Best Pattern Trading Strategies:
A chart pattern is a trading signal that can help you anticipate future price movements. There are many types of chart patterns, and they’re based on the shape formed by price action over time. Chart patterns can be used to predict potential reversals in a market, signal long-term trends, and identify areas where buyers or sellers are dominant at any given moment in time.
Trading is a game of probability and chart patterns are one of the most important tools in your arsenal. When used correctly, they can give you an edge over other traders and help you make better decisions. We’re going to cover five of the best pattern recognition strategies for trading. These price patterns are ideal for spotting trading opportunities and entering a trade, but each pattern has different implications for when you should enter and exit.
Head and Shoulders Chart Pattern:
The head and shoulders pattern is a reversal chart pattern that can be both bearish or bullish, here’s how they should look:
- The left shoulder forms when price moves down to the high of the preceding peak. This represents a short-term low.
- The head forms when price moves down to the low of the left shoulder and then bounces off it, forming a higher low than before. This represents a medium-term low.
- The right shoulder (and therefore complete head-and-shoulders pattern) forms when price dips below the level of both these points, representing another short term low point where prices are now much lower than they were at either previous bottom or peak levels.
Triangle & Wedge Chart Patterns:
Triangles and wedges are two of the most popular chart patterns, and they’re also some of the most common. They’re both continuation patterns that can be either bullish or bearish. However, they’re very different in several ways.
Triangles are corrective patterns. They have a well-defined beginning, middle and end; they form as prices move steadily lower before turning sharply higher once again to form an upside breakout from their formation area. Wedges are terminal ones (also called “triangle reversals”). This means that when you see one appear on your chart it’s likely going to signal an impending reversal in price movement—which could either lead to further downside action or eventually result in an upside breakout from the pattern itself (depending on whether you’re dealing with a bearish wedge or bullish one).
Another difference between triangles and wedges is their symmetry: while triangles have symmetrical bodies that extend down at equal angles from both sides of their reference line/base trendline, wedges do not exhibit such symmetry; instead they tend toward being asymmetrical as one side slants downward steeper than does another side by comparison with its base trendline’s angle.
Cup-and-Handle Chart Pattern:
The cup-and-handle pattern is a bullish pattern that forms in an uptrend. The formation consists of two parallel trendlines and resembles half of a teacup. The handle is the consolidation period before the price breaks out of its prior range, which can take anywhere from weeks to months to form.
Flag & Pennant Chart Pattern:
A flag and a pennant are similar continuation patterns, meaning they form after an uptrend or downtrend. They are reliable patterns that form at the end of a trend and show reversal potential. They can be spotted easily and traded simply, so you don’t need to rely on technical analysis to trade them successfully. The only difference between flags and pennants is their shape—flags look like rectangular flags whereas pennants resemble triangles pointing downward (also called inverted triangles).
Double Bottom & Double Top Chart Pattern:
A double bottom is a reversal pattern that occurs when there are two troughs at approximately the same price level. This can happen at any time, but it’s most common in daily charts and weekly charts. The pattern forms when the price moves from peak to trough, then rises again to form another peak before falling back down again to touch or nearly touch (within 1% of) the valley floor for a second time. This can happen because prices often stop falling before reaching a new low point. The double bottom formation then acts as confirmation that the downward trend has ended and that upward momentum is starting again.
A double top is another reversal pattern that occurs when there are two tops at approximately the same price level within about six weeks of each other (though this varies with market conditions). It uses similar logic as above: When prices reach new highs but fail to break through them soon after, they typically return below those highs within six weeks or so—and sometimes sooner than expected if there’s enough volatility in any given day’s trading volume during those six weeks’ worth of sessions before they do so.
Use Chart Patterns as Part of Your Crypto Trading Strategy:
We hope you enjoyed learning about these five chart patterns which are among the best pattern recognition strategies for trading and the most reliable indicators of future price movements. Knowing how to spot them is an invaluable skill for any trader who wants to make smart investments but in order to give yourself the best chance of getting ahead of the market, chart patterns should be used in confluence with other strategies – and finally always remember to trade with sensible risk management.
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