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Arnaud Deblander
Mar 14, 2022 12:40 PM

What are chart patterns?

Chart patterns are distinctive formations that resulted from the rise and fall of assets on a chart. These patterns are the cornerstone of technical analysis. When the patterns exhibit a change in trend direction, it is known as trend reversal. On the contrary, if the trend continues in its direction, albeit a short pause; it is a trend continuation.

Traders and investors rely on these patterns coupled with indicators to make decisive moves. What are some of the most popular patterns that pro traders look at? Here’s the list!

1) Head & Shoulder

This is one of the most classic figures in pattern analysis. It is a particular form of a triple top; it will in 90% of cases, this indicates a downward turn.

The figure shows three successive tops: the most important one is central and can be called “the head”. It is surrounded by two other smaller tops. The figure must be symmetrical, both in the spacing of the different tops and in their duration. The neckline can be upward, downward or oblique.

The target position should be equal to the distance from the neckline to the head.

The psychology aspect:

This configuration indicates a failure of the three successive attempts of increases. In terms of trend, the inability for a cryptocurrency to form a new higher on the last top indicates a slowdown in the upward trend. Usually this is seen through an increase without real volume.

The variants:

This configuration will never appear in a perfect form. There are unusual shapes: tops that are completely symmetrical and so on.. The important thing here, beyond focusing on the form, is to understand the essence of this configuration: it is a figure of reversal.

Where to place yourself?

Option 1: Start a short position as soon as the neck line is broken or wait for a pullback. Position the stop loss above the neck line.

Option 2: Start a short position at the top of the third top.

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2) Inverse Head & Shoulder

This is the bullish version of the Head & Shoulder, it is a special shape of triple bottom where the central bottom is deeper. Again, the symmetry is a key element of this configuration.

The target position should, here again, be equal to the distance from the neckline to the head.

The psychology aspect:

This is a pattern of failure after three successive attempts of decrease. Be careful to recognize the figure and its three movements. It has to be a clean setup.

Where to place yourself?

Place yourself as a buyer at the break of the neck line or during the pullback, which takes place every other time. The stop-loss should be placed just below the neck line.

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4) Falling wedge

The wedges are chartist figures delimited by two converging trend lines that, unlike the triangles, are oriented in the same direction. So, a falling wedge has a converging support line and resistance line, both facing downwards.

The psychology aspect:

The bullish behavior of this figure may seem surprising. Indeed, the downward resistance shows the increase in selling pressure, with sales triggering lower and lower as well as purchases. The descending wedge is therefore a succession of new lower levels and new lower highs. How can we explain the strong predominance of bullish exit? This is due to the decrease in the amplitude of the oscillations. In the end, prices are falling but less and less low. Buyers will eventually make bears doubt and the price will go up.

Where to place yourself?

Open a long position when the price breaks the resistance line.

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5a) Ascending Triangle

Classic configurations where the support is ascending and the resistance horizontale. The price trend must oscillate between these two trend lines with a decreasing amplitude. The bullish exit takes place in 60%-65% and there is a risk of pullback in 50% of the case.

The psychology aspect:

Triangles are areas of consolidation. They represent only a pause in a previous trend. In the case of an ascending triangle, the ascending support shows that buyers are manifesting themselves for increasingly high price levels. The horizontal resistance indicates the price is blocked upwards over a fairly narrow price range. When the sellers have sold everything, the buyers being more numerous and aggressive will break the resistance upwards.

Where to place yourself?

If the price breaks the resistance: buy

If the price breaks the support: sell

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5b) Descending Triangle

Classic configurations where the support is horizontale and the resistance descending. The price trend must oscillate between these two trend lines with a decreasing amplitude. The bearish exit takes place in 53-54% and there is a risk of pullback in 65-70% of the cases.

The psychology aspect:

The horizontal support highlights buyers who block the decline of the cryptocurrency over a fairly narrow price zone at a level where sellers can decide not to sell their securities anymore. The downward oblique resistance clearly shows the progressive selling pressure with increasingly lower selling prices. The output becomes expected bearish.

Where to place yourself?

If the price breaks the resistance: buy

If the price breaks the support: sell

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5c) Symmetrical Triangle

Symmetrical triangles are figures formed by two symmetrical trends lines with respect to the horizontal. The support is oblique and bullish while the resistance is oblique and bearish. The price evolves in oscillations between these two trend lines with an amplitude that decreases over time. A bullish exit has a 63% chance of happening and a pullback can happen in 62-64% of cases.

The psychology aspect:

This is a figure of indecision where the two symmetrical lines reflect the two forces present: buyers vs. sellers. It is therefore a phase of balancing the two forces. The winners are the ones who had the advantage before, here the buyers.

Where to place yourself?

If the price breaks the resistance: buy

If the price breaks the support: sell

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6) Double Bottom

The bottom, synonymous with lows, often happens in pairs or threes. So we are talking about double bottom or triple bottom. These indicate potential support areas and are therefore likely to lead to upward reversals in 68 to 72% of cases.

The second bottom may be less deep than the first (as you can see on the graph). The neckline, which can be horizontal or oblique, serves as the general symmetry axis in the figure, allowing us to calculate a target. Generally, the breakout must be accompanied by a high volume.

A pullback is observed in 65% of cases. It is a return to the neck line.Generally these bottoms have a “V” shape more often than a “U” shape.

The psychology aspect:

The crypto is in a downward trend and fails twice on a low price zone. The rise of the second low will then dissuade sellers who have often liquidated most of their shares during the first bottom. This generally results in lower volumes at the second bottom.

The variants:

The so-called curved shape: where the second dip is less low than the first.

The so-called optimized shape: where the second dip is lower than the first, which gives a false sales signal also called a “bear trap”.

The so-called Adam & Eve shape: a first very pointed V-shaped low and a second more spread out U-shaped low.

Option 1: Wait for the neck line to break. Put your stop loss under this line and calculate your objective according to the depth of the dip (see graph). Pullbacks being quite frequent you can also wait until it arrives to position yourself as close as possible to the neck line.

Option 2: Position yourself in the ascending phase of the second bottom with a stop loss positioned below the lowest of the second bottom. This strategy requires taking a portion of the profits at the neck line because a third bottom is always possible.

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*Of course the contrary is true for a double top.*

7) Diamonds

Diamonds are figures in the form of “diamonds”.In theory, each trend line should be hit at least twice but in reality it is very rare to find a perfect diamond. This is a reversal pattern that is more commonly observed on tops than on bottoms.

The psychology aspect:

The psychology of a diamond pattern is best expressed with the idea of a changing of the guard. The broadening price action indicates that there is a loss of control by whoever formerly was in control and the power struggle will either resolve itself as a continuation of the past trend or will consolidate into a decision in the form of a break in one direction or another.

Where to place yourself?

The placement is quite simple on this kind of figure. This is a reversal pattern. Thus in case of diamond on top, it is necessary to sell after the break of the triangle support by positioning the stop above the resistance. For diamonds on bottom which are less common, we will wait for the resistance of the triangle to trigger a buy, the stop loss will have to be placed under the support.

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Conclusion

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