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What is Technical Analysis ?

Technical analysis includes the use of past performance for predicting future market behavior. It studies historical market data of price and volume and uses insights from market psychology, quantitative analysis, and behavioral economics to predict future market behavior. 

 

Technical analysis involves 2 main future market behaviors

 

                                1. Chart Patterns

                                2. Technical (Statistical) Indicators

 

Technical analysis is mostly used for generating short-term trading signals from various charting tools. However, it can also help in improving a security’s strength/weakness evaluation, thereby improving overall valuation estimation

 

With the help of technical analysis, you can evaluate investments and identify trading opportunities in price trends and patterns seen on charts. Therefore, you can time your entry and exit better. 

 

In this article, we’ll discuss the top 3 best chart patterns so that you can find good opportunities while trading Bitcoin and other cryptocurrencies. Before going into details, let’s find out what we mean by chart patterns.

What are Chart Patterns ?

In Bitcoin and cryptocurrency trading, pattern recognition plays an important role because unique patterns on charts help traders to find good trading opportunities. 

 

Chart patterns are distinctive formations on charts created by price movements of Bitcoin or other cryptocurrencies. They are the foundations of technical analysis. A chart pattern is formed when a line connects common price points during a specific time period. These patterns can be simple trend lines or more complex ones such as double head-and-shoulders formations.

 

Technical analysts and chartists identify these price patterns, examine current movements, and anticipate future market movements. However, traders often face the problem of information overload by drawing an endless number of patterns on a chart. That’s why, as a trader, you have to first determine which patterns you’ll see to make a trading decision. 

What are the Main Categories of Chart Patterns ?

Almost all the chart patterns can be categorized into two categories:

 

 

Reversal Patterns

 

These patterns indicate a change in trend direction. It can be broken into top and bottom patterns. The most common reversal patterns are Double Top, Triple Top, Double Bottom, Head and Shoulders, Reversed Head and Shoulders, and Falling Wedge. 

 

Continuation Patterns

 

These patterns indicate that there is a pause in the trend line. It also indicates that the trend will continue in the existing direction after a brief pause. The most common Continuation Patterns are Flag and Pennant (and Wedge), Ascending Triangle, Descending Triangle, and Price Channel. 

 

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Top 13 Best Chart Patterns in Technical Analysis

#1 Double Top Pattern

 

It is a bearish reversal pattern, involving two consecutive tops of roughly the same size with a small trough in between the two tops. 

The double top chart formation is confirmed when the Bitcoin price breaks below the neckline after reaching the second top. This neckline was the previous support level. After the double top formation, this support gets converted to the new resistance level. 

 

However, a trader must always wait for the confirmation of the double top formation before selling your Bitcoin. To confirm a convincing break below the neckline, look for a sign such as a rise in volume.

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#2 Triple Top Pattern

 

The triple top pattern is similar to the double top pattern formation. It is also a bearish reversal pattern. As the name suggests, it has 3 consecutive tops (instead of 2 in case of the double top pattern) of roughly the same size with two small troughs in between the three tops. 

In this case, you should confirm the formation of the triple top pattern. Check out whether the Bitcoin price breaks below the neckline after reaching the third top.

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#3 Double Bottom Pattern

 

It is a bullish reversal pattern, which includes two consecutive bottoms of roughly the same size. These two bottoms are separated by a small peak. 

Before taking a trading decision of longing or shorting your position, you have to confirm whether the BTC price has broken out above the neckline after the second bottom. With the price breakout, the neckline reversed from a previous resistance to possible support. 

 

You can confirm a strong break above the neckline if there is a rise in volume. If you are conservative enough, you can wait for the resistance-turned-support to hold when the Bitcoin price tests for the first time. However, always keep in mind that price movement doesn’t always test support after breaking above. So, keep that thing in mind. 

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#4 Head and Shoulders Pattern

 

This chart pattern is formed after an uptrend, indicating the trend reversal. Three successive tops of the Head and Shoulders pattern can be recognized by the middle top, which is the highest among the three successive tops. In this formation, the two outside tops (considered as shoulders) are lower in height and are almost of the same size. 

You can connect the two lows to form a neckline, which acts as a support. This trendline can be horizontal, or diagonal like a trendline. Formation of the Head and Shoulders pattern is confirmed once the Bitcoin price breaks the neckline after the third and last top.

There are 3 steps in this formation:

 

Step 1: Price makes a final higher high.

 

Step 2: Price fails to make another higher high and closes below the previous high, forming the right shoulder. 

 

Step 3: The BTC price drops below the neckline, consequently making a lower low and confirms the end of the uptrend. 

 

While analyzing the Head and Shoulder chart pattern, always keep in mind that the slope of the neckline is an important indicator. Two cases may happen:

 

  • Sloping down neckline: If this happens in the pattern then it signals bearishness as BTC price has already made a lower low before the right shoulder. 

 

  • Upsloping neckline: If this happens in the pattern then it signals bullish potential. 

 

An important lesson in this head and shoulder pattern is that the volume and momentum remain bigger than that in the head, despite the fact that the head makes a higher high in this pattern. It is this divergence that provides us an early signal indicating that the head probably is the highest high and it will not go any further. Next, we can expect a lower right shoulder, confirming the formation of the head and shoulder pattern. 

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#5 Reversed Head and Shoulders

 

 

The name says it all. The pattern is just the reverse of the head and shoulder pattern. This pattern includes a downtrend, followed by a possible reversal to the upside.  

Reversed Head and Shoulders pattern is a very successful bullish chart pattern. It consists of 3 swing lows. This pattern has a very high probability. Only a break above the neckline confirms the formation of this pattern.

