Trading 101: Introduction To Crypto Chart Patterns
The cryptocurrency market has reached new heights in 2021 with Bitcoin's fascinating growth. The bull market we experienced this year is the best one yet since the inception of cryptos. With the astronomic rise of Bitcoin's value, many altcoins have registered their all-time high values in the first quarter. This phenomenon has lured the world into the crypto market space in some way or the other. We have seen millions of new addresses (both Bitcoin & major altcoins) being registered and significant growth in the trading volume.
Of all the existing ways to benefit from the crypto market, such as HODLING, Lending, Staking, Mining, etc. the most profitable is trading cryptos. As you know, trading involves buying & selling cryptos to take advantage of the price differences. The most effective and proven way of trading cryptos is by applying technical analysis on the crypto price charts and accurately forecast the upcoming price action.
Pattern Trading is an integral part of technical analysis and is widely popular in the crypto trading community. Identifying and trading these patterns will help you make huge profits, but you should make sure to follow all the rules without fail. In the current crypto sideways market, when most of the coins are moving in a range, identifying and understanding the formation of a crypto chart pattern will clear your indecision on interpreting the market condition.
For that purpose, we will publish a series of articles related to pattern trading where we explore some of the most reliable & crucial crypto chart patterns. In this article, we will discuss what exactly a crypto chart pattern is, the purpose of these patterns, different types, as well as pros and cons of trading them. Let's get started.
What Are Crypto Chart Patterns?
Many novice crypto traders get confused between crypto chart patterns and the typical candlestick patterns. The fundamental difference between the former and the latter is the number of candles involved in forming a pattern. Previously, we have discussed the continuation and reversal candlestick patterns where one to four candles are involved. But in a crypto chart pattern, many candles are involved. This number can range between 20 candles to 200 candles and sometimes beyond that as well.
The price of any crypto asset moves in three different stages - Trends, Ranges & Channels. While the price moves in these three market states, technical traders have identified certain patterns on the price charts that resemble the things we see in our daily life. One best example of this could be the Flag pattern This pattern is formed when a group of candlesticks combines to form a flag-like structure.
After rigorous back-testing, many professional traders across the globe have certified the validity of these patterns and assigned certain rules for each of them to be valid. Following these rules in pattern trading is essential, and if you fail to do so, there is a strong chance of facing significant losses.
The Purpose of Using Crypto Chart Patterns
According to expert opinions, recognizing and perfectly trading a chart pattern can yield way more profits in crypto trading than any other method. Using fundamental analysis for crypto trading would only make sense for swing traders. It is impossible for day traders and scalpers to trade the markets using crypto fundamentals as the time frames are too short. Chart patterns can be found in any trading timeframe. Be it 15 min, 4 hours, or daily time frame; we can find and trade these patterns to make instant profits.
Also, these patterns help crypto traders in determining the strength of an existing trend during critical market movements while helping them decide market entries and exits. Patterns make things easy for novice crypto traders as they help them understand the future direction of the price. Along with this, a deeper understanding of the reason behind any pattern formation will help you in differentiating a real and a false breakout when it occurs. More about this will be discussed in the upcoming articles in this series.
Crypto Chart Pattern Types
Crypto chart patterns are classified into three different types based on their impact on the crypto asset's price after their appearance. They are:
- Trend Continuation Patterns
- Trend Reversal Patterns
- Neutral Patterns
As the name suggests, the formation of a trend continuation pattern in a crypto asset implies that the existing trend will continue. Likewise, the appearance of a trend reversal pattern means the existing trend is weakened, and a reversal can be expected soon. If this pattern occurs in an uptrend, there is stable infrastructure now where you can short cryptos. Trading the neutral patterns is tricky. The development of these kinds of patterns on a price chart indicates that the price might go in any direction. Therefore, we must be cautious while trading the Neutral Patterns.
Popular Chart Patterns You Must Know
Trend Continuation Patterns
- Cup & Handle
Trend Reversal Patterns
- Double Top
- Double Bottom
- Head & Shoulders
- Expanding Triangle
- Ascending Triangle
- Descending Triangle
- Symmetrical Triangle
Note: A detailed explanation of the patterns mentioned above and how to identify and trade them will be discussed in individual articles of each of the patterns. So keep watching this space - KuCoin blog.
As simple as they sound, pattern trading skill is the most appropriate example of “easy to learn but difficult to master.” It is important to dedicate a significant amount of time to learning a pattern, knowing its rules, applying them on a demo account, in different timeframes, and on different asset classes. The more you are closer to mastering these patterns, the more confident you will be while trading them and dismissing any possible fake-outs. Stay tuned for more articles on reliable crypto chart patterns and how to trade them. All the best!
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