Learn Cryptocurrency
8 Mar 2022

What a Foldback Pattern is and How it Helps Analyze Price Action

Ananda Banerjee

Crypto trading isn’t as complex as new traders think. They often rely way too much on complex trading indicators (not that they aren’t effective). And in an attempt to learn every trick of the trade, they ignore the simplest of concepts. So history ends up repeating itself.

Understanding history outpaces some of the most impactful trading indicators like trendlines, support and resistance lines, RSI (Relative Strength Index), and more. That’s where “Foldback” comes in. Keep reading to find out what that is and how it helps.

Key Takeaways

  • Foldback patterns are reliable tools for analyzing and determining the broader market movements.
  • A foldback can be mirrored to ascertain the next leg of the price action.
  • Foldbacks are repeat swing structures that can be used to predict the generic market breadth across the subsequent timeframes.
  • Identifying a foldback pattern requires practice and familiarity with the highs and lows of the preceding swing structure.
  • Foldbacks can be used with other technical indicators like RSI, Support-Resistance lines, and more. 

Crypto trading runs like clockwork. Chart patterns, regardless of the time frame, tend to repeat themselves. And these repeated patterns can be used or rather extrapolated to form futuristic patterns. These futuristic patterns also often (more frequently than you can imagine) retrace the same path as they have followed earlier.

These historically determined patterns are termed Foldbacks. They are typically the chart inverses of immediately preceding patterns. But there is a lot more to a “Foldback” than this, much of which will be covered here.

What is a Foldback Pattern?

Simply put, a foldback pattern is nothing but a type of “Swing pattern”, which is a visual representation of a specific trend. It is essentially a reliable technique for market analysis wherein historical price points are used to predict the immediate future of a crypto asset.

To understand foldbacks better, it will help to go over some of their important features. They are:

  • A foldback pattern is best viewed across a larger time frame.
  • Foldbacks can be retraced to predict the future of a crypto asset.
  • Retraced or future patterns are termed mirrored foldbacks.
  • You can draw mirrored foldbacks by taking the highs and lows of the previous swing pattern into account.
  • Other trading indicators can be paired with foldback patterns for increased accuracy.

Predicting the Future of an Asset using a Foldback Pattern

At specific points in time, every crypto asset is known to tread the inverse of its initial path. This knowledge is what makes foldback patterns usable. And if you get the right signals on the latest chart, retracing the price action in the past can help you determine the mirror image or mirrored foldback.

What Do Foldback Patterns Tell Us

A foldback pattern doesn’t thrive on granular details like support-resistance lines and breakout points. Instead, it paints a generic picture of a crypto asset’s future price action. If you draw a mirror-image foldback accurately, you might be able to predict the structure that the asset’s subsequent price movement might follow.

A foldback pattern can help you with:

  • Understanding the nature of the preceding swing structure;
  • Tracing the next leg of the crypto movement;
  • Determining the sub-swings, especially if an asset seems to be moving steadily, without many emotional drivers along the way;
  • Following prior data accurately—in most cases the mirror-image foldback does this better than you can comprehend; and
  • Path-retracing across varying time frames. (The time frame of path-retracing varies widely. For instance, an asset might have formed a specific structure in three months, but the same structure can be retraced within two months, four months, or even one month while retracing.)

Now that we’ve taken care of the nitty-gritties of a foldback pattern, let us see how it used to make predictions.

Predicting the Broader Movement of a Crypto Asset

Step 1: Select a relevant time frame.

  • Choose wider time frames for more accuracy.
  • Daily charts are most common and reliable.
  • You can even opt for weekly charts if the asset is not so volatile.

Step 2: Look for symmetry.

  • Carefully view the chart to see if there are any recurring swings along the way.
  • Keep the latest price point as a reference and then move left to see the identical structures that the asset’s price has been making.

Step 3: Identify key points.

  • Once you have determined an accurate swing structure, find the highs and lows of the pattern.
  • At the lowest price point of the swing (the point from where the price starts to improve), draw a vertical line.
  • The line acts as the mirror with the preceding pattern on the left and the current price action on the right.

Step 4: Reverse the pattern.

  • Get a line-based chart view of the existing candlestick pattern. (You can use the line-chart enhancer on TradingView to get the corresponding line pattern for your chart.)
  • Shift the line chart lower and as a separate pane.
  • See how far right along the vertical line has the asset retraced the path of the older swing structure.
  • You can simply copy the foldback part of the line chart (black arrow) and superimpose the same onto the right side of the chart to get a picture of the broader asset movement.

Holdback pattern for predicting crypto moves

Source: TradingView

Step 5: Predict by superimposing.

  • With the foldback line chart available as a reference or guide, you can predict the key price levels of the asset concerned.
  • The troughs associated with the reference line chart can also be used to predict sharp price-changing possibilities.
  • The highest price point of the foldback can be termed as the resistance point.
  • If the price reverses before making the high, assume it to be the end of the mirrored foldback.

Once one foldback pattern is drawn, superimposed, and completed, you need to keep looking for recurring swing patterns to keep the analysis going. 

Step 6: Add other indicators to the chart. (Optional)

A Foldback pattern is a powerful trading tool in itself. But it won’t hurt to rope in a few allies: reliable on-chart momentum, and trend indicators.

Here is how you can do this:

  • Once you have identified and captured a foldback pattern, consider pairing it with other key indicators.
  • Add the likes of RSI, support/resistance lines, and even Fibonacci retracement/extension levels to enhance the accuracy of your analysis.
  • Do not overcrowd the chart with indicators as that might leave you confused.

Benefits

By now, you might have realized that foldbacks aren’t known for their specificity. Instead, they are mostly good at making the broader structure of the upcoming price action apparent. Yet, they have some benefits that you simply cannot refute.

Some benefits are as follows:

  • Foldback patterns can be made more accurate with relevant support and resistance lines.
  • An RSI momentum indicator may be used to make the predictions even more accurate.
  • A clear foldback pattern and the corresponding line chart can determine smaller swings in the upcoming price action.
  • Foldback patterns aren’t standalone chart resources. The process of drawing and extracting info from them is continuous.

Limitations

  • Not meant for beginners who aren’t familiar with chart timeframes, highs, lows, and key levels.
  • It requires a lot of practice to perfect.
  • It doesn’t tell us anything about the key buying and selling levels and only paints a broader market picture.
  • The time frame of the mirror image is often different from the original foldback.
  • Highs and lows of the current price swing might be higher or lower than the retraced swing.

Wrap-Up

Foldbacks are accurate, yes, but not when it comes to handpicking key buying and selling levels. Instead, an accurately identified foldback pattern can help determine the crypto asset’s future swing (swings). And once the generic trend is known, you can pair other indicators to get a clearer view of the market.

Foldback patterns are great forecasting tools. Especially for assets like Bitcoin and Ethereum that are more immune to market volatilities. But regardless of when and how you use a foldback pattern, it is important to keep a close eye on the market movements across multiple time frames to be able to perfect this form of analysis.

 

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Ananda Banerjee

Content Writer

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