If you are looking to boost your scalping skills, knowing and understanding how to interpret crypto chart patterns becomes an indispensable skill. In this article, we will show the differences between the types of graphic patterns, their particularities and explain how to take advantage of them. Learn how these formations can help you identify market trends.
Graphic pattern categories
By researching different types of chart patterns, you will discover a wide variety of formations and the analysis associated with them. To interpret them properly, it is useful to know that these patterns are grouped into four main categories.
Categories of chart patterns
- Trend continuation patterns;
- Reversal patterns;
- Undefined patterns;
- Harmonic patterns.
This initial classification helps us understand the general behavior of the market in which they operate and to speculate what could happen in the future. By combining pattern analysis with other technical analysis tools and signals, you will take advantage of opportunities and improve your decision-making accuracy. Remember that correctly identifying these patterns requires practice and experience, therefore we recommend that you test and study different scenarios before applying them in real-life operations.
Next, we will explore the distinctive characteristics of each type of pattern and showcase examples to facilitate their differentiation.
Before we proceed, to avoid any confusion, you need to learn about the main differences between crypto chart patterns and Japanese candlesticks.
Trend continuation patterns
Trend continuation patterns indicate that the current market trend will continue. They are formed when the price moves in one direction, pauses and then continues in the same direction. It can be interpreted as a sign that buyers or sellers are taking a break before the main trend resumes. Some of the most common trend continuation chart patterns are:
- Flag: occurs when the price forms a narrow channel parallel to the main trend;
- Triangle: when the price forms a triangular figure with an uptrend line and a downtrend line;
- Rectangle: occurs when the price forms a horizontal channel.
These can also be found as consolidation patterns. Their appearance indicates stability in the market, i.e., that it will continue in the same direction as the main trend, either upward or downward.
Trend reversal patterns
These patterns can provide early signals of exhaustion of the current trend and, as the name implies, the possibility of a reversal.
Here are some of the most common trend reversal chart patterns:
- Double top: this pattern is formed when the price reaches the same resistance level twice and fails to break above it. It is a sign that the buying pressure is weakening and there could be a shift to a downtrend;
- Double bottom: contrary to a double top, a double bottom occurs when the price reaches the same support level twice and fails to break it. It indicates that the selling pressure is weakening and there could be a shift to an uptrend;
- Head and shoulders: this pattern is characterized by three peaks, the central peak being higher than the other two. The first and third peaks are the "shoulders," while the second peak is the "head." This pattern suggests the exhaustion of the uptrend and the possibility of a reversal to a downtrend.
These reversal patterns must be confirmed by a break of support or resistance levels. Once the breakout occurs, it is possible to determine the new market direction and make trading decisions accordingly.
Undefined patterns or bilateral figures
Indefinite patterns, also known as bilateral figures, do not indicate the direction of the trend. Although less defined, they are still helpful in anticipating market movements. These patterns allow you to be alert and prepared to act on whatever direction the price takes after the consolidation phase.
They occur when the price forms a symmetrical figure. Generally, they indicate a phase of indecision in the market.
The most common undefined patterns are:
- Ascending triangle: it appears when a horizontal resistance line is formed and the lows are set higher with each wave. To enter a long position, one must wait for a break of the resistance line or a reversal of the resistance line;
- Descending triangle: occurs when one side of the pattern is formed by horizontal support and the other by descending highs. It is useful for finding an entry point after a breakout of support or a reversal of support;
- Symmetrical triangle: in this pattern, the highs are lower and the lows are higher. Both sides of the triangle have the same angle of inclination. When it appears, it is difficult to predict what will happen, but a breakout can trigger a price movement equal to the size of the pattern.
To interpret these patterns, it is important to observe the specific characteristics of each one and look for additional signals to confirm possible price movements. In general, it is recommended to wait for confirmation of the breakout or reversal before making any decisions.
Harmonic chart patterns occur when the price forms a figure that follows a certain mathematical proportion. These patterns are less common than the previous ones, are considered more complex and require detailed analysis. But can be very effective in identifying investment opportunities.
The most common harmonic chart patterns include:
- Gartley Butterfly;
- The crab;
What these patterns indicate will depend directly on the figure they form and their proportions. It is important to know that you should only consider this signal when the figures comply with the established parameters.
Types of chart patterns in trading – Conclusion
Chart patterns are an essential tool for traders looking to identify opportunities in the market. We hope you have found this guide useful. Don't forget that the interpretation of chart patterns must be complemented with fundamental analysis and proper risk management. If you have any doubts, do not hesitate to consult other articles in our blog.