterns. We will discuss whether crypto charting is a reliable addition to your trading toolbox, what is the role of chart patterns within the context of technical analysis, and how to spot them in the wild. For every specific pattern in this guide, we will also provide a real-life example from the Bitcoin price history, so you never miss a trend when you see one.
Read also: Forex Trading vs Crypto Trading: Unveiling Opportunities and Risks
Ready to dive into the exciting world of crypto chart patterns and unveil the secrets hidden behind the enigmatic titles such as "descending triangles" or "head and shoulders pattern"? If the answer is yes, read on!
What are crypto chart patterns?
First, let's start from the very basics, namely what the trading chart patterns are in general. As you can guess, they aren't just for crypto only: in fact, chart patterns work for any asset, as they are basically repetitive formations on a price chart used to predict potential future price movements.
Depending on how you count and who you ask, there are more than 70 identified patterns, and each has its own set of rules and ways to interpret. We, however, won't go into such details here and will only take a look at the most popular crypto chart patterns to give you a basic understanding of how to deal with them.
Reversal vs continuation patterns
In technical analysis, chart patterns are divided into two main types: reversal patterns and continuation patterns. As the names suggest, a reversal pattern indicates that the current market trend is about to change direction, switching from bullish to bearish or vice versa. Some examples of the common reversal patterns include head and shoulders pattern, double top/double bottom, and triple top/triple bottom.
Continuation patterns, on the other hand, suggest that the existing trend is likely to continue after the end of a previous pattern and can be thought of as brief pauses in the market movement before the trend resumes. It's worth noting, though, that there's no way to tell which way the price will go as the pattern is still forming, and it's typically advised to assume that the trend will continue unless confirmed otherwise. Among the most typical continuation patterns are ascending triangles/descending triangles, cup and handle pattern, flags, and pennants.
Chart patterns in the context of technical analysis
At its core, technical analysis — a trading approach to forecasting future short-term price movements by analyzing past price action — consists of four key elements: trends, patterns, indicators, and entry signals.
Trends, arguably the very foundation of technical analysis, refer to the general direction of the market at a given point in time. There are three trends the market can exhibit: upward trend (aka bull market, when prices go up), downward trend (bear market, prices go down), and sideways trend (prices seem stuck within a relatively narrow range with no significant movement in either direction).
Trends play a key role in forming support and resistance levels, which are the lines where the price regularly bounces back or drops, respectively. The key levels of support and resistance often serve as price targets for the asset, and being able to correctly identify them allows traders to manage risks and spot potential entry/exit points.
Once the trend is identified and support/resistance lines are drawn, here comes the turn for chart patterns to provide insight for the trader. To identify specific formations on a price chart, traders usually use specialized software or platforms.
Before acting on identified chart patterns, traders look for confirmation signals from technical indicators — mathematical calculations based on historical data — such as oscillators (MACD, RSI, Stochastic Oscillator) and overlays (Bollinger bands, Fibonacci lines). As this article focuses exclusively on patterns, we won't cover indicators, but there are many helpful resources available online.
Finally, the last step is to identify entry signals, which are the specific criteria set by traders to buy the asset. It's worth pointing out that there's no universal best option for determining when to enter the trade, as some may prefer a crossover of moving averages as an entry signal, while others may wait for a certain pattern to occur.
As you can see, charting is just one of the equally important items in the technical analysis toolbox, and any chart patterns should be evaluated holistically, considering other market factors in play.
Can you rely on crypto chart patterns for trading?
Are chart patterns reliable? This is what every beginner trader asks themselves, as there is a lot of contradicting opinions and evidence on whether using them is more profitable than, let's say, tossing a coin or following the advice of fortune cookies.
The truth is that learning trading patterns may be actually beneficial for you, but not in the way you think. Both trading algorithms and humans use charting, which makes their behavior more predictable and influences the direction in which the market goes. Looking at pending orders in the market around the reference points provided by the chart is what makes them useful — not blindly following the "sell the triple top, buy the triple bottom."
As already mentioned, trading on chart patterns only won't get you anywhere — your pattern recognition skill should go hand in hand with using indicators and analyzing volume, coupled with a solid understanding of what is the "personality" of this specific asset you're about to trade.
Another thing worth keeping in mind when using charting is that once the pattern is formed, it is useless and the market event is over. Instead, a good trader should anticipate based on the early formations where the market is going before the full pattern emerges. This also means that the statistical likelihood of the correct prediction is lower than most people think, as the market can change its direction and an entirely different pattern would come out. However, in the longer run, proper chart pattern analysis combined with other metrics will give you a statistical edge and put you in profit.
Top crypto chart patterns
Now that you are aware of the limitations of charting and won't (hopefully) blindly follow the formations you spot in the wild, it's time we take a look at the most used crypto chart patterns.
