Chart patterns? What are they and how to use them to your advantage? All this and more will be covered in this article. This article was made possible by AAX. Thanks to AAX for sponsoring this post.
Chart patterns have been around since training began. they are tried and tested patterns that often give a great indication of the imminent price movement of a coin or asset.
As with all technical analysis, these things usually work due to the number of people using them.
We always recommend keeping your TA as simple as possible. Why? Because once you start throwing 57 different indicators on your charts, you are no longer looking at what everyone else is looking at.
The best traders, IMO, play it simple. Chart patterns fit this simplistic method and it is easy to understand how and why the patterns work.
Our other technical analysis articles are below if you want to check them out.
So, back to chart patterns….
You will have heard all the lingo; head and shoulders, double top, double bottom, cup and handle etc. There are only a few you really need to understand in my opinion.
Flat on the top and an increasing diagonal line going up with the price movement. So how do we know which way this will move once it breaks the trend lines?
Well, as with most things in trading, this is open to interpretation but, these are often bullish patterns.
The only way to find out is to wait for the candle to close above the resistance or the candle to close below the support. As always waiting for the confirmation and not jumping the gun early is the best strategy.
This chart is from today so I expect something to happen either way…
Descending triangle or wedge whatever you want to call it. The opposite of the ascending example above.
A downward trend, price action getting smaller and smaller until the trendline is broken. Again, once the trend has closed above and confirmed, this would be the ideal time to place a buy or sell order, depending on which it breaks (resistance or support ).
The key I believe here was that it bounces off support goes up to resistance and THEN doesn’t actually come back down to support until later.
So what does this mean? Well, people were buying back in even before it reached that support level. This is often seen when there is a high demand for the coin. People were not willing to wait for it to hit support.
The rest is history.
Head and shoulders pattern.
I know what you are thinking… I should be nominated for the Turner prize for my contributions to modern art with this schematic but try not to get too caught up in it.
What are the head and shoulders telling us? The price has gone up reached a price and sold off. It retests the support and pumps harder this time and tries to break resistance.
The resistance isn’t broken.
The bulls try again and only achieve the highs of the first shoulder. This can kill momentum. 3 attempts at breaking resistance and no joy.
This can usually signal a down-turn in the market/price.
So what do you think the inverse head and shoulders is? Well, it’s the bullish twin of the H&S.
Double top and double bottom
This one is not too dissimilar to the head and shoulders patterns.
This is an easy one to figure out. Price tries to push up and gets rejected. bounces off support and retests the resistance.
Once it fails for the second time this could signal a downturn if support is not held.
If it goes for it once more this is of course call a triple top and almost 100% signals a down-turn is coming if it doesn’t break resistance.
Bulls are demoralised if they can’t push the price over the resistance line and the more attempts the less likely it is to happen.
If I was in this type of trade I would be out on the second or third support.
Cup and handle
This one is for my fellow Brits. We can spot a cup of tea when we see one.
Apologies for the horrendous lines they are purely for illustrative purposes.
The big curve from previous highs, right down to a low and back up again to retest historic highs.
Bounce off the resistance into a parallel channel which once it breaks usually signals an uptrend.
But why is this?
Well, from the top right down to the bottom that is a low drop and not for the faint-hearted. Diamond hands for life.
Once this coin picks up the pace and tests the resistance it bounces off and only retraces a tiny fraction of the previous dip. This once a trend is reverse signals a very very bullish price movement.
Think of it as a lot of diamond hands holding bags whilst others are coming into the trade. There is buy pressure and reduced selling pressure as those who have held through the horrendous dip want some glory at the end.
SXP send it Joselito.
That’s about it, there are others obviously but these few should give you enough ammunition to go into the markets and take some money from the bears.
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