Pattern trading is one of the vital tools that most price action traders use in their trading. Once the price forms a specific pattern, it represents a market story that helps traders to anticipate the future movement.
Pattern trading is prevalent in the traditional financial markets, but investors wonder how it works in the crypto market. The cryptocurrency market is an entirely decentralized market where the price follows the pure supply and demand. Therefore, any price action pattern in this market works better than other financial instruments.
If you are keen to know the famous price patterns in crypto trading, the following section is for you. Today we will discuss the top 10 most potent patterns that are effective for trend traders.
Top 10 most powerful for crypto trend traders
Most price action patterns form when the price moves to a zone before showing an aggressive movement. Traders can use them in both trending and counter-trending trade, but any direction towards the trend is more likely to succeed.
1. Cup & handle pattern
This pattern appears before a solid bullish trend. It combines a larger U pattern like a cup, followed by a small handle pattern. The cup pattern says that buyers became active in the market as they recovered the price from the selling momentum. Later on, the handle pattern comes with a new lower high, indicating that sellers failed to take the price lower. Once the price breaks the high of the cup & handle pattern, a strong bull run happens.
The above image shows the Bitcoin intraday chart where the cup and handle pattern formed. Once the price breaks above the near-term high, it shows a massive bullish movement.
2. The triangle crypto patterns
This pattern happens when buyers and sellers become indecisive about the market direction. Therefore, the price starts to squeeze on a point, and when the price gets the momentum, it breaks out in either a bullish or bearish direction.
The above image shows the intraday chart of BTC/USD, where the price breaks above the triangle resistance and moves up with an impulsive bullish pressure.
Keynotes: any triangle breakout towards the trend has a higher possibility of working out.
3. Rectangle crypto chart pattern
The rectangle pattern happens where buyers and sellers lead a balanced market by selling from the resistance level and buying from the support. Therefore, the price moves within a range with no specific trend. However, once a breakout happens, the price may move with aggressive pressure.
If the higher time frame trend is bullish, any bullish breakout from the rectangle pattern is more likely to show a good result.
The above image shows how a rectangle pattern breakout increased the buying pressure in the BTC/USD.
4. Flag crypto patterns
The flag pattern is a corrective market momentum where the price barely makes new low and high but maintains a parallel channel. The flag pattern usually appears after a strong bullish trend in the bullish market, pointing out buyers’ profit-taking.
The flag pattern’s trading approach is to wait for a bullish breakout from the trendline and open a buy trade from a correction.
The above image shows how a bearish flag pattern appears within a bullish trend and continues after the breakout.
5. Reversal crypto chart patterns
The reversal pattern appears in a swing low or swing high and indicates a trend reversal. However, we can use a reversal pattern in trend trading by finding it after a minor bearish corrective trend from where the bullish pressure will continue.
There are many reversal patterns based on price action and market condition. Among them, 123 Reversal pattern works well in both bullish and bearish market conditions. A buy trade appears at the swing low and completes the pattern once it breaks the near-term resistance.
The above image shows the 123 reversal pattern at the swing low, and once the price moved above the 45,946.19 resistance level with a solid bullish candle, it made a sharp move towards the upside.
6. Head and shoulders crypto pattern
The head and shoulder are famous and influential market patterns that work at the top of a bullish swing and indicate a bearish trend. Similarly, the inverse H/S pattern appears in a bearish swing low and indicates a bullish swing. The lower part of the H/S pattern is the neckline. Once the neckline breaks with intense bearish pressure, the pattern becomes valid.
7. Double/triple tops and bottoms chart pattern
The double top pattern forms when the price makes an equal high on a swing level. It represents a story where buyers attempt to break the previous swing high but fails. As a result, the price rebound lower with a counter-trend momentum.
Sometimes, the price may try three times to break the high and form a triple top pattern. Moreover, a similar theory applies to the bearish market, calling it a double/triple bottom pattern.
8. Rounded top and bottom crypto chart pattern
The rounded top and bottom pattern appears in the swing low or swing high and works as a significant price reversal. The uniqueness of this pattern is that it forms with a price behavior where it moves within a rounded shape.
Let’s see an example of the rounded bottom crypto pattern.
9. The failure swing trading crypto chart pattern
The failure swing pattern is another popular market reversal pattern where the price fails to form the double top pattern. There is an equal low or high in a double top or bottom pattern, but in the failure swing pattern, the price fails to reach the primary swing level and move lower without testing it.
In the above image, we can see that the price comes lower and forms a swing low. Later on, it moved higher and came back but did not reach the previous swing low. Instead, the price makes a lower high and moves above the near-term resistance.
10. Rising three method pattern
It form with the combination of five candles. The first candle remains bullish with a filled body and the second to fourth candle remains bearish and corrective. At last, the fifth candle forms with strong bullish momentum and closes above the first candle’s high.
The rising three methods pattern is a popular bullish trend continuation pattern that works perfectly in any crypto asset. It usually appears within a bullish trend and indicates a correction and rebound towards the trend.
All of the price patterns discussed above are profitable in the cryptocurrency market if you can use them to understand market behavior. However, these patterns do not provide any guaranteed movement, and you should use these besides other tools.
In any pattern trading, make sure to wait until the pattern completes. Otherwise, it may become obsolete by forming an inaccurate pattern. Lastly, follow the higher time frame’s direction as higher time frame traders are big investors who can develop a trend.