Ascending triangle pattern
The ascending triangle is a bullish chart pattern that is characterized by a horizontal resistance line and an upward-sloping support line, which meet at the point called apex. The pattern forms when the asset price sees higher lows, which indicates that the buying pressure increases while selling remains at a relatively consistent level, setting expectations that the price will eventually break through the resistance line. For a valid ascending triangle, the price should touch the resistance level at least twice, and the support level at least three times.
As the pattern develops, the volume tends to decrease, which means that the market has entered a period of consolidation and indecision. During the breakout phase, however, volume may rise significantly, confirming the validity of the pattern.
The potential price move following the breakout is typically determined by projecting upward the distance between the support and resistance lines at their widest point, and such level is often set by traders as their price target. The stop loss is placed below the recent low, and the entry point follows the high-volume breakout.
Descending triangle pattern
The descending triangle pattern is a mirror version of the ascending triangle pattern, where the support level is a horizontal line, and the resistance level is sloped downward. The pattern occurs when the price forms lower highs, suggesting selling pressure and increasing bearish momentum. The breakout below the support line typically occurs on the downside, signaling the continuation of an existing downtrend.
As in the case of the ascending triangle, the target price is set by measuring the height of the triangle at its widest point and projecting it downward from the breakout point. The stop loss is usually placed above the most recent peak, and the position is entered following a spike in volume below the breakdown candle.
Rising wedge pattern
The rising wedge is a bearish reversal pattern that is characterized by two converging trend lines, where both support and resistance lean upwards, forming the wedge shape, hence the name. The consolidation phase typically results in a breakdown at the downside, signaling the reversal of a prior uptrend.
The most common entry strategy is to enter the short position when the price breaks below the lower trend line, with the height of the wedge projected downward as a price target.
Descending wedge pattern
The descending wedge is a bullish reversal pattern that is, as you can easily guess, the opposite of the rising wedge. The pattern forms when the price of an asset sees lower highs and lower lows, which suggests that the selling pressure is running out of steam and the bulls are taking the initiative. The pattern is confirmed when there are at least two touches on the support level and two or three touches on the resistance level.
Most traders enter the position when the pattern is complete with the breakout above the resistance line and place a buy order.
Head and shoulders pattern
Head and shoulders is one of the most widely recognized chart patterns in technical analysis, beloved by many traders for its reliability and high success rate. The pattern typically occurs at the peak of a bull run and signals a potential change to the downtrend. Hence, it's a bearish reversal pattern.
The pattern consists of three peaks, a higher peak in the middle (the head) and two lower peaks on the sides (the shoulders). The neckline, which is a trend line connecting the lows of the price movement, serves as a support level, and the breakout below it confirms the shift in the market sentiment from bullish to bearish.
The target of the head and shoulders pattern is typically determined by measuring the vertical distance from the head to the neckline and projecting it downwards from the breakout point. The stop loss is placed just above the right shoulder, or, alternatively, at the head of the pattern, which assumes bigger risks for the trader.
Inverse head and shoulders
As a mirror image of the head and shoulders chart pattern, the inverse head and shoulders has three lows and two peaks connected by a neckline that serves as a resistance level. The lowest middle trough, known as the head, signals the bottom of the downtrend, followed by a temporary rally to the bottom of the right shoulder.
The pattern is considered confirmed when the price breaks above the neckline, signaling a reversal from the bearish trend to bullish, which is typically accompanied by an increase in trading volume. Similarly to its twin pattern, the price target is set by measuring the distance from the head to the neckline and projecting it upwards from the price breakout. A strategic stop loss is advised, placed at the level of the right shoulder or below the low of the breakout candle.
Cup and handle pattern
Cup and handle is a bearish continuation pattern, where the rounded bottom resembles a cup, and the right side of the chart faces upward forming the shape of a handle, hence the name. It is considered a bullish continuation pattern, as it is characterized by a temporary consolidation phase before the bulls retake the reigns.
The handle should be noticeably narrower than the cap and one-third to half of its depth. The highs of the cup form a resistance line, which, once broken, confirms the pattern. The trading volume typically rises closer to the breakout point and is at its lowest at the bottom of the cup.
The price target can be set by measuring the distance between the bottom and top of the cup and projecting it upwards from the breakout point. Stop loss is usually placed below the handle, which is the last bearish candle before the trend reversal.
Bullish pennant
In chart analysis, a bullish pennant is a continuation pattern that consists of a strong upward movement (the flagpole) and then a brief consolidation phase (the pennant itself) that ends with a breakout (the second flagpole). The upper trend line (resistance) connects the highs of the pullbacks, while the lower trend line (support) connects the lows of the price movement.
The confirmation for the pattern is received when the price breaks above the upper trend line followed by an increase in volume. The height of the flagpole projected upwards from the breakout point serves as an estimate for the price target, while the stop loss is placed below the lowest candle within the pennant formation.
It's worth noting that pennant crypto chart patterns share a lot of similarities with a flag pattern, the only difference being that the consolidation phase for pennants is triangular, as compared to parallel lines in a flag. The flags also typically last longer, but in other aspects, these are pretty much the same, so we won't dedicate a separate paragraph to the bullish flag and its opposite.
