Welcome back to our series on technical analysis. So far, we have learned the following:
- Top 3 Simplest Crypto Trading Strategies
- Introduction To Japanese Candlestick Patterns
- Three Simple Japanese Candlestick Patterns To Use Right Now
Today let’s take the next step in determining more sophisticated patterns that will indicate a bullish or a bearish signal to traders. Some go overboard with these patterns. Case in point, the infamous “stegosaurus,” aka, “I really want to find a pattern here.”
However, there are some that do work wonders. In today’s article, we will be looking at the following:
- Head and Shoulders
#1 Triangle Pattern
Triangles are patterns that indicate a trend continuation and are often formed during mid-trend. The triangle patterns are formed when the upper and lower trendlines meet at the right side’s apex. Thus, the upper trend line connects the highs, while the lower trend line connects the lows. The triangles usually form three kinds of patterns:
- Ascending triangle: This triangle uses an upward trending line, with the price action getting tighter and tighter until the bulls take control and break above the upward horizontal line.
- Descending triangle: This triangle uses a downward trending line with the price action getting tighter and tighter until the bears take control and break below the downward horizontal line.
- Symmetrical triangle: This triangle has price action getting tighter between upward and downward trending lines. This pattern could either break when the bulls push the price above the downward trending line or the bears push it below the upward trending line. This pattern indicates a temporary accumulation.
The following chart shows a triangle in action.
Between March 25 and April 10, the Bitcoin price was trending in an ascending triangle pattern. Before the buyers broke out, BTC reached an all-time high of $64,863.10 on April 14.
#2 Wedge Pattern
The next patterns we will be looking into are the wedges. A wedge is often an indication of a trend reversal. It is a pattern marked by converging trend lines on a price chart. The two trending lines make a wedge shape and formation.
- Falling wedge: The sellers are desperately trying to push the price down but are progressively losing their momentum. As such the buyers take back control and push the asset’s price up.
- Rising wedge: The buyers are desperately trying to push the price up but are losing their momentum. The sellers wrest back control and promptly sink the price.
The following chart shows a falling wedge in action.
Between January 9 and February 1, the Bitcoin price dropped from ~$40,500 to $33,500, reaching a low of $28,750 as it trended in a falling wedge before the buyers broke out and BTC reached >$49,000.
#3 Flag Pattern
The flag pattern is a convenient pattern that signifies that the asset price is going through a short accumulation period before continuing the previous trend.
The Flag pattern has three elements to it:
- The pole or the initial trend
- The flag, aka a period of accumulation whose trend is opposite to that previously seen in the pole
- The breakout following the flag, which should ideally replicate the initial trend
Regardless of the time frame, the shape of this candlestick pattern should be similar and proportional to a flag where the second pole should have a similar length as the first one.
There are two kinds of flag patterns:
- Bullish flag: The initial trend was bullish, the flag is bearish and the subsequent breakout was positive.
- Bearish flag: The initial trend was bearish, the flag is bullish and the subsequent breakout was negative.
The following chart shows a bullish flag in action.
Looking at the chart above, BTC/USD jumped from $17,000 on December 12, 2020, to $40,000 on January 8, 2021. Following that, the consolidation flag happened till January 28, wherein it dropped to $30,500. After that, Bitcoin regained control and jumped to $57,500 on February 21.
#4 Head And Shoulders Pattern
Finally, we will be looking at one of the most interesting technical analysis patterns out there – the head and shoulders. This is a fascinating pattern that helps in detecting momentum exhaustion and trend reversals. The “shoulders” of the pattern will be around the same level, and the head will be above or below the shoulders.`
There are two variations to this pattern:
- Head and Shoulders: In this pattern, the head is above the two shoulders. After charting this pattern, the asset price drops down.
- Inverted Head and Shoulders: In this pattern, the head is below the two shoulders. After charting this pattern, the asset price goes up.
Let’s look at the head and shoulders in action.
In the BTC/USD daily chart above, the asset formed the head and shoulders between March 8 and May 12. Following this pattern, the Bitcoin price dropped from $56,600 to $34,750 between May 12 and May 28.
So that concludes the fourth chapter in our series on technical analysis. Next, we will look at more price behavior and familiarize ourselves with more tools to help better understand the crazy world of technical analysis.
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