Crypto Chart Pattern Compendium
All technical analysis (TA) uses the left side of the chart to attempt to predict the right side of the chart with a reasonable degree of certainty. With chart patterns, the business of TA can become more of an art than a science. People, or robots and algorithms written by people, have traded markets for decades, but the same chart patterns appear again and again on any tradable product.
TA and chart patterns work well with cryptocurrency because it is often difficult or impossible to properly evaluate fundamentals beyond basic network use and activity. Crypto is also 24/7 market with no interruptions or after market hours, which can make the chart patterns more obvious because there is zero downtime while the pattern forms.
Each chart pattern generally has a known completion percentage and outcome. The king of chart patterns is Thomas Bulkowski who chronicled almost 14,000 chart patterns on stocks from 1991 to 2008. The patterns are also closely aligned with Wyckoff market cycles. The markup or markdown phases often include continuation patterns whereas the accumulation and distribution phases often form reversal patterns.
Recognizing Chart Patterns
A chart pattern can be defined as a recognizable formation or fractal that gives a bias towards future price movements. All chart patterns have a stereotypical fractal structure which are generally easy to identify. A poorly defined pattern should not be discounted entirely, but thought of as having a reduced chance of having the predicted outcome. Fractals can be any repeating pattern on a price chart for an asset, not necessarily a classically known pattern. Chart patterns and harmonics are examples of these known repeating fractals.
The key to successfully trading these patterns is to identify them and form a trade plan as the pattern takes shape. The most important aspect of every chart pattern, for new traders especially, is a clear road map for entry, target, and stop loss of a trade. The setups for these chart patterns can therefore be seen as highly actionable trading signals.
In general, all patterns trigger a long or short entry when horizontal or diagonal support or resistance is broken, which is often but not always accompanied by volume confirmation. There are plenty of excellent looking setups that never go anywhere and early trade entries can often go in the opposite direction. All patterns can be drawn and predicted as soon as information allows, but a trade entry should never occur until after the pattern has completed. If a horizontal entry is missed, price often returns to retest this level after the breakout. This is known as a throwback.
Stop losses are placed at a local high or low of the chart pattern, and targets are determined by using the measured move in conjunction with a 1.618 fib extension — both of which are based on the depth of the pattern. All measured moves are usually the size of the pattern formation itself, projected up or down from the breakout point. Fib extensions and measured moves paint a projected target, but that target can always under or over shoot depending on market conditions. More often than not, a target is reached perfectly either on a wick or during a new consolidation period.
Consolidation periods are often accompanied by descending volume. Buyers and sellers become less and less eager to enter a trade until the direction becomes clear. On aggregate, a chart pattern can gauge the sentiment or uncertainty of the market and provide a prediction for the next move in price.
If the volume profile does not match a pattern, it does not mean the pattern does not exist, it merely suggests that the probability of the pattern playing out as expected is significantly lower. Confidence and position sizing should be adjusted to accommodate. A matching volume profile for the pattern considerably increases confidence and probability of the pattern playing out as expected. Often, a descending volume profile will be a leading indicator for a developing chart pattern. If volume is noticeably descending, look for potential chart patterns.
There is also a time component or time factor for each pattern. A pattern developing on a higher time frame can suggest a higher probability of success for a trade. The most successful chart patterns often have a total duration of days and months, not minutes or hours. This does not mean that lower time frame patterns do not form adequate setups, but rather that they often have a higher failure rate due to excessive noise and lack of definitive consolidation.
There are three types of patterns based on their biases; continuation, reversal, or bilateral. The formation of a continuation pattern suggests the expectation of trend continuation after the pattern completes. The formation of a reversal pattern suggests the expectation of a dwindling trend, with price moving in the opposite direction after the pattern completes. Bilateral patterns carry no bias and can be considered a ‘trade the breakout’ situation. Generally, this means traders are risk off, flat, or in no position until the move becomes obvious.
You do not often see reversal patterns forming as continuation patterns in a trend, but it can and does happen. A head and shoulders pattern at the bottom of a bear trend is one example of this phenomenon. When these patterns do complete, it should be seen as a strong continuation signal. Here is a chart pattern cheat sheet for further reference.
Triangles are a common recurring pattern shape and should be thought of as pricing coiling before large price movement. An ascending triangle in a bull market holds a bullish bias while a descending triangle in a bear market holds a bearish bias. The formation of a pennant also holds a trend continuation bias. Triangles also typically complete after three quarters full or greater, meaning, after the triangle is drawn, a move can and does often occur before the pattern has completely filled in.
All of the following charts below were drawn on log scale. I prefer log scale because percentage changes are better reflected as price moves higher or lower. For example, the distance between US$100 and US$200 is equal to the distance between US$200 and US$400 because both scenarios represent a 100% increase in price. Chart patterns can be found on linear or log scale but I’ve found that patterns on log scale can be easier to identify.
One of the longest forming chart patterns in crypto was Bitcoin’s ascending triangle in 2015 and 2016 which took 205 days to complete. The triangle concluded with a false breakout on low volume before ultimately heading North.