Bearish pennant
The bearish pennant, as you can infer from the name, is the opposite of the bullish pennant characterized by a sharp downward price movement (the flagpole) and a consolidation phase that ends when the price breaks down below the lower trend line of the pennant, signaling the continuation of the trend.
As in the case of a bullish pennant, the price target is estimated by the height of the flagpole but projected downwards. The upper candle of the pennant in this case serves as placement for a stop-loss order.
Double top pattern
Double top is considered one of the most reliable trend reversal patterns and consists of two peaks separated by a trough between them, resulting in a formation that resembles the letter "M." The peaks are ideally the same height and form a resistance line, while the lowest point of a trough projects a support line.
In a double top pattern, the first peak marks the culmination of the uptrend where the bulls start losing traction, leading to a temporary reversal represented by a trough. The second peak, which forms after, usually reaches a similar level but fails to break above, suggesting that sellers are strong, and the resistance line is likely impenetrable.
This bearish pattern is confirmed when we observe the breakdown below the support line followed by an increase in volume that signals that sellers are taking control over the market. Most traders set their price target by measuring the distance between the peak and a trough and projecting it downwards from the breakdown point. When it comes to a stop loss, the most common approach is to place the order just above the highs of the pattern, as breaking through this key resistance level will invalidate the bearish momentum.
Double bottom pattern
Double bottom, which is a crypto chart pattern opposite to a double top, commonly marks a bullish reversal and has two troughs roughly on the same price level that form a support line. The high in between them acts as a resistance, so together they form a "W" letter.
The formation of the pattern occurs as follows: first, the downtrend reaches the support line and bounces off it, creating the first trough. After comes a short rally that declines again and retests the support level (the second trough) but fails to break below it, signaling that the bears are running out of steam and that the reversal may soon follow.
Once the price goes above the height of the peak, the pattern is confirmed. The price target is set by projecting upwards the distance between the trough and the peak, and the stop loss is placed just below the support level created by the lows of the pattern.
Triple top pattern
Triple patterns are mostly similar to double top/double bottom crypto chart patterns, the most significant difference being the number of price extremes within the pattern, two vs three. What's worth keeping in mind, though, is that triple patterns are generally considered stronger reversal signals, as the presence of an additional peak or trough suggests that support and resistance levels are tougher to break through, so any shift in market sentiment is likely to be more impactful and long-lasting.
A triple top pattern consists of three peaks, each representing a failed attempt to break through the resistance level, and two lows that form a support line. The trading volume typically decreases with each peak, indicating that buying pressure is drying out and sellers are bracing for a reversal.
The pattern formation is complete after the breakdown below the support line, which also brings a surge in trading volume. The price target is typically determined by measuring the height of the pattern and projecting it downwards from the breakdown point. The stop loss is placed either above the recent high or the breakdown candle.
Triple bottom pattern
Triple bottom is a bullish reversal pattern characterized by three consecutive lows and two highs between them that form support and resistance lines, respectively. This chart pattern forms when the existing downtrend encounters a tough support that it fails to penetrate, bouncing off three times before breaching resistance. The trading volume should gradually drop throughout the pattern before increasing at the breakout.
The price target is again a height of the pattern but projected upwards. Place a stop-loss order just below the resistance level.
Ascending channel
The ascending channel is a bullish continuation pattern that typically forms within the existing uptrend and has two parallel trend lines sloping upwards. Each trend line has to have at least three touches for a pattern to be considered valid. The price movement is characterized by higher highs and higher lows, indicating a gradual increase in buying pressure over time.
Most traders are looking to enter the long position when the price touches the support line. Conversely, when the price approaches the resistance line, it suggests a possible selling opportunity. However, it's also worth keeping in mind that sometimes false breakdowns or breakouts can occur, and need to be confirmed by monitoring the volume and the price action that follows. Although, a genuine breakout is also possible, and is considered either a strong bullish signal (in case of an upward breakout) or a potential trend reversal (a downward breakout).
Descending channel
Descending channel, as opposed to the ascending channel, has lower lows and lower highs connected by the two parallel trend lines sloped downwards.
Traders who are confident that the price will remain inside the channel initiate trades when the price touches either of the two trend lines. Typically, a buy order is placed when the price gets closer to the expected lower low, and a sell order when the price moves to the next lower high.
Again, it's essential to remember that the channel isn't fixed in stone and breakouts can occur. The price penetrating the upper trend line is a signal for a bullish reversal, and the breakdown below the support is therefore a bearish continuation.
Bottom line
While understanding crypto chart patterns is undoubtedly a useful skill and arguably an art on its own, no trading strategy is really foolproof, and proper risk management is a must for both beginner and veteran chartists.
Most importantly, no one can predict the next market move with 100% confidence, and most technical analysis techniques can only in the best case narrow down the uncertainty and assign probabilities to several scenarios. That being said, we advise you to be mindful of these limitations and use crypto trading patterns only with other forms of analysis.
