Bitcoin Technical Analysis: Top 8 Chart Patterns for Crypto Trading

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Technical Analysis: Chart Patterns for Crypto Trading

Chart patterns are the bread and butter of any technical trader, and it is important to understand what they mean, and know how to act accordingly.

Instead of thinking about patterns as a way of determining whether price goes up or down, think of chart patterns as regions of consolidation, whereby breaking outside of the pattern can lead to a sustained breakout with volume. Always let price action tell you what to do, rather than predict where the price is going ahead of time. If your position goes underwater, make sure to follow your trading rules and cut your losses when they go beyond your threshold, as laid out by the parameters of your trading rules and strategy.

Note that there is no certainty that chart patterns will always play out, but merely represent a relatively high probability of success. As with candlestick patterns, chart patterns should be used in confluence with other methods, such as indicators or trend analysis, for better results.

Top 8 Chart Patterns for Crypto Trading

There are too many chart patterns to list them all here, so we will just be picking some that have a relatively high success rate. We will discuss 3 continuation patterns, 5 reversal patterns, and briefly introduce harmonic chart patterns.

  • Continuation Chart Patterns
    1. Ascending/Descending/Symmetrical Triangle
    2. Bull/Bear Flag
    3. Cup & Handle
  • Reversal Chart Patterns
    1. Head & Shoulders
    2. Double/Triple Top/Bottom
    3. Adam & Eve
    4. Diamond Top/Bottom
    5. Swing Failure Pattern (SFP)
  • Harmonic Chart Patterns

Continuation Chart Patterns

1. Ascending/Descending/Symmetrical Triangle

The ascending triangle is a trend continuation pattern, where you see higher lows into resistance. When you see the market making higher lows into resistance, it tells you that sellers are getting exhausted and the buyers are in control.

The exact opposite is true for the descending triangle pattern.

A symmetrical triangle (also called a pennant) is also a continuation pattern, though it has a lower probability of success, and oftentimes evolves into a different pattern such as a channel or rectangle. This is because the market making both lower highs as well as higher lows indicates a sign of indecision, and that neither buyers or sellers were able to take control.

Continuation Chart Patterns: Symmetrical triangle, ascending triangle, descending triangle

2. Bull/Bear Flag 

The bull flag pattern is a continuation pattern formed in an uptrend, representing a period of consolidation after a strong momentum markup.

The consolidation consists of smaller range candles compared to the earlier trending move, representing a “weak” pullback, and typically the tighter the range the stronger the breakout.

The exact opposite is true for the bear flag pattern.

Continuation Chart Patterns: Bull flag, bear flag

3. Cup & Handle

The cup & handle is a bullish continuation pattern that marks a consolidation period followed by a breakout.

As the name implies, there are two parts to the pattern: the cup which is formed after an advance and looks like a rounding bottom, and the handle which is formed when a tight trading range develops near the peak of the cup. The smaller the retracement in the handle, the more bullish the breakout is likely to be.

Note that cups with very deep bottoms or “V” shapes show sharp reversals and should be avoided.

Continuation Chart Patterns: Cup & Handle pattern

Reversal Chart Patterns

1. Head & Shoulders

The regular head & shoulders pattern is defined by two swing highs (the shoulders) with a higher high (the head) between them. It is characterized by the highest volume on the left shoulder followed by the head, and finally with rising volume on the breakout. The two shoulders do not always have to be at the same price, but the closer they are to the same area the stronger the pattern generally becomes. Note that the neckline can also be a sloping trendline.

The point of entry is typically at the break of the neckline after the right shoulder, with a target of the same distance as from the peak of the head to the neckline.

The upside-down version is called the inverse head & shoulders pattern.

Reversal Chart Patterns: Head & Shoulders

2. Double/Triple Top/Bottom

The double (triple) top pattern is defined by two (three) nearly equal highs with some space between the touches. Generally, the wider the gap between touches the more powerful the pattern becomes.

The pattern is complete when price breaks below the swing low point created after the first high in a double (triple) top, and is considered a success when price covers the same distance following the breakout as the distance from the double (triple) high to the recent swing low point.

The upside-down version is called the double (triple) bottom pattern.

Reversal Chart Patterns: Double top, triple top, double bottom, triple bottom

3. Adam & Eve Pattern

The Adam & Eve pattern is a trend reversal pattern characterized by a sharp and deep first bottom on high volume (Adam). The market bounces and develops a more gentle correction, printing a second bottom (Eve) on lower volatility which is more rounded and wider.

Reversal Chart Patterns: Adam & Eve pattern

4. Diamond Top/Bottom

The diamond pattern is a trend reversal pattern. Price action starts out as a broadening pattern, where the peaks are higher and the troughs are lower. It then changes to where the peaks are lower and troughs are higher. Connecting the peaks and troughs will form a diamond.

An important feature of a diamond top (bottom) pattern is that the volume corresponds with the size of the trading range, increasing as the price rises (declines) and the range peaking near the high (low) price point. The downward (upward) trend that follows this is an indication of reduced enthusiasm amongst traders about the market. This narrowing range in the second half of a diamond pattern can be represented by a descending resistance level and ascending support, which is a critical breakout point. Traders should look out for this line to be crossed before accepting that the trend is going to change. 

As with any chart/candlestick pattern, the risk of false breaks can be reduced by confirming the reversal trend by using other indicators, such as a stochastic momentum indicator pictured below (point X).

Reversal Chart Patterns: Diamond top, diamond bottom

5. Swing Failure Pattern (Stop Runs)

The swing failure pattern (SFP) is a very common pattern in Bitcoin and cryptocurrency markets, and one that gives a very high reward/risk ratio trade. It is caused by big traders looking for large liquidity to fill their orders by hunting stop-losses and baiting breakout traders.

An example is shown in the image below which formed the December 2019 bottom on BTC/USD, including an explanation of how it is formed as well as how to trade it.

Reversal Chart Patterns: Swing failure pattern (SFP)

Harmonic Chart Patterns

Harmonic price patterns are those that take geometric price patterns to the next level by utilizing Fibonacci numbers to define precise turning points. At the root of the methodology is the golden ratio, or some derivative of it (0.618 or 1.618). The golden ratio is found in almost all natural and environmental structures and events; it is also found in man-made structures. Since the pattern repeats throughout nature and within society, the ratio is also seen in the financial markets, which are affected by the environments and societies in which they trade.

Harmonic patterns are much more advanced than simple candlestick or chart patterns above, and we will not go through them in detail here. For more information, read about harmonic patterns on Investopedia and Babypips.

Harmonic Chart Patterns: Cheat Sheet

For an exhaustive list of candlestick and chart patterns, check out the Encyclopedia of Chart Patterns by Thomas Bulkowski, and The Pattern Site.

For more Bitcoin technical analysis resources like this, read our complete guide to learn how to trade crypto.

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