Speculating the cryptocurrency market is no easy task. Just like any other trader, crypto traders are tirelessly seeking ways to predict the future movement of digital assets.
The price of cryptocurrencies can be influenced by numerous factors such as new features and upgrades, signing new partnerships, changes in regulations, hacker attacks and so on. All of this information can be valuable to predict the value of an asset, especially when used in conjunction with other methods such as trend detection.
Mastering crypto technical analysis will allow you to detect distinct movement patterns and as a result, predict the price trends despite the volatility of cryptocurrencies.
In today’s guide, we’ll discuss the most common patterns you’ll come across when trading cryptocurrencies.
Head and shoulders pattern
The head and shoulders is a common pattern that looks like a baseline with three peaks with the middle peak being higher than the other two.
The head and shoulders pattern predicts a bullish-to-bearish trend reversal pattern. In technical analysis, it is seen as one of the most reliable patterns regarding trend reversal. When detected properly, the H&S pattern is a strong indicator that an uptrend will soon come to an end.
The first shoulder represents the first price stagnation which is followed by a new high once the head is reached. There’s always a chance the bulls will further pump the price but once it starts declining again they will attempt to push it back up. That’s what the second shoulder stands for. After the second attempt, it’s clear they are failing and bears are taking over the market which signifies a trend reversal.
This reversal’s targeted price is roughly at the same distance from the neckline as is the peak of the head but in a downward direction.
When trading, you should not assume the H&S pattern will form. It’s recommended to wait for the decline after the right peak reaches the neckline. Then, you can take a position but not without taking other essential signals into consideration.
Reversed head and shoulders pattern
The reversed H&S pattern is the opposite of the one we discussed above and indicates that the market’s bears are losing control of the market. You should wait for the last shoulder to form completely before taking a position.
Just like in basic geometry, in trading, we have several types of triangles although different. They can be ascending, descending, and symmetrical.
Ascending triangle pattern
An ascending triangle pattern can be detected if the price is swinging between the constant line of resistance and the support is rising. Basically, the the trend forms higher lows and the highs remain relatively constant.
In technical analysis, the ascending triangle is seen as a reliable bullish formation that could maximize your profits if used correctly.
Some might rush to take a position near the support line which can result in a loss when the price movement becomes a bearish double or triple top instead.
You can detect targeted prices by looking at the widest distance between highs and lows, and applied up from the breakout point.
The best way to go about it is to wait for the significant upward breakout with a significantly larger volume to take a position. Traders can get caught in a bull-trap when following breakouts without inflated volume.
The descending triangle is a classic bearish formation where the price action flows between a steady support line and descending resistance which indicate that the crypto asset’s value is about to drop. Basically, the trend forms lower highs and the lows remain relatively constant, the oposite of a ascending triangle.
Once the downward trend starts, the pattern is confirmed and you should expect the price to do down further.
Symmetrical triangles are very frequent in crypto trading but they are also unpredictable.
Once the formation reaches its closure the trading volume will decrease since traders will likely have a hard time deciding their position.
There are two possible breakout movements: positive and negative. Either of them will be followed by a volume significantly larger than it was when the triangle’s peak was reached. As a result, traders need to carefully watch the north/south breakout points before taking a position.
Once the breakout occurs, traders can draw the parallel with the opposite side of where the breakout happened to deduce the target. To mark the targeted price you will need to connect that parallel line with the base of the triangle to transcribe the distance between the opening of the triangle to that parallel from the breakout point.
Wedges are also staples in crypto trading and investors consider them to be multiple price wave reversal patterns. While inside a wedge, the price action will go through multiple highs and lows until it leaves the pattern.
There are two types of wedge patterns – rising, and falling – and we will discuss both below.
Rising wedge pattern
In the rising wedge formation, the price will go through several highs and lows, all of them getting higher. This pattern predicts that a bullish trend will reverse into a clear bearish course.
In most cases, the price range of the wedge’s opening exposes the minimal price decline after the potential downward breakout.
The falling wedge is the reverse structure of the rising wedge and it typically predicts a robust bullish market after the eventual reversal.
The falling wedge formation looks like the mirror image of the rising wedge, but it is considered to be announcing a bull-run once the eventual reversal happens.
Traders should patiently wait for breakout confirmation before taking the long position since the bullish trend after the falling wedge can be notable.
The descending wedge’s minimum targeted price is the opposite of the ascending wedge.
It’s also worth mentioning that in the crypto market peaks don’t need to follow highs and lows in a precise straight line but are close enough in the price range to outline the formation.