Predicting Bullish or Bearish Price Movements With Classic Chart Patterns
Trading

Predicting Bullish or Bearish Price Movements With Classic Chart Patterns

9 months ago

In the crypto universe, knowledge is key. The sooner you get hold of it, the better your chances are to make a fortune. Learn how to read candlesticks to predict the price movements of coins.

Predicting Bullish or Bearish Price Movements With Classic Chart Patterns

Daftar Isi

While you can’t always be privy to the latest information as it gets disseminated, you can cast your eyes to the CoinMarketCap chart section for each cryptocurrency, where all of the markets’ whispers, headwinds, actions, and reactions get carefully distilled in red or green Japanese doji candlesticks on the timeframe of your choice, hanging there for you to make sense of. 

Both beginners and advanced traders use seemingly complex chart patterns to speculate on an asset’s price movements and make intelligent trading decisions. While reading these patterns cannot guarantee a profit, many expert traders have proven that as long as you follow the right trading strategy and stick to it, you are likely to make a profit in a span of multiple trades. 

A sound trading strategy involves proper technical analysis (TA), coupled with other parameters, as well as indicators like moving averagesexponential moving averagesMACD, etc. 

Note that predicting chart patterns and price movements yield probabilistic results, not certainties. There may be times when you perfectly execute a trade and still end up with a loss, and vice versa. Regardless, you need to stick to your strategy in order to make sustainable long-term profits.

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Can Chart Patterns Truly Predict Bullish and Bearish Price Movements?

While some fundamental investors dismiss trading patterns as mere astrology, this couldn’t be further from the truth. There is no magic in the charts themselves, but there are intricacies in the human mind that can be applied to trading. When trading decisions in the market are grouped, you can see common patterns. A study that has shown that human behavior is 93% predictable supports this thesis. 

Market psychology plays an essential role in these patterns as large-scale investors and retail traders often depend on an asset’s price history in order to strategize their next move. This creates certain patterns to appear in charts if enough people participate in a particular market. This is also why TA results are reliable reference points whenever strategizing trades.

However, it needs to be noted that the lesser the number of market participants in a trading pair, the more distorted the patterns become, making them easy to manipulate. 

What Do You Need to Know to Predict Bullish and Bearish Price Movements?

Before we get into the various patterns, let us refresh ourselves with what the term actually means. 

  • Bullish movements refer to a potential upward trend of an asset’s price. 

  • Bearish movements refer to a potential downward trend of an asset’s price. 

These two should serve as hints on when to take a short or long position.

Moreover, drawing support and resistance lines are also crucial in reading patterns. 

  • Support lines refer to the price level where the price stops dropping further, 

  • Resistance lines refer to the price level where the price stops increasing further.
It is also vital to take note of trading volume in confirming the accuracy of the pattern trends you see. For example, huge upward moves not supported by a proportional growth in volume means that an asset might not sustain the upward trajectory.

How to Predict Bullish or Bearish Price Movements

You need to do TA in order to predict an asset’s possible next move, which requires knowing how to recognize certain classic chart patterns as soon as they’re printed. As stated earlier, there are bullish and bearish chart patterns that you can use to increase the likelihood of making accurate calls.

Once you have mastered the patterns involved, you should be able to incorporate them into your trading strategy.

Bullish Chart Patterns

Ascending Triangle

The ascending triangle is a bullish signal as it shows that an asset’s price may continue to rise further. You can start identifying this pattern by drawing a trendline, one which follows the bottom swing, then another trendline that follows the asset’s resistance level.

You’ll notice that the price swings tightly within the trendlines, but creates higher lows in each swing despite rejections at the resistance level. This reflects that the buyers are stronger than the sellers. Upward price breakout happens above the triangle where the trend lines meet and the swings complete.

Inverted Head and Shoulder

The inverted head and shoulder is a bullish signal that comes before a trend reversal pattern forms, where the price swings back upwards after a sharp downward action. You can see this when the price patterns create three bottoms, with the middle bottom being the lowest and the other two creating higher lows but at about the same height. When this happens, the third bottom could lead to an uptrend in price action, breaking out above the resistance level of the first two bottoms.

Falling Wedge

The falling wedge is a bullish signal that appears after a price consolidation, where the price action continues to go up and down albeit strictly between the ranges of the support and resistance levels. This signals a breakout as soon as the consolidation tightens. Falling wedge patterns can be seen during the downward trend of an asset preparing for a recovery.

Bullish Rectangle

The bullish rectangle is a bullish signal that appears during a sudden price consolidation in the middle of an uptrend. The price action in this pattern leads to swings between the stable levels of support and resistance. When you see this pattern, you can wait for an asset to continue going up as soon as it finally breaks out of the resistance level.

Bullish Pennant

The bullish pennant is a bullish signal that appears after a sharp upward move, which will be followed by price consolidation. In this pattern, the price action goes sideways, creating lower highs and higher lows. When the price gap between the highs and lows becomes narrower, the trend may likely continue on a bullish breakout.

 

Triple Bottom

The triple bottom is a bullish signal that forms after a downward trend, which reverses into an upward trend. This can be seen when price action has continued to drop to form three similar bottom price floors. The size of the bottoms must be nearly similar and should have adequate spaces in between each consequent bottom. If the price breaks above the resistance line of the swings coupled with an increase in trading volume, you may expect a bullish reversal of the asset’s price.

Bearish Chart Patterns

Head and Shoulder

The head and shoulder is a bearish signal that forms after a bullish swing turns into a bearish move. This should show a price pattern with three peaks: the middle peak being the highest and the other lower two peaks at about the same height. When the last peak is accompanied by low trading volume, you may expect a bearish reversal.

Rising Wedge

The rising wedge is a bearish signal that appears after the pause of an uptrend, then begins to consolidate between rising levels of support and resistance. This is recognized as a bearish pattern signaling a downward momentum. As soon as the price action tightens following higher highs and higher lows, the price may continue to break down past the support level established from the price’s recent swing.

Triple Top

The triple top is a bearish signal that appears after the price action consolidates and creates three similar highs. It should show the price momentum upwards getting rejected thrice on the same resistance level. When this pattern completes itself, it breaks down from the support line right after the third peak.

Final Words

Reading classic chart patterns is merely one part of a broader trading strategy, which you can use to your advantage as long as you don’t rely on it alone. A sound trading strategy would also require you to determine the right entry and exit points in your trade. If coupled with other indicators and used the right way, it can bring massive profits especially if you’re in the crypto market where gains are orders of magnitude higher than others.

There’s an old adage in poker, which is essentially trading on a set of incomplete information that there are three levels to attain before you can be considered a professional player. 

Level 1: You play your own cards (what you have).

Level 2: You play your opponent’s cards (therefore what you think he has)

Level 3: You play your opponent’s perception of your cards. 

The same rationale kind of applies to you as a trader. Your opponent is the market and other traders. As you start trading, you just look at what you’re holding and how the price is moving. As you get better, you begin to look at pattern formations and how the market is “playing” (for example resistance and support levels). To become a great trader, you need to get to level 3, not only reading the charts but also anticipating where the market’s head is at and what they think smaller traders like you are holding. 

Leverage shakeouts and whale price manipulation come to mind here, where big investors put incredible selling or buying pressure on the little guys in order to manipulate them into taking the action they want. 

So hold on to your cards, I mean coins, and use these techniques to see what the markets are really saying. 

And don’t be scared if all else fails to use your gut instinct, which you continuously calibrate by reading up and looking at project fundamentals such as the team’s roadmap, partnerships, investors, and the problem they’re solving. 

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