Crypto Chart Patterns in Trading

FXOpen

Chart patterns are important technical analysis tools that enable traders to anticipate market direction based on the shapes that form due to various price fluctuations. They can use this information to make more informed trading decisions.

Heightened volatility and unpredictability are some of the features of cryptocurrency markets, but combining crypto trading patterns with other technical and fundamental indicators can provide useful insights. This FXOpen article looks at some of the most common chart patterns and how you can use them.

Ascending and Descending Triangles

Ascending and descending triangles appear when a horizontal trend line connects two or more lows or highs, and a sloping line connects falling lows or rising highs, creating a point where the price tends to break from the horizontal line.

In an ascending triangle, an upward-slanting line forms support, and the horizontal line acts as resistance. This suggests buyers are gaining momentum in lifting the price while consistently encountering resistance.

Theory: As a cryptocurrency continues to make higher lows, it becomes more likely to break out higher. Traders usually take a long position once it moves through the upper line of the triangle with higher volume, as it will likely rise by an amount equivalent to the triangle’s widest part.

In a descending triangle, the downward-slanting line forms resistance, and the horizontal line acts as support. This suggests sellers are pushing the price down to the support level.

Theory: As the crypto continues to make lower highs, it becomes more likely to break out lower. You could go short once it drops through the bottom of the triangle with rising volume, as it could fall by an amount equivalent to the triangle’s widest part.

Head and Shoulders and Inverse Head and Shoulders

The head and shoulders is one of the most reliable crypto graph patterns. It signifies a bearish reversal that can form at the end of a bullish trend.

The shape comprises three parts: a temporary high that forms a shoulder, a larger move-up that forms the head, and a third shallower move-up to form the other shoulder. The pattern is completed by a horizontal neckline acting as support and suggests the rally is losing steam.

Theory: It’s stated that you could go short once the cryptocurrency breaks below the neckline after the second shoulder. The target would be based on the distance between the neckline and the head projected down from the breakout point, with a stop-loss above the right shoulder.

The inverse head and shoulders is used for predicting a reversal from a downtrend. The first low forms the left shoulder, the deeper decline forms the head, and the third low forms the other shoulder. The upside-down pattern is completed by a horizontal neckline through the highs between the shoulders.

Theory: Once the cryptocurrency breaks above the neckline, you might go long. The target would be projected up from the breakout point, with a stop loss below the right shoulder.

Channel Down and Channel Up

The channel down is a bearish pattern that forms when the lines slope downward. The lower line acts as support and the top line as resistance, with the price bouncing between them.

Theory: If the pattern is emerging, you might expect the crypto to remain within the channel and open trades when the price bounces from either channel boundary. If the pattern completes, you could take a long position.

The channel up pattern has a reverse shape, forming when the two lines slope upward in a bullish trend. The lower line provides support, while the top line creates resistance.

Theory: As with the channel down, you could trade within the range or take a short position once the price breaks out to capitalise on the rapid move.

Bullish and Bearish Flag

Flags are popular bearish and bullish patterns in crypto charts that indicate a pause in an ongoing trend. They resemble a flag on a flagpole and can highlight trading opportunities in anticipation of a coin moving further in the direction of the trend.

The bullish flag appears during an upward move, with a strong rally – or flagpole – followed by a brief period of consolidation signalled by parallel lines forming the flag. The flagpole points to an initial surge in buying pressure, and the flag represents a pause or profit-taking point.

Theory: You could go long when the price breaks above the upper boundary of the flag, especially with a rise in volume. You could place a stop loss below the flag and a target based on the length of the flagpole, projecting up from the breakout point.

The bearish flag appears during a downtrend. A strong, downward move forms the flagpole, and a brief consolidation period creates the flag, signalling a pause before the trend continues.

Theory: You could go short when the crypto drops below the lower boundary of the flag. The price target would depend on the length of the flagpole, projecting down from the breakout point, with a stop loss above the flag.

Falling Wedge and Rising Wedge

A falling wedge forms when two converging lines slope downward, with the top line in a steeper descent than the bottom one. As the price consolidates, it creates a wedge shape suggesting a potential reversal. But it can also indicate that a bearish trend will continue.

Theory: Swing traders can trade between the lines as the pattern emerges, before the breakout, but most traders wait for it to complete before going long. A target is usually set based on the distance between the widest part of the wedge and the breakout point.