When false breakouts do occur, the pattern can still remain valid, especially if the pattern had a long formation duration. Despite breaking down first, the setup for a long trade remained as soon as the horizontal resistance was breached.
The ascending triangle carried a 1.618 fib extension and measured move of US$607 and US$715 respectively, which was reached before price reversal. When the zone of resistance, or target for a pattern is within a large range, closes for those trades with weight around the average of the two extremes is the most conservative approach.
The resolution of the slow forming ascending triangle led to a bilateral triangle with targets of US$500 and US$800. This triangle did not have a clear descending volume profile and broke down on news that Bitfinex had been hacked for US$72 million.
Another bilateral triangle formed on the Bitcoin/USD daily chart throughout the month of January 2018, with targets of US$6,135 and US$16,335, which were reached on the downside target almost exactly. The pattern formed with the classic descending volume profile of consolidation.
The Ethereum/USD pair also experienced a slow-forming ascending triangle which took over 160 days to complete before eventually reaching it’s measured move of US$810. The pattern had a clear descending volume profile with a volume ramp once the horizontal resistance was broken. Price also tested the horizontal support twice before going higher. This is known as a throwback.
The Ripple/USD pair formed a 209 day bilateral triangle which broke to the upside target, consolidated, and eventually reached much higher. The pattern also had multiple descending volume profiles and resolved with a strong volume confirmation to break the range.
Triangles can also continue to push price higher when the trend is strong enough. On the Bitcoin Cash/USD pair, several triangles formed, both reaching their respective targets.
The Stellar/USD pair formed a tight, multi-month triangle throughout most of 2018. The pattern failed to break upwards despite carrying a bullish bias. All patterns, regardless of the setup, are subject to macro market conditions. Despite seemingly being a slam dunk trade, the pattern broke down following with the rest of the crypto market.
Similar to triangles, wedges form fairly often and signify reversals or pending support tests. A falling wedge (FW) has a bullish bias. A rising wedge (RW) has a bearish bias. Either can form after a bullish or bearish rally. Much like the triangle, wedges often break out when at least three quarters full or greater.
A FW forming after an up trend signals a continuation bias. A tight downward sloping wedge can form down to as low as 50% of the prior move. Throwbacks can occur at diagonal support similar to horizontal support or resistance. Break out is confirmed with an increase in volume.
The Bitcoin/USD FW below had multiple poles to use with the measure move. In this case, both targets were hit nearly exactly before pulling back. When multiple measured distances are available, I often use both to form a range of conservative and maximal targets.
A FW following a bear trend has a strong reversal bias. As sellers get exhausted on less and less volume, the trading range gets smaller and smaller. This multi-month FW on the Ethereum Classic/Ethereum pair was coupled with a building bullish divergence. Altogether, this setup is one of my favorites because of the confluence between price, volume, and oscillators.
A similar setup with a FW and bullish divergence occurred in January 2017 after a swift drop in price. These setups are also easy to watch as they are forming because they occur after a large price movement.
Bitcoin/USD formed another FW after dropping from US$6,200 in late 2018. Even on the four hour chart, the bullish divergence continued to build as price went lower. When price broke diagonal resistance, RSI also broke 50 and relative volume increased.
The Ripple/bitcoin pair also had a variant of the FW at the bottom of a downtrend throughout 2017. Like many patterns in crypto, this formation did not necessarily fit the classic rules of chart patterns, but nevertheless, behaved as expected. The pattern was completed after a wash out or capitulation at the lowest level followed by a swift price reversal.
A RW after a bear trend signals a continuation bias of the prior trend. Patterns on certain crypto pairs may be extremely slow moving with a subtle slope. The multi-month pattern on the Ripple/Ethereum pair never reached the measured move target, which pointed to a historic low for the pair. Instead, the pattern reached the lowest low of the RW and reversed upward.
At the height of the Bitcoin price in December, price was forming a wedge with price moving higher on lower and lower volume. This is known as a bearish divergence, and when paired with recognition of wedges, can yield highly profitable trades. The break of the wedge was also confirmed immediately with a spike in volume despite only a small drop in price.
RWs were common throughout Bitcoin’s bull run in 2017, most of which broke up and were not reversals. Hence, the importance of trading the breakout with wedges and using local highs or local lows as a stop loss. Both of the wedges below broke North, despite the pattern formation.
Head And Shoulders
The head and shoulders (H&S) or inverted head and shoulders (iH&S) chart patterns both represent reversal chart patterns. Ideally, the pattern has an obvious horizontal support or resistance line, which can present as a diagonal as well.
The hallmarks of a H&S include a series of three extreme lows, with the second low exceeding the first and third lows. Both shoulders should reach for about the same price. Although a strict descending volume profile is preferred, there is often a volume peak in the head of the pattern.
On the Ethereum pair, a multi-shouldered H&S formed in mid 2018. Multiple shoulders on the pattern are not particularly common but should not invalidate the pattern and setup. This pattern resolution also shows the importance of using both the fib extension and measured move when determining targets. Once price breaches support, stop losses are placed just above the last shoulder formed.
