Stocks and cryptocurrencies behave in much the same manner. The prices of both rise and fall according to supply and demand. The more demand for a cryptocurrency, the higher the price. The rise and fall of prices is easily visualized in trading charts.
Charts often display prices using “candlesticks”, a single vertical line indicating the highest and lowest trading prices for the day. The candlesticks are typically colored green on days the crypto closed at a higher price than the day before and red for days that it closed lower.
In any trading chart, you can see price levels that the crypto just can’t seem to break beyond. When a price bumps into a level as the price rises, we call this resistance. When the price seems to meet resistance at a lower price point, we call this support. Prices have a hard time climbing above resistance points. Conversely, prices tend to have difficulty dropping below a price support level.
You can draw a line along the resistance and support levels to visualize a “resistance line”. Resistance lines that angle downward show a decreasing price pattern while resistance lines that trend upward show a rising price pattern.
By studying crypto trading charts, you can predict how the price will behave in the future. Certain patterns within a price action are common and known as “chart patterns”. Below is a collection of stock chart/crypto chart patterns that every trader should know.
Wedge trading chart pattern
A wedge forms when the price bounces between support and resistance lines. In this example, the wedge is outlined in yellow lines and is falling. A “falling wedge” hints at a breakout above the upper resistance line. A “upward wedge” typically results in the price breaking downward through the support resistance line.
Symmetrical Triangle trading chart pattern
A Symmetrical Triangle pattern looks similar to a wedge but the lines begin the close together. The price variant is narrowing and prepared to break out. A Symmetrical pattern does not indicate which direction the price will break but when it does, the break can be quite large. A similar pattern, the Pennant or Flag pattern, is discussed below.
Pennant or flag trading chart patterns
While the Pennant pattern looks like a Symmetrical Triangle pattern (see above), they are typically considered distinct patterns with subtle differences. First, a Pennant pattern is prefaced by a “flagpole”. This flagpole represents a sharp rise or fall in the price followed by a period of consolidation. Secondly, the period of consolidation (the “pennant”) is shorter in the Pennant pattern than seen in the symmetrical triangle pattern. A pennant pattern lasts between 1-4 weeks whereas a symmetrical triangle pattern can last for months. In other words, a triangle pattern forms when the price range contracts over a period greater than 3-4 weeks.
Double Top trading chart pattern
The Double Top trading chart pattern looks like the letter “M”. The price bounces off the upper resistance line, failing to break through, then off a support line and back again to the resistance line where it again fails to break through. The resistance line has been tested twice and failed. The price will typically break down through the support line and fall.
Double bottom trading chart pattern
The Double bottom trading chart pattern is the opposite of the Double Top pattern. The pattern looks like the letter “W”. The price bounces off the lower support line, failing to break through, then off a resistance line and back again to the support line where it again fails to break through. The support line has been tested twice and failed. The price will typically break upward through the resistance line and continue to rise.
Ascending Triangle trading chart pattern
The Ascending Triangle pattern displays a horizontal resistance line, a steady price that has been tested multiple times but failed to break through. The support line display a rise showing the bottom end of the price continued to rise as the resistance line was tested. This pattern hints at a breakout to the upward side, above the resistance line.
Descending Triangle trading chart pattern
The Descending Triangle trading chart pattern is opposite of the Ascending triangle pattern. This pattern displays a horizontal support line, a steady price that has been tested multiple times but failed to break through the downward side. The resistance line display a decline showing the top end of the price continued to fall each time the support line was tested. This pattern hints at a breakout to the downward side, below the support line.
Rounding Bottom trading chart pattern
The breakout from a Rounding Bottom pattern depends on the price action before the rounded bottom formed. For instance, the price was rising, then fell into a Rounding Bottom pattern. We would expect the price to break out upward and past any resistance zones.
Cup and Handle trading chart pattern
The Cup and Handle trading chart pattern looks just like a Rounded Bottom pattern (see above) except there is a small decline after breaking out. This retracement , the “handle”, is only temporary and identified by its confinement between two parallel price lines. The asset will reverse out of the handle and continue on its bullish (upward) trend.
Head and shoulders trading chart pattern
The Head and Shoulders pattern is a common one, especially when predicting the reversal of a bull market. The chart displays a large center peak with two smaller peaks on each side (a “head” surrounded by “shoulders”). The price action can be seen as struggling to rise. Each attempt to rise results in a fallback to the support line. displays a horizontal resistance line, a steady price that has been tested multiple times but failed to break through. The support line display a rise showing the bottom end of the price continued to rise as the resistance line was tested. This pattern hints at a breakout to the upward side, above the resistance line.
Gap patterns occur when the asset experiences a strong price movement through a support or resistance line. The gap, or empty space in the chart, is the difference between the open price and the prior close price.
There are three types of gaps – breakaway, runaway, and exhaustion. They differ depending on when the gap appears in the trend. Breakaway gaps occur early in the trend, runaway gaps occur around the middle of the trend, and exhaustion gaps appear toward the end of the trend.
You should pay attention to the volume during the gap. A gap on large volume indicates conviction in the direction of the gap. For instance, a volume increase on a breakout gap hints the price will continue in the breakout direction.
Additional data points must be taken into consideration when analyzing chart patters. For instance, RSI can tell us whether the asset is over- or under-sold and volume can tell us how “strong” the signal is.
Analyzing the Head and Shoulders Pattern
In this chart, you can clear see the first shoulder form. After forming the first shoulder, the price bounces off the resistance line and climbs upward to form the head. The last prices in the head fall, then bounce off the trendline and rises back to the resistance line, forming the second shoulder. At the second shoulder’s peak, the price bounces off the resistance line again and begins to fall. This is the signal to sell. The pattern is complete, but our analysis does not stop there.
We know that inexperienced short sellers often look for this pattern. They place their shorts with stops just above the neckline. Then the more experienced players come in and take out the stops (by engineering a short squeeze). This is what caused the price to reverse and begin climbing again. However, this is a short-term reaction. After the stop action is complete, the price will typically continue it’s fall (we see the beginning of this action at the end of the chart) but this is not always the case. The price action after the dip truly indicates what happens next.