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#6 Falling Wedge Pattern

 

 

There are two downsloping trendlines along with a support line in the falling wedge chart pattern. The Bitcoin price makes lower highs and lower lows as the trendlines slope downwards. This indicates bearishness. 

 

The buyers and sellers come closer together with the convergence of the two lines (resistance line and support line. In the falling wedge pattern, the lower support line is less steep. This indicates that the downward momentum of price is decreasing and the lows are getting less low.  

 

That’s why this falling wedge pattern is usually regarded as a bullish chart pattern. However, many pro traders have experienced that a falling wedge pattern is formed before a trend reversal as well as a continuation. 

 

  • A bullish breakout is confirmed when the Bitcoin price closes above the resistance. If you are a conservative trader, you should wait for a more reliable signal, especially when the BTC price tests the resistance as support and it holds.

 

  • A bearish breakout is confirmed when the Bitcoin price breaks below the support line and subsequently holds it even after the BTC price tests it. 

 

A breakout is reliably confirmed when volume increases. 

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#7 Rising Wedge Pattern

 

This chart pattern is exactly the opposite pattern of the falling wedge pattern. It usually provides bearish signals. However, many pro traders also believe that the rising wedge pattern also provides a bearish signal. 

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#8 Flag and Pennant (and Wedge) Patterns

 

Both the flag and pennant patterns are considered as the only continuation. However, wedge patterns can signal both continuation and reversal. Let’s differentiate among them with the following image:

All these continuation patterns show a small consolidation before the resumption of the previous trend. It is important to note that all these 3 continuation patterns (Flag, Pennant, and Wedge) are preceded by a big jump or drop in price. It looks similar to a pause in the middle of a drop-down or run-up. 

 

 

A reliable pattern of continuation (be it Flag, Pennant, or Wedge) can’t be considered without a sharp initial advance or decline (which is called a flagpole). Therefore, it can be said that these continuation patterns are preceded by flagpoles. 

 

 

While the Pennant pattern usually slopes neutral, Flag and Wedge slope against the trend. When a breakout takes place in Flag and Pennant patterns, a continuation trend is signaled. However, a reversal trend is signaled in the case of the Wedge pattern. 

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#9 Ascending Triangle Pattern

 

 

It is a bullish pattern. Ascending triangle pattern usually forms in an uptrend as a continuation pattern. In some cases, ascending triangle patterns act as a reversal pattern at a downtrend’s end.

With the support making higher lows, this pattern indicates that the Bitcoin price is pushing against the resistance and building up the momentum. Interestingly, the slope of the resistance line remains horizontal, making equal highs (at least 2 highs). In the upsloping support line, there will be 2 minimum lows. 

 

 

The ascending triangle shows that with the development of the triangle the volume decreases. An increase in volume will confirm a breakout. The big sale orders usually create a horizontal resistance line. However, the pattern indicates a building up of buying pressure. The bullish trend catches up and the price goes up only when the BTC price breaks above the horizontal sell wall. 

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#10 Descending Triangle Pattern

 

This triangular pattern is the exact opposite of the ascending triangle. Here, the support line remains horizontal, formed by at least 2 equal lows. The downward sloping resistance line is formed with at least 2 highs. Descending triangle pattern is a bearish continuation pattern. This is because lower highs are made by the price.

With the development of the descending triangle, volume decreases. It increases only when the Bitcoin price breaks out of the descending triangle. This pattern is a continuation pattern but at the end of an uptrend, it acts as a reversal pattern.

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#11 Symmetrical Triangle Pattern

 

This is both a continuation and reversal pattern, consisting of 2 higher lows and 2 lower highs.

A symmetrical triangle pattern is different from a pennant in the sense that the latter needs 3 or 4 candlesticks to be formed and the former needs more than that for formation. Another major difference is that pennants and flags are half-masts that occur in the middle of the move and are most common during explosive price spikes.

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#12 Rectangle

 

A rectangle pattern is also a continuation pattern that acts as a pause in the trend. You can easily identify this pattern from its two equal highs and two equal lows that are connected to form the parallel lines of resistance and support, which are the top and bottom lines of a triangle respectively. 

Near the support line, the buyers push the Bitcoin price back up. However, near the resistance line, the sellers push the Bitcoin price back down. The BTC price consolidated within these trading ranges. At the end of the pattern, you’ll see a breakout.

 

At the development stage of the rectangle, volume decreases. Sometimes, it just fluctuates. To confirm price break out, always see whether the volume has increased. 

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#13 Price Channel

It looks quite similar to the rectangle. The price channel includes two lines, the main trendline and the other channel line. These lines are based on two highs and two lows.

 

The only difference of price channel with that of rectangle pattern is that the former price channel either slopes up or down. However, in the case of a rectangle pattern, the channel remains horizontal. 

 

While the upper trendline acts as resistance, the lower trendline acts as support. Downward sloping price channels give a bearish indication, upsloping price channels give a bullish indication.

When a price channel is downward trending, resistance is the main trendline and the support line is called the channel line. When a price channel is upward trending, support is the main trendline and the resistance line is the channel line. 

 

In case of an uptrend price channel pattern, traders should buy near the support line and sell near the resistance line. 

Final Words

 

 

Traders should make trading decisions on the basis of a wide range of factors and technical analysis factors instead of one piece of information. A successful trader always looks for meaningful confirmation from independent perspectives. Using chart patterns is only one part of the decision-making and not the entire spectrum. 

 

Pro traders always make buying or selling decisions by using chart patterns along with other independent analytical tools such as trendlines, candlesticks, Elliot Wave, divergences, indicators, Fibonacci Retracements, MACD, and myriad of other technical and fundamental factors. 

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Related Resources:

 

If you still need assistance, you can refer to the following  guides: