FindingMarco has gone to such lengths to explain what the Crypto Chart Patterns can do.
1. Introduction to Crypto Chart Patterns
Past performance, says every financial disclaimer ever written, “is no guarantee of future results.” That’s true as far as it goes, at least in the mind-numbingly dull prospectuses that investment companies must include with any securities offering. Frankly, it’s a little disingenuous: No, there aren’t any guarantees. On the other hand, what else is there to go on?
The human race has arrived at its present condition partly because of our brains’ ability to recognize patterns. One can imagine it didn’t take too long for primitive man to notice that if someone got too close to, say, a crocodile that he ran the risk of getting eaten. Or to notice that the possibility of rain increased greatly when it was cloudy.
Even setting aside whatever debates exist in the area of evolutionary biology, think about taking a walk down a busy street in an unfamiliar city. Your subconscious mind is constantly assessing all of the visual data so as to glean whatever clues it can. If you’re skeptical of this, try an easy experiment: Walk 20 blocks concentrating only on the faces you see. Before you make it from First Street to Third, it’s a safe bet you will spot someone who looks like someone you know.
Your brain subconsciously compares every face you see to every face you have seen before, looking for someone familiar. In a very short distance, you’re likely to see dozens of faces that bring to mind people you might not have thought about in decades.
Another version of the same trick can be accomplished with a drive somewhere you’ve never been: Your attention is heightened because you have a hard-wired desire not to get lost. Your eyes sharpen as your grey matter switches into ultra-high definition: That’s why you generally can find your way back in reverse so naturally — pattern recognition and your homing instinct are two sides of the same coin.
To put it another way, you don’t notice things like the billboards along the route you take to your dry cleaner — unless there’s a new one that interrupts the pattern. But when you’re on the road, your mind will actively seek as much information as possible. You’ll find yourself reading billboards out of your peripheral vision, with your brain filing all that visual data for future comparisons. With practice, you can harness and hone this ability to train yourself to heighten your observations any time you like.
In the market, the price charts of securities are chock full of all sorts of patterns. To varying degrees, these patterns can be predictive of future outcomes. After you’ve introduced your brain to some of the most common chart patterns, you will find that you have a surprising ability to pick up on what has happened, compare it to what you know has happened in the past, and use it as a guide to predict the future. It’s not infallible, but the more you study patterns and the more charts you look at, the better you will become at recognizing them reflexively, by instinct.
This cerebral ability can keep you safe, help you find your way, allow you to recognize people you know (or notice their doppelgänger) and, in the financial context, to give you an edge as you process the nearly infinite stream of data you can glean from thousands of charts. Past performance is no guarantee of future results. But it can still give you a powerful advantage to engineer profitable trades.
One caveat, though — another morsel of trivia from the world of cranial geography. The same part of the brain that gives you a mental jolt or even a mental high from the prospect of financial reward (called the nucleus accumbens) is the same part of the brain that lights up when one uses drugs like cocaine.
It turns out the brain likes and indeed craves the endorphin rush that accompanies financial gain. That’s why you feel elated when you chance to find a five-dollar bill in the pocket of a jacket you haven’t worn in a while. It’s just a lousy five bucks; hardly enough for a respectable latte, but it still jazzes you up. So you have to be prepared to go into your trading mindset with eyes wide open and your thinking as clear as possible.
Yes, your brain is great at pattern recognition. But it also likes the prospect of the neurochemical surge that accompanies monetary gain. That’s why smart traders train themselves to use as many analytical tools, such as the various chart lines we covered earlier, to guard against false positives. In other words, never allow your brain to persuade you into forcing a pattern on a chart that’s not really there. Remember: The people you see in San Francisco who look familiar usually aren’t really the same folks you know back home in Scarsdale. They just look like it. So stay sharp, stay vigilant and stay close to the data that can help guide you.
Here are some of the common patterns you should be able to recognize as a successful cryptocurrency trader…
2. Candlestick Pattern
Big Black Candle. Long black body with a wide high-low range. Price opens near the high and closes near the low. BEARISH.
Big White Candle. Long white body with a high-low range. Price opens near the low and closes near the high. BULLISH.
Black Body. When open is higher than the close.
White Body. Close higher than the open. BULLISH.
Hangman. Black or white candlestick with a small body near the day’s high with little or no upper shadow and a long lower shadow — two to three times the body’s length. If it occurs during an uptrend, it’s a BEARISH pattern.
Shooting Star. Small black or white body with a long upper shadow and little or no tail. During an uptrend, it’s BEARISH.
Hammer. Black or white candlestick with a small body near the high, no or very little upper shadow and a long tail. When the hammer appears during a downtrend, it’s BULLISH.
Inverted Black Hammer. Black body in an upside-down hammer position. A reversal signal.
Long Lower Shadow. A black or white body with a lower shadow that’s at least two-thirds of the candlestick’s length. When this pattern shows up near support, it’s said to be BULLISH.
Long Upper Shadow. Black or a white candlestick whose upper shadow is at least two-thirds the length of the body’s. At resistance, it’s BEARISH.
Marubozu. A black or white body without a tail or shadow — the highs and lows are the open and close. Indicates continuation.
Spinning Top. Small black or white candlestick. Shadows range in length. On its own, the Top’s a neutral indicator, but it’s a critical element of other patterns.
Shaved Bottom. Black or a white tailless body
Shaved Head. Black or white candlestick without an upper shadow.
Doji. When the open and close are very close. Shadow lengths vary.
Dragonfly Doji. The open and close occur at the highest of the day. A long lower shadow is BULLISH. If the dragonfly appears at the bottom of the market it is said to signal a reversal.
Gravestone Doji. Open and close are at the low for the day. A long upper shadow is BEARISH. If the gravestone costs at the market top it’s thought to signal a reversal.
Long-Legged Doji A Doji with two long shadows, upper and lower. Neither bullish nor bearish.
Bearish Harami. Unusually long white candlestick followed by a small black body contained within the large white body. BEARISH if it comes on the heels of an uptrend.
Bearish Harami Cross. Large white body followed by a doji. A reversal signal that appears at the top.
The Bullish Harami. An atypically long black body followed by a small white candle contained within a large black body. BULLISH if preceded by a downtrend.
Dark Cloud Cover. Long white candlestick followed by a black candlestick that opens above the white candle’s high AND closes in the white candle’s body. During an uptrend, it’s a BEARISH REVERSAL.
Engulfing Bear Line. Small white body contained within the following large black candlestick. If it happens at the top it’s a strong reversal signal.
Engulfing Bull. Small black candle contained within the following large white body. A major reversal signal when it occurs at the bottom.
Neckline. Black candle followed by a small white one with a close near the low of the black candle before it. Occurs in a downtrend. BEARISH when the white’s low is penetrated.
Three White Soldiers. Three long white candlesticks with progressively higher closes near or at their highs. When it appears at bottom it is interpreted as a bottom reversal signal.
Three Black Crows. Three long black candlesticks, each with a lower close, near or at their lows. When it appears at top it is considered as a top reversal signal.
Evening Star. A large white body followed by a small body in black OR white that gaps above the previous candle. The third is a black-body candlestick that closes well within the large white body. It is considered as a reversal signal when it appears at top level.
Evening Doji Star. A three-day pattern that begins with a large white body, then a Doji that gaps above the white body. The final element is a black body with a close into the white body. More bearish than the Evening Star. If it appears at the top, it indicates a reversal.
Morning Doji Star. A large black candlestick followed by a Doji that happened below the preceding candlestick. On the following day, a third white candlestick is formed with a prize close well into the black candlestick before the Doji. A major reversal signal. BULLISH.
Morning Star, A large black candlestick followed by a small body (black or white) that appeared below the large black candlestick. On the next day, a third white candlestick forms close to the black candlestick. Consider a strong reversal signal when it appears at bottom.
Now it’s time to test your knowledge. Grab some index cards and draw each candlestick pattern on one side and the name on the other. Double check these flashcards against the user key below. Don’t cheat – getting these down cold can help make you money! Practice until you’re proficient, including as to whether the pattern is bullish or bearish, then start looking for these patterns – and using the software to identify them.
Do be aware, however, that different trading platforms will have different and fairly subjective criteria about the definitions, so be sure to check. (For instance, what is the cutoff point for a long, normal and short bodied candlestick? While you can eyeball it, a computer needs a set of rules.)
NOTE: While anyone can take advantage of a bullish signal by buying, the only way to profit from a bearish signal is to short. If you glossed over short selling in the earlier section, please take a moment to go back and review it, and endeavor to ask your broker about a margin account.
3. Gap Chart Pattern
This is one of the easiest patterns to spot, so it’s a great pattern for new traders to keep their eyes peeled for. Gaps happen when a security opens trading much higher or lower than its closing price the day before. Higher gaps can indicate a new support level (a buying opportunity).
If the gap is lower, it signals a new resistance line. In both cases, conventional wisdom — that is, the conclusion drawn by observing this phenomenon (this pattern) — holds that traders can assume the trend will persist in the gap’s direction. While technical traders might not even concern themselves with the specifics of why a pattern emerges on the chart, gaps are typically caused by news events that occurred after the close of the previous day. Good news tends to create higher gaps, and bad news leads to lower one.
Winner’s Tip: Gaps usually happen on atypically heavy volume. If a gap appears without significant trading activity, be suspicious. If the volume is there, though, the trend is likely to continue until the priceline falls below the opening price that initiated the gap.
Thinking Things Over: While gaps are an easy pattern to spot, they might be more of a mental exercise for cryptocurrency traders. That’s not because news doesn’t move the bitcoin and altcoin markets — it absolutely does. The reason is that there has to be a pause in trading created by the end of a regular trading session for a gap to emerge. As many crypto exchanges operate 24/7, gaps tend to be rare and only appear when some major unexpected news event occurs.
4. Head and Shoulder Chart Pattern
This one is a little more complex because it requires four distinct points: two shoulders, the head and the neckline. And it’s worth noting that some people will not naturally “see” (or perceive) the literal head and shoulders, just as some people can’t see the mythical figures created by the stars that make up the night sky’s constellations. Software can be a big help in spotting patterns.
A head and shoulder forms when a previously identified uptrend reaches a new high, which establishes the LEFT “shoulder.” From there, the price falls but then rises again to a second new high. That’s the “head.” Next follows a price drop that honors the initial sell off from the left shoulder. The next step is another uptick, which matches the initial high that sets the RIGHT shoulder. When the priceline breaks the neckline, the pattern has run its course and prices move back lower.
Winner’s Tip: Head and shoulders marks a top (a sell sign) and simultaneously illuminates a downside price — helpfully providing both the entry and exit point for the trade.
Thinking Things Over: The above description is for a head and shoulders TOP, but the pattern also works in reverse in what is known as the “Inverse Head and Shoulders.” Pretend it’s Opposite Day and try your hand at reversing the pattern!
5. The Triple Top Chart Pattern
If head and shoulders seems hard to spot, a sort of subspecies might be more to your liking – the Triple Top. It is a type of pattern that is sometimes called a reversal indicator: It marks an imminent change in the priceline’s direction. At the crux of this pattern is the idea of resistance – the point on the graph at which the market loses its enthusiasm for a stock that has otherwise been uptrending. Once the same (or very close) high has been reached for the third time, adherents to this pattern assume that a third reversal is in the offing and they sell (or “short”) the shares. It’s another chart that also works in reverse as the Triple Bottom: Once the price reaches the same trough (or low, or “support” line), traders assume the shares will bounce again, so they BUY.
Winner’s Tip: The Triple Top is best used when evaluating a longer term chart – months instead of weeks.
6. The Double Bottom and the Double Top Chart Pattern
This is the Reader’s Digest Condensed Version of the Triple Bottom, and it tends to occur a little more frequently. The second time the price hits a high or low is the entry point of this trade. After two highs, the move is to sell, just as after the price reaches the same low twice it’s time to buy. And this leads us to an important side note.
Winner’s Tip: One of the sadder side notes in the financial world is the odd fact that massive lottery winners tend to go broke – sometimes even after winning hundreds of millions of dollars. Evidently winners assume that such a sum could never be exhausted, so they overspend on silly depreciating assets like a Rolls-Royce Phantom in a different color for every day of the week.
Many also tend to invest their winnings not in something prudent, like tax-free municipal bonds, but instead in ill-conceived high-risk “business” schemes that can turn a king’s ransom into a memory in short order rather than provide a reliable income for the rest of their lives. Alas.
One financial planner took a unique approach to this phenomenon, and it’s an instructive story for us to consider in the context of trading. Her idea was simple: She sent each of her clients a Powerball ticket when the jackpot reached some ridiculously huge dollar figure. She enclosed a letter wishing her clients luck – and suggesting that each should write down exactly how they would spend the $500 million prize.
Now, every financial adviser on God’s green earth tries and tries and tries to persuade his or her clients to write and adopt rational household budgets. And to a person, each adviser eventually realizes the futility of this advice. The fact is, people hate budgets, and they hate them for one reason. Budgets are just Too Real. They hit too close to home. Budgets force people to make difficult decisions with their finite resources. In this case, though, the response to the free lottery ticket and the chance to do a half-billion dollars’ worth of fantasy shopping elicited a massive response. Sure, her clients loved the free lottery ticket, but it turns out they loved “spending” the money even more.
A familiar scenario began to repeat itself, with two critical things happening. First, most clients put some real thought into what such a windfall would mean to their lives. Everyone’s first instinct was similar: They said they’d build a mansion, take a trip around the world and pick up a few toys at the Ferrari dealership or Harry Winston.
But what surprised this financial adviser was how many soon discarded those ideas, realizing after they really thought about it that they didn’t need a 40-room estate, a month at The Ranch at Rock Creek (just Google it) or a diamond the size of a kiwifruit. Not only that, but scores of her clients started to call to ask her where and how they should invest their fantasy winnings. It was a really smart way to teach a lot of good lessons that people otherwise have a difficult time wrapping their arms around.
