Market movements are often unpredictable, baffling even seasoned traders. Technical analysis attempts to bring some predictability to the movement of crypto, stocks, and bonds by creating and interpreting charts. There are chart patterns for trading that can help you identify and predict market trends. This blog explains how following these levels and charts could help you become a better trader.
What is a chart pattern?
Simply put, a chart pattern is a graphical representation of a series of trend lines and curves. They often form recognizable formations on the price chart of crypto or any other asset, indicating either a buy or sell opportunity. Chart patterns have interesting names such as ‘head and shoulders,’ ‘double tops,’ and ‘double bottoms.’ Often, they are used in combination with other technical analysis tools like moving averages and relative strength indices (RSI) to help traders make entry or exit decisions.
Types of chart patterns for trading
There are different types of chart patterns that are commonly used in trading. Here are some of them.
Head and shoulders
The head and shoulders pattern is a reversal pattern—it indicates a change in price movement after an uptrend. It has a left shoulder, a head, and a right shoulder. Most often, it is a bearish signal. When the price makes a new high and retreats, it leads to a left shoulder. The head forms when the previous high is broken to form an even higher one and goes down. The right shoulder, subsequently, is formed when the price attempts to make a higher high but is unable to.
Traders may use the head and shoulders pattern along with other metrics to predict a bearish change in the market.
The double-top pattern is, again, a bearish indicator. As the name suggests, this pattern can be recognized by two consecutive peaks at roughly the same price level, separated by a trough. The second peak is usually lower than the first peak and confirms reversal (after an uptrend). The pattern is complete when the price falls below the neckline.
The double bottom pattern is essentially the same as the double top, except this time, it’s a bullish reversal. Double bottoms can be recognized by two consecutive lows at about the same price level, separated by a peak.
A rounding bottom pattern is a bullish reversal pattern that appears on a price chart after a downtrend. It is characterized by a smooth ‘U’ curve in the shape of a bowl. The bowl might sometimes take months, or even years, to complete. Once the price rises above the resistance, or the highest point of the bowl, traders can use other indicators to confirm signs of a bullish reversal.
Cup and handle
The cup and handle is another bullish chart pattern, denoted by a ‘cup’ shape on the chart, followed by a ‘handle’ for the cup curve. The handle is essentially a smaller downtrend following the end of the cup. The pattern is complete when the price breaks above the ‘handle.’
Wedges can be either bullish or bearish, depending on the direction of the trend. A falling wedge, which forms during a downtrend, is a bullish signal. Conversely, a rising wedge, which develops during an uptrend, is a bearish signal. The pattern gets completed when the price breaks the support (in a rising wedge) or the resistance (in a falling wedge).
Pennant or flags
A pennant pattern is a continuation pattern that can be bullish or bearish depending on the direction of the trend. Here, a small symmetrical triangle forms after a sharp price move and can take multiple weeks to develop fully. The direction of the breakout determines the future price movement in most cases.
This is a bullish continuation pattern, which means it occurs during an uptrend to signal a further bullish trend. It is characterized by two elements—a horizontal resistance level for the peaks, and an upward sloping trendline for higher lows. The pattern is complete when the price breaks above the resistance level of the peaks.
On the other hand, a descending triangle is a bearish continuation trend. It is characterized by a trend line sloping downwards, connecting lower peaks, with a horizontal line connecting the lows. Unlike the ascending triangle, this occurs during a downtrend.
The symmetrical triangle is, in some ways, a combination of ascending and descending triangles. Essentially, trend lines converge from both sides, connecting a series of lower highs or higher lows, forming a triangle shape. If the price breaks above the triangle, it is considered a bullish signal, and vice versa.
How to use TradingView charts
TradingView is one of the most popular charting platforms out there. It is widely used by crypto traders thanks to the availability of a wide range of charts, customizability, mobile access, and other features.
Here’s how to use them:
- Sign up for a free account or a paid one.
- Search for the crypto you want to trade and load the chart.
- Apply technical indicators and drawing tools directly on the chart to help with your analysis.
You could also use TradingView’s social features to find other traders with similar strategies and compare notes!
Although chart patterns have made it simpler to predict price movements, they are not always accurate. In fact, it is said that 80% of traders fail and quit because they can’t time the market. It is advisable to rely on both fundamental and technical indicators to make more accurate trading calls.
How do you use chart patterns for trading?
Chart patterns can be used to decipher price movement patterns and predict future movements. Traders use them to configure entry and exit points to make profitable trades.
What is the most accurate chart pattern to trade?
While there is no one accurate chart pattern, you can certainly increase your accuracy if you combine several technical indicators and fundamental research into the coin project.
Does chart pattern trading work?
It is difficult to predict price movements accurately right from the start. However, people often get better with practice!
Is chart pattern for trading profitable?
Chart patterns in trading can be profitable when used effectively. They help traders analyze market trends, make informed decisions, and manage risk. However, success depends on skill, strategy, and risk management.
What is the best chart pattern to trade?
The best chart pattern to trade depends on your trading strategy and goals. Popular patterns like the Cup and Handle and Bullish Flags are commonly used for profitable trading.
What are the 12 most important trading patterns?
The 12 most important trading patterns include familiar ones like Head and Shoulders, Double Top, and Bullish Flags, along with Candlestick patterns like Doji and Hammer, useful for predicting market movements.
Do chart patterns work in trading?
Yes, chart patterns can be reliable tools in trading when used with caution and in conjunction with other indicators. Their effectiveness varies, with success rates typically ranging between 50% to 89%.
How many chart patterns are there?
There are numerous chart patterns used in trading. Common ones include Head and Shoulders, Double Top, Double Bottom, Cup and Handle, Rounding Bottom, Wedges, Pennants, and more, totaling over a dozen.
Which pattern has highest success rate?
The pattern with the highest success rate in trading can vary, but some traders consider the “Cup and Handle” pattern to have a relatively high success rate for bullish signals.