How to read crypto trading charts & patterns
What you'll learn
- An overview charting tools
- Introduction to chart patterns
- An example of a Pennant formation
- How to crowdsource chart resources
If you’ve followed the sequence of our knowledge base articles, explaining how to trade crypto, you should be familiar with the concept of technical analysis.
Technical Analysis uses crypto price history and volume - visualising that data in trading charts - trying to predict where it will move next.
Experienced traders do this by looking for any of a large number of recognised patterns which may point to specific subsequent price movement, as well as applying custom annotation to create their own interpretation.
It is worth pointing out that trading charts and pattern recognition aren’t unique to crypto; it is fundamental to trading any asset, though the specifics may vary. In order to understand it, you must start by familiarising yourself with the tools that will enable you to annotate and draw charts.
One of the most popular tools on the market is Tradingview. You can access the basic elements of Tradingview for free simply by visiting a cryptocurrency exchange such as Bitstamp. You’ll see the Tradeview option when you land on their homepage. Other similar tools are available.
We’ve discussed the basics of crypto price charts already, so if you are unfamiliar it would be worth to go and read these articles:
Built-In Chart Tools
Trading tools like Tradingview can be thought of a bit like Excel. Their job is to do as much of the heavy lifting of analysis, applying defined statistical measures and indicators, but leaving you with the crucial challenge of understanding their relevance to future price movement.
The range of indicators and ways of filtering price data is enormous, so part of the challenge is deciding what you consider important.
Date Ranges
One of the most basic ways to filter data is by date range, which isn’t arbitrary. Looking at bitcoin’s price for the last day presents an entirely different perspective than the last five years.
As Technical Analysis generally - but not exclusively - focuses on short term positions, you’ll generally be focused on analysis within short timeframes.
That isn’t where date consideration ends, because a standard trading view will utilise candlesticks - an explanation of candlestick charts is covered earlier in our knowledge base. They allow a trader to understand price context within specified periods, visualised through narrow vertical rectangles, with what look like wicks at the top and bottom - together resembling a candle.
The wicks indicate price highs and lows, and the rectangle, price and open and close within the specified period. The colour of the wick tells you whether the price went up or down.
Trading view allows you to set the candlestick range, anything from 1 minute to 3 days; the opposing ends of that spectrum lend themselves to completely different trading strategy.
Trading within one minute intervals would focus on trying to make tiny margins multiple times, often through arbitrage. The much broader candle range is relevant for trading styles such as Momentum Trading.
Technical Indicators
As mentioned, standard trading tools are jam-packed with Technical Indicators which are available via a simple drop-down menu. Tradeview boasts over 100 as standard, so as mentioned you need to first decide what sort of trader you are, where you think you can find an edge, and apply the relevant indicators, rather than being led by whatever indicator looks interesting.
Learn Crypto’s trading knowledge base introduced some of the most common technical indicators which fall into these common categories:
- Price led - Specific to price change
- Volume - Based on the volume of trading activity
- Leading - Precede a specific change in direction
- Lagging - Confirm a specific change in price has happened
Selecting a standard technical indicator will automatically overlay the price chart - such as Moving Averages - or create an additional pane below the chart in parallel - such as RSI - (Relative Strength index).
These indicators don’t need to be used in isolation, but are commonly used in combination, along with research which may not be quantifiable within a trading chart, such as news or fundamentals.
Price Chart Patterns
Technical analysis becomes more complex when you start looking for standard patterns within the price chart, or to annotate your own interpretation of price and volume movement.
The idea is to identify patterns that are considered to have a proven correlation to a specific price move, based on whether price moves below support or above resistance levels.
That measurement is known as the Success Rate, but unfortunately, this isn’t an objective statistical value, such as the known value of one standard deviation. The whole area of Technical Analysis and charting is subjective, so there is no definitive reference table Success Rates. Much of the difficult comes from being able to create a set of explicit criteria for the formation of the pattern and the confirmation of breakout - up or down.
Depending on which trading study you pick - and there are many - the success rates for patterns can vary dramatically, which on its own should make any new trader cautious to put a huge amount of faith in them in isolation.
Trading patterns should instead be considered as one tool among a wider selection of methods for trying to discern price.
The reference table below, created by a user within the Tradingview community provides a very good summary of four pattern categories within which are common patterns with names describing the shape that price points create.
- Continuation - Temporary interruption of an existing trend
- Reversal - A reverse in the existing price direction
- Neutral - The expectation of a significant change in price direction, but no specific certainty of whether it is up or down
- Specials - These are specialist patterns that should only be considered by experienced traders.
Basic Rules for Drawing Patterns
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.