When you look at a chart you may see certain patterns emerge (or at least appear to emerge) and sometimes these patterns can indicate the potential direction of future pricing for the market you are looking at. In essence this is a part of technical analysis. Technical analysis “is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.
” Technical analysis is a huge subject area and sometimes it can be a mix of mathematics / statistics and ‘art.’ It is also important to remember that technical analysis and chart patterns can be applied to any marketplace from stocks to indexes to crypto-currencies.
In this article we are going to take look at some simple chart patterns that you can use to potentially guide you in making trading entry or exit decisions. These particular patterns are well documented and have been shown to be successful over time in indicating possible price direction (by that I mean they are quite highly reliable and certainly perform better than 50:50).
Chart Pattern 1: Bull Flag
The bull flag (or sometimes referred to as a pennant) derives its name from the resemblance to a flag (or pennant on a pole). It is a very high probability indication that price will breakout upwards. In the below BTC/USD example the bull flag can be seen the pattern starts at point A, the upward move finishing at B (the pole). Then the flag develops (this is basically price consolidation after the upwards move) in a nice high and tight formation at the top area of the pole (shown between the green lines). Price breakout then occurs confirmed by increased volume.
Bull Flag Set-Up Bull Flag Breakout
Trading the Bull Flag:
Imagine you have seen BTC price move higher and you are keen to buy, the bull flag pattern can help you identify, enter and exit. How? Looking back at our example, once the pattern is identifiable you can plan entry. As long as the flag stays high on the pole the pattern remains good, entry can be done at a point inside the flag waiting for breakout, or you can enter once breakout occurs. You can also use the pattern to calculate a profit exit. Take point B (pole top $500) from point A (pole bottom $445 = $55) then divide by something like 75% (=$41) then add that to the low of the flag (point C $41+$485 = $526). Why divide? This just helps factor down the outcome to give you a higher reliability profit target, you don’t have to do this.
Chart Pattern 2: Channels
A trading channel is another high reliability pattern that can successfully guide a trader. A channel becomes apparent when you can successfully plot two parallel lines (of support and resistance) over a time period. The example below of the past few weeks of BTC/USD trading shows a descending channel where price action remains generally within the channel upper and lower lines. A channel can be drawn ascending, descending (as in our example) or horizontal. The more touches (or respect) price action has of the lines the more confirmed the pattern is. The odd candle can stick outside the lines without corrupting the pattern.
Trading the Channel:
Once you establish a trading channel you can construct entries and exits based on price action continuing to ‘respect’ the channel support and resistance lines. Buy at support, sell at resistance.
Chart Pattern 3: Kangaroo Tail
The final pattern for this article is the Kangaroo Tail (also sometimes referred to as a Hammer). This is a reversal of prior trend pattern that shows up as one candle reaching out well beyond normal price action. In our example I am showing the recent BTC/USD pricing, the Kangaroo Tail is indicated by price stabbing down to the low of $275 and recoiling back quickly. The market has tested the low point and rejected it leading to quick price reversal. The tail candle itself is around $60 (from top to bottom) and much larger than its surrounding candles and obviously has a long tail.
Recent Kangaroo Tail Signal in BTC/USD
There are many hundreds of chart patterns and different ways to interpret them (this interpretation is the ‘art’ aspect of chart patterns). Experimenting with different charts is a great way to investigate patterns and how they do or don’t appeal to you and your trading style. In upcoming articles we will look at further technical analysis topics that can be successfully combined with chart patterns in your trading activity.
Finally we encourage interaction and your input, perhaps you would like a certain topic covered or you might have a view on one of the topics discussed. Whatever it may be please feel free to add your comments.