Though there are common chart patterns, the Trading tool won’t identify them for you, so you need to learn how to identify them yourself.
As you can see from the cheat-sheet Continuation and Neutral patterns are symmetrical in terms of the price points that contribute to the pattern formation.
They suggest that a significant price move is expected, but the direction isn’t certain. The upper and lower boundaries of the pattern provide the parameters for the expected breakout.
Pennant Formation Example
As the best way to explain how chart patterns work is via an example we’ll look at a Pennant pattern – one of the most common continuation indicators.
They follow a significant move higher or lower with above average volume, which is followed by a few weeks of price consolidation, and decreased volume before a further breakout.
Within the consolidation, the range of highs and lows decreases which forms the characteristic pennant shape. Traders will look to profit from an anticipated breakout, defined by a move either above or below the top/bottom lines of the pennant, by placing an appropriate trade with a stop-loss at the opposite bound.
So if the expectation is of an upwards breakout, the stop-loss would be below the lower line of the pennant as that would invalidate the expectation. The reverse would be true if anticipating a breakout lower.
Regardless of the type of pattern you should always be using a stop-loss, a type of trade that is used to mitigate the cost of getting things wrong. If you think the price will breakout positively, you set a stop-loss below the lower boundary of the pattern because that invalidates your expectation and stops your potential losses at that point, as you have no certainty as to how low price might move, potentially wiping out your whole trading capital.
As with much of charting, setting a price target – a core element of trading – isn’t an exact science, but could be based on the sum of the price prior to previous breakout that then forms the Pennant formation, added to the price when there is a breakout from the Pennant.
Reversals, given their name, aren’t ambiguous in that way. They anticipate a specific directional move that is the opposite of recent price movement. The key is in identifying the specific reversal pattern with confidence then setting your trade, as ever calculating your price target and applying a stop-loss at the point where you expectation is invalidated.
Don’t be tempted to try and engineer a specific pattern to price movement, as that defeats the object. Maintain the required symmetry for Continuation and Neutral patterns.
Annotating Price Charts
In order to identify any of the common patterns from the cheat sheet you’ll need to develop a proficiency with drawing the patterns over the price chart. Tradingview incorporates all the tools to allow you to do this, but it will take some practice.
You don’t need a Tradingview account to try this, but it will make it easier to save any of the charts that you annotate. The drawing utilities are similar to basic drawing/photo editing applications, allowing you to create trend lines, text, add icons and labels.
At this point your head might be swimming a little bit with the huge amount of subjectivity associated with interpreting crypto price charts. As mentioned throughout our section explaining how to trade cryptocurrency, there is no shortcut to success. Trading takes an enormous amount of time to learn and research, and reading chart patterns successfully can only come from experience – especially with regard to assessing Success Rates.
You’ll find that trading services allow you to test your strategies without risk, and to even compile them in code. Tradeview support something called Pine script, a simple language for compiling trading strategies, but if you have data science skills you can easily use common programming languages such as Python or R to build and backtest your own models.
Crowdsourcing Insight
You don’t, however, have to face this challenge on your own as one of the most important recent changes within Trading is developing the social element. Traders can share their strategies with the wider community and gain validation or feedback, or simply utilise the existing strategies created by more experienced users.
This does come with a very large caveat, because as with all aspects of trading, there is no shortcut to success. If someone has discovered a profitable strategy, consider their motives for sharing it? If they are encouraging you to pay for a bespoke service, think very carefully if this is worthwhile, as those kinds of services can be a slippery slope.
If you are relatively new to trading the best approach is to use the wider community to simply absorb as much information as possible and to learn from other’s mistakes so you don’t have to make them.
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