Basic Chart Patterns and How to Read Them
Quick guide to how to read basic patterns that can appear in the graphs of various tokens, which could be useful if you want to dive into day trading or if you just want to know what is coming in the future of specific token.
You can take this as a second part of the previous article about basics of Technical analysis. Today, I would like to show you some of the basic patterns that can appear in the graphs of cryptocurrencies. Also, you will get to know how to read them, what they mean and what they are used for.
Head and shoulders
Head and shoulders pattern is considered to be one of the most reliable trend reversal patterns. This pattern is renowned for its three peaks. The one in the middle is the highest (head) and on each side is a smaller one (shoulders). To trade this pattern, it’s recommended you wait for pattern to completely appear and then after the price breaks out (price moves lower then neckline). The most common entry point is when the neckline breaks. Then, a SELL trade is usually placed.
This pattern is often used to determine when a bullish trend is coming to an end. It often appears after an uptrend and it can indicate an upcoming trend reversal (from bullish to bearish). You can also sometimes find the opposite of this pattern which is called Inverted head and shoulders (and usually signifies turn from down- to uptrend).
Cup and handle
As a second pattern, we have Cup and Handle. This often appears after a downtrend (as can be seen below) and it tells trader that he should place a buy order or buy immediately, because an uptrend is likely to follow. It can be recognized when trading candlesticks form first bigger bowl (cup) and then the smaller bowl (handle) is formed.
Cup and Handle often signalizes a change in markets, from bearish to bullish.
Flag
Next pattern is called Flag. This is generally regarded as a bullish pattern. It can be found by looking for candlesticks that form the shape of a rectangle pointing downwards. It should be missing its right border. It’s important that the flagpole precedes it (as shown below).
The Flag pattern is mostly used to determine if the previous trend (uptrend) will continue or not. While Flag pattern may show us that the uptrend will continue, it is also important to take a look at the traded volume to see if the trend is able to succeed.
Higher highs
This pattern can be put into the same category as the next one. Both of them are useful when you want to identify whether or not a cryptocurrency is in an uptrend or a downtrend. First lets talk about Higher highs. If the cryptocurrency is constantly hitting higher prices we are talking about uptrend. This can indicates the bullish trend of the crypto as more investors are ok with paying higher and hogher price.
Lower lows
Tying into the previous pattern… Lower lows. As higher highs indicate bullish trend, the Lower lows indicate bearish trend. When the price of a currency is constantly hitting lower and lower prices, we are talking about downtrend. It means that investors are selling and buying cryptocurrency at lower and lower prices. This pattern may be scary for some investors as they see the price going down, but you should keep calm (Patience is a virtue!) and just look for patterns that could indicate the change in the trend like the Flag or others.
Wedge
As our last pattern in this article, we would like to describe the Wedge. The Wedge will be performed when candlesticks form a sideways positioned and (usually) elongated triangle. By definition, this happens when the price is hitting lower highs and higher lows simultaneously. With the help of two imaginary (or drawn) straight lines, you can determine the breaking point of the pattern — the tip of the triangle — often times even before it happens.
Typically the Wedge is used when a trader wants to look for a price reversal. By that, we mean if the cryptocurrency is trending more upwards in the wedge, the currency may then turn into downward trend.
Thank you for reading.