It’s difficult to look at your household budget because it means making decisions with limited resources and, for most people, putting off their wants to take care of their needs. Writing a spending plan with no real budgetary caps, on the other hand, freed people to do some out-of-the-box thinking.
The moral of this story is that every financial move requires planning, and that planning must be centered on a stated, concrete goal. In the trading world, it is not particularly difficult to create a simple flowchart with if-then scenarios that cover the potential outcomes of a given action.
To wit: If I enter a trade at this point, my goal is to capture X return and then to close the trade. That covers the upside, which is, believe it or not, the harder part. The plan should also cover the downside, of course, and with more complex trades it should also include risk mitigation strategies – beginning with a stop-loss to automatically exit the position if losses reach a certain threshold and perhaps adding in more sophisticated hedges as you grow comfortable with them. (Some of these are covered in the next section, which will introduce or reintroduce you to derivatives.)
Always have a plan. That’s true for the Powerball jackpot. That’s true for a trip to the grocery store. And it’s certainly true, prudent and wise for any trade executed by any trader. It’s a dirty little secret of the investing world that success doesn’t require ESP or an MBA in mezzanine financing.
Rather, the most important characteristic of successful investing, as with any contact sport, is simply to understand the fundamentals. The second most important trait is discipline – sticking to your plan not only in the sense of guarding against losses but in protecting gains from your own brain’s own hard wiring. The most dangerous thing you as an investor can tell yourself is, “this time things are going to be different.” No. No! A thousand times NO. The whole point of technical trading and the statistical applesauce behind it is that patterns repeat. Things are not going to be different just because you have some winnings on the table. Most outcomes are going to be average – in fact, you can count on the fact that half of all outcomes will be BELOW average. Fully two-thirds of them will occur within a highly predictable distance of the median. We’ve covered that arithmetic, but it bears repeating. Here endeth the lesson.
7. Saucer Chart Pattern
This pattern mixes things up a little, perspective-wise. Instead of relying on certain price points, the saucer pattern is based on three separate long-term price trends. The first trend is a pronounced downtrend, a steep slide. Next comes a period of sideways movement, typically along the support line. That’s followed by a new uptrend. The trick is to buy along the support line and wait for the uptrend to take hold, then sell at a profit – and hopefully a predetermined one. This can be pretty tough for new traders when they make a profitable trade: They are tempted to hang on to capture a few more shekels. The trouble is that they often hang on not only after their gain has evaporated and even turns into a loss. Planning ahead is the best course of action to prevent this mistake.
Winner’s tip: The saucer pattern is not a quick trade. Trends take time to emerge. While some technical indicators might play out in the course of a day, this one easily could take a year. The other way that traders can confirm this pattern is to pay close attention to volume. It should be fairly low during the sideways trend.
8. The T-30 Chart Pattern
Now that you have been introduced to five common technical chart patterns, it’s time to add another factor into the mix — the trend lines we reviewed earlier. You had to have seen that coming, right? In the T-30, the T stands for “tail,” which is trader slang for a price with a pronounced drop that hangs down below a certain point. In this case, that point is the 30-day exponential moving average.
To spot this trend, you will need to set up a chart window that shows the security’s price, its EMA and, if possible, the 200-day moving average. The buy signal is the price drop on heavier-than-usual volume. The position is held, with the expectation that several sideways trading sessions are likely in the coming days before prices begin to rise.
Winner’s Tip: You need not buy the bottom of this tail for the trade to work. In fact, it is crucial to bear in mind that no trader can buy every bottom and sell every top. Technical trading is not a target shoot where the winner has to hit the bullseye to win the Kewpie Doll, it’s more akin to a game of horseshoes or hand grenades:
Close enough counts! With that in mind, it’s a smart idea to heed the experts, who recommend that traders wait until late in the session to initiate this trade after the tail — or “hammer” — breaks through the 30-day EMA (or even reaches as low as the 200-day moving average).
Bonus tip: Use the full power of your trading platform. This software is unbelievably useful, and most traders miss out when they only learn a few of the possible functions. Almost every trading platform out there is packed with various how-to’s and tutorials, so be sure to take full advantage.
Be prepared for the inescapable fact that technical charts and the computer screens they live on can look pretty intimidating. That’s why we’ve gone to such lengths to explain what the most common tools can do. One thing many traders do when they begin is to try to make the chart window a little more manageable visually by removing some elements, and volume is too often a casualty. Do not make this mistake. Volume does make the chart seem a little daunting, but you will get used to it, and it can and usually does provide extremely vital information.