An iH&S formed on Bitcoin/USD pair in early 2018, also with multiple shoulders and a stark descending volume profile. The breakout was confirmed with a spike in volume as price broke the diagonal neckline.
The Ethereum/Bitcoin pair also formed a H&S in early 2018, which barely grazed it’s first target. Patterns with extreme wicks or diagonal support and resistance are often difficult to measure properly. The trader needs to decide whether or not to include these wicks when measuring targets. Measuring from both the candle wick and the candle body can further provide a target zone to close the trade.
An H&S pattern can also have an elongated head compared to the shoulders, as was the case in July 2017. A longer head formation only increases price projections once the pattern completes, but should not decrease the probability of the pattern reaching it’s projected target. Steep reversals while forming the head are also likely to distort the typical descending nature of the volume profile.
A large potential iH&S failed to resolve as expected in early 2018 on the Bitcoin/USD pair. This chart illustrates the importance of patience with entry triggers. Although the pattern completed, the horizontal resistance line was never breached.
In mid 2018, a one month iH&S formed on the Bitcoin/USD pair with the stereotypical descending volume profile. The volume history of the volume range (vertical bars) also illustrated the gap in price history after the neckline was breached. Confluence for the target prior to the move included; the 1.618 fib extension, the measured move, the previous horizontal break point, and an increase in volume history at the price target.
Ideally, the necklines of H&S or iH&S are strictly horizontal, but this is not always the case. Several of these patterns have formed on Ethereum/USD recently with a diagonal neckline. When this occurs, the targets become harder to identify based on price structure alone. The iH&S below formed on decreasing volume, with price currently sitting at the neckline throwback. The stop loss for the active long entry is below US$418, which was hit within the next few days.
Adam and Eve
The Adam and Eve (A&E) or inverted Adam and Eve (iA&E) chart pattern has a reversal bias and is a variation of a double top or double bottom. Ideally, the pattern has an obvious horizontal support or resistance line, which can present as a diagonal as well.
The pattern forms with an Adam (V) left and Eve (U) right. The V is violent and quick whereas the U is gentle and slow. In legacy markets, the A&E typically has uniform lows. With crypto, the Eve formation is almost always diminutive compared to the Adam. This may be because crypto market participants are largely driven by emotion which leads to violent sell offs and early buys after extreme lows are reached.
An A&E formed on Bitcoin in 2017 before the bull run to US$5,000. When measuring targets, I typically use the second Eve low rather than the first Adam low as a more conservative approach. Both lows can be included with the measured move to create a zone for an expected target.
Early in Ethereum’s history, an A&E formed around US$10 which would signify a bottom before a massive 4,500% bull run. Obviously, this won’t always be the case, but does illustrate the ideal trade entries that can be obtained when accurately identifying reversal patterns.
The Cardano/Bitcoin pair also had a A&E form below 1000 satoshis before a 250% bull run. This pattern immediately blew past the measured move target and gives credence to ‘letting runners run’ instead of closing 100% of the trade at the expected target.
On the Ripple/USD pair, a very clear and symmetric A&E formed with a classic descending volume profile. On higher time frames, A&E patterns look similar to a W bottom. The 1.618 fib extension and measured move yield a target near the 50% retracement of the previous range.
This A&E would go on to fail to reach the intended target, only to reform a few weeks later with a large consolidation pattern. On the second attempt, price had explosive volume once breaking the horizontal resistance.
Cup and Handle
The Cup and Handle (C&H) or inverted Cup and Handle (iC&H) chart pattern has a continuation bias after forming a U-shaped cup and often stark V-like handle. The pattern remains valid so long as the handle does not break 50% of the entire cup. Trade entries are triggered once price breaks the support or resistance of the cup, with a stop loss below the low of handle.
A multi-month C&H formed on the Bitcoin Cash/Bitcoin throughout late 2017. The pattern formed after a failed completion of an A&E, and very quickly reached the projected target after breaking diagonal resistance.
A diamond bottom or diamond top indicates formation of a reversal bias as momentum from the previous trend is waning. The diamond shape is created with higher highs and lower lows, touching each trend line more than once. The formation of the pattern can be thought of as consolidation before the next decision point.
Volume for this pattern tends to be variable and not strictly descending, due to highly volatile price conditions while forming. As the formation is completing, trade entries with stop losses above or below the most recent high or low are warranted.
On the Bitcoin/USD pair, several diamond patterns formed through April of this year. The larger diamond completed with a significant increase in volume. On higher time frames, this diamond appeared as a W double-bottom.
The shape of the diamond is often not perfect, while the price action within the trend lines is often highly volatile. This diamond on the Bitcoin/USD pair also had the stereotypical descending volume profile throughout the entire pattern formation.
The Ethereum/USD pair formed a wide-ranging and noisey diamond bottom with declining volume throughout mid-July 2018. The pattern resolved upward as expected with a large increase in volume.
Diamond patterns can occur on any time frame but most often occur after a large impulsive move. A diamond top formed the on Bitcoin/USD pair but concluded with several fake outs before the retracement downwards. When a breakout in price structure is not obvious, waiting for volume confirmation is preferred.
Disclaimer — Everything in this article is intended as educational information and not trading advice.