A rising wedge forms when the two converging lines slope up, with the lower line in a steeper ascent than the top to create a narrowing shape. It appears in an upward trend and signals a reversal but can also indicate a trend continuation.

Theory: As with the falling wedge, traders may trade within the wedge before the breakout, but usually, they wait until the price drops below the lower line to go short. The target will be based on the distance between the widest part of the wedge and the breakout.

Double Bottom and Double Top

The double bottom is a bullish reversal pattern that forms after a decline with two consecutive dips in which the price bounces back from a low, creating a "W" shape on the chart. The pattern is complete when the cryptocurrency breaks above the resistance formed by the peaks between the dips. Volume often rises during the breakout, which indicates buying pressure and helps to confirm the pattern.

Theory: Once the crypto breaks through the resistance on higher volume, you may go long and set a profit target based on the distance from the bottoms to the resistance level and a stop loss below the bottoms.

The double top is a bearish reversal pattern that follows an upward move, with two consecutive peaks where the price reaches a high and reverses, creating an "M" shape. The pattern is completed when the price drops below the support level formed by the dip between the peaks.

Theory: Once the price falls below support, you may go short. You might set a target based on the distance from the peaks to the support level.

Triple Bottom and Triple Top

The triple bottom is a bullish reversal pattern that forms after an extended decline, with three consecutive lows around the same level that create strong support. This can be a sign of buying pressure ahead of a turn higher. The dips denote failed attempts to break through support, and each support test typically sees a fall in volume until the coin breaks above the resistance drawn through the peaks between the lows on rising volume.

Theory: Once the price breaks through resistance, you may go long in anticipation of a reversal, with a stop loss below the bottoms and the target equaling the distance between the bottom and the resistance.

The triple top is a bearish reversal pattern that forms after an extended uptrend, with three consecutive highs around the same level creating strong resistance. This can show selling pressure ahead of a potential reversal. The peaks signify failed attempts to break through resistance.

Theory: Once the price falls through support (the line drawn through the lows formed between the tops), you may go short in anticipation of a reversal, placing a stop loss above the highest point and a profit target equaling the distance between the tops and the support.

Bullish and Bearish Pennant

The bullish pennant represents a brief consolidation before an uptrend continues. The small triangle forms following a sharp rally, which creates the flagpole, as the price consolidates within converging trendlines before breaking out. The consolidation phase has lower volumes than the breakouts.

Theory: You might go long when the price breaks above the top of the pennant, which signals that the rally may extend. You could set a target based on the length of the flagpole, projecting up from the breakout point and a stop loss below the pennant.

The bearish pennant features a flagpole created by a rapid price drop on higher volume and a small symmetrical triangle formed on lower volume as the price consolidates within converging trendlines.

Theory: You might choose to go short when the price falls below the pennant, signalling that the cryptocurrency could continue losing value. The target would be based on the length of the flagpole, projecting down from the breakout point, with a stop loss above the pennant.

ABCD Pattern

The ABCD pattern indicates potential reversals. The shape is easy to identify and shows opportunities with a high probability of success.

The pattern has four points and follows a specific structure resembling a series of zigzag lines. It can signal entry and exit points by recognising specific Fibonacci ratios between the price swings.

  • Point A is the start of a significant price move.
  • Point B retraces from point A.
  • Point C takes the direction of the initial move, extending beyond point A.
  • Point D is a potential reversal point.

Theory: You could go long at point D in a bullish pattern and short in a bearish pattern. You might set a profit target based on Fibonacci extensions or other indicators and a stop loss below point D in bullish trades and above point D in bearish trades.

Butterfly

The butterfly pattern has four parts that identify potential reversals based on specific price swings.

  • XA leg is the start of a significant move.
  • AB leg retraces from point X.
  • BC leg resumes in the initial direction but fails to reach point A.
  • CD leg is a potential reversal point.

Theory: You could take a position at or near point D in anticipation of a reversal. You would go long with a stop loss below point D in a bullish butterfly shape and short a bearish butterfly with a stop loss above point D in bearish trades. Take-profit targets could be placed based on the Fibonacci levels.

Conclusion

Crypto chart patterns can provide useful insights into cryptocurrency price movements that help traders decide when to enter and exit positions. Cryptocurrency chart patterns that develop over longer periods tend to be more reliable, and prices often make large moves once they break out of the pattern.

You can open an FXOpen account to practise using different types of crypto graphs and indicators to identify potential trades. The TickTrader platform allows you to draw a range of patterns and indicators on price charts to hone your skills.

At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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