Understanding crypto chart patterns: a guide to charting and analysis

In recent years, cryptocurrency has become one of the most popular asset classes to trade. And like any other financial market, cryptocurrency is subject to patterns and trends. These crypto patterns can be analyzed to gain insights into potential future price movements. Understanding crypto patterns is a crucial aspect of technical analysis. Having this knowledge can help traders to make informed decisions about buying and selling cryptocurrencies. It’s therefore useful to understand technical analysis and have a general idea of the market's behavior.

This guide will explore the basics of crypto chart patterns, what they are, and list some key patterns that every trader should know.

What are crypto chart patterns?

Crypto chart patterns are simply trends and formations observed on cryptocurrency price charts. Traders can use these patterns to identify potential price movements. By noticing them, traders can make informed decisions about their next move, which ultimately helps them decide when to buy or sell the asset in question.

Bullish patterns signal that the price is about to see an upswing, in which case, traders tend to buy. If a crypto pattern is bearish and the price looks like it’s about to drop, traders tend to sell their assets and profit before the price goes down.

There are many different types of crypto patterns. Each of them has its own characteristics and implications for price behavior. By carrying out technical analysis, traders can analyze the market, based on the price action over a certain period of time. Technical analysis shouldn't be confused with fundamental analysis. This is a different type of analysis that deals with market sentiment. In other words, it attempts to predict traders’ behavior based on current events. While technical analysis deals with market signals and price data, fundamental analysis attempts to predict reactions caused by feelings.

What are the most common crypto patterns found on charts?

Over time, multiple patterns can appear on a chart. Learning what they look like and how to spot them, allows traders to make better informed trading decisions. Some of the most common patterns in crypto charting include the following:

Cup and Handles

Our first trading chart pattern is called the cup and handles pattern. This is a bullish signal, which typically indicates that the price will trend upwards. The pattern was named after the shape it takes, which resembles a cup with a handle.

Source: tradingview.com

It starts with the formation of a cup, or a “U” shape. The shape usually appears in periods of consolidation within the market. Once the cup has formed, the price tends to form a handle. As you can see from the image above, in order for the handle to form, the price of the asset must drop. However, this is only a temporary drop. Once the handle is complete, the price typically surges up, and continues the previous uptrend.

Wedges

Next, we have crypto patterns called wedges. There can be two types of wedges — rising wedges and falling wedges.

Rising wedges are normally bearish signals. They’re typically formed by two converging trend lines that slope upward. The upper trend line’s slope is steeper than the lower one. This should not be confused with an ascending triangle, even though they look similar. The difference is that the lines are sloped in the same direction.

On the other hand, we have falling wedges. This bullish chart pattern is formed when two converging trend lines slope downward. This time, the lower trend line has a steeper slope. This pattern is referred to as a bullish reversal pattern. It’s similar to a descending triangle, except the upper and lower lines are sloped in the same direction.

Source: wikifx.com

Head and Shoulders pattern

Moving on to one of the most popular trading patterns, the head and shoulders. This is one of the most reliable trend reversal patterns in all technical analysis. It’s been observed in the crypto industry for years and is fairly reliable for predicting price movement.

The pattern is very easy to recognize, as it has three peaks. The middle one is the highest of the three, forming a “head.” Meanwhile, the two lower peaks form the two shoulders. This bearish pattern shows that the market is in a downtrend and that the price may continue to fall.

It’s worth noting that the three peaks should be of relatively similar height. The middle one is slightly higher than the other two, however, the “shoulder” peaks should be of very similar height. The closer it is to symmetry, the more perfect the pattern. Once traders manage to identify the pattern, they can start using it to make their predictions.

Ascending and Descending triangle

Ascending and descending triangles are two more common patterns we see develop within the crypto market.

Source: investopedia.com

The ascending triangle is a bullish reversal pattern. It’s formed by a horizontal resistance line and a rising trend line. The two lines converge to form a triangle pointing upwards. The pattern appears when an asset's price repeatedly tests its horizontal resistance but fails to break it. This signals that the buying pressure is picking up, and the market might see a breakout.

The opposite situation forms a descending triangle. This time, a horizontal support line and a declining trend line converge to form a triangle pointing downwards. This time, the price repeatedly tests a horizontal support line, and just like before, it cannot break the trend. The crypto pattern is confirmed when the price breaks below the support line. This is a bearish signal, meaning that traders should expect prices to start dropping soon.

Double and Triple Top pattern

Next, we have a double and triple top trading chart pattern.

The double top pattern is another bearish reversal pattern. It happens when a crypto price reaches a new high, drops down slightly, then goes on to retest the highs it just set. However, this second surge is typically unable to breach the previous high and the price starts dropping. It suggests that the bulls weren't able to push the price up the second time.

Source: investopedia.com

Then, we have a triple top crypto pattern, which is similar, except for the fact that it has three tops. This pattern behaves the same except for the fact that it surges and drops three times before finally breaking support. Again, this is another bearish pattern. It suggests the bulls have run out of steam, and that downwards price action is on the horizon.

Source: tradingview.com

Double bottom

Finally, we have a double bottom pattern. This one is considered a bullish pattern that's created by two consecutive troughs, roughly equal in price. However, the two are separated by a peak that appears between them.

Source: thinkmarkets.com

What happens is that the price of an asset reaches a low, then surges up to make a peak. After that, it drops back down to the original low. The double bottom pattern suggests that the selling pressure was exhausted. As such, the buying pressure rises, and a breakout towards the upside is expected.

Why charts are crucial for crypto traders

Understanding crypto patterns is an essential skill for anyone looking to trade cryptocurrencies While there is no guarantee that patterns repeat themselves, technical analysis can still help traders understand the market. This would give them an idea of what to expect, and allow them to make better-informed decisions. If the market gets disrupted and stops following the pattern, traders have to react and adapt. But, knowing how to read charts and notice patterns would at least give them a place to start.

FAQs

Are there patterns in cryptocurrency?

Yes, cryptocurrency charts are filled with various crypto patterns. They can signal positive and negative upcoming market behavior depending on the pattern.

What is a 3-top crypto pattern?

The 3-top crypto pattern, also called Triple Top Pattern, is a bearish reversal pattern. It's similar to a double top, only it has three tops instead of two. It happens when a price reaches a resistance 3 times before finally breaking its support.

Do trading patterns apply to crypto?

Yes, trading patterns can apply to crypto, similarly to how they apply to traditional financial markets. In fact, they're necessary for creating technical analysis — one of the basic tools crypto traders use.

How do you read crypto patterns?

Reading crypto patterns involves analyzing price charts and identifying trends and patterns. This is done through the use of technical analysis.