Navigating the Complex World of Stock Trading for a Lucrative Financial Future
If you’re looking to improve your trading skills, understanding technical analysis is essential. Whether you’re trading stocks, forex, or cryptocurrencies, mastering chart patterns can help you predict price movements and make more profitable trades.
In this in-depth guide, we’ll break down the fundamentals of technical analysis, including trend identification and key chart patterns that traders rely on to spot opportunities in the market. Whether you’re a beginner or an experienced trader, learning these secrets of profitable trading will give you the edge you need to succeed.
“Whoever finds himself in this field, comprehends all the rules of the game and learns how to successfully apply his knowledge in practice – will ensure himself a trouble-free life.”
Introductory words:
In order to learn how to steadily earn on the market, and especially on the cryptocurrency market, you must have a sufficient amount of knowledge, which must be constantly updated with new and right informations. Let’s start our “dive” into the world of market analysis from the very basics. The information will be useful for each of you. Well, let’s get started:
What is Technical Analysis (TA)?
Technical analysis is a base that every self-respecting trader should know. In essence, TA is based on the study of price in the past to predict its movement in the future using various figures/patterns/indicators/slides, etc. There are subtleties and tricks that everyone should know.
Any market, be it currency/stock/cryptocurrency, is a balance of supply and demand. When this balance is disturbed and the demand for a particular asset increases sharply for some reason, we see active purchases and growth of the price of this asset. This is especially common in our cryptocurrency market (all sorts of true and false manipulations). Nevertheless, there is no such thing as endless growth (as well as decline).
Markets and the assets within them move cyclically
For example, in a bullish trend, the growth phase is always replaced by the correction phase, due to which the indicators are unloaded, overheating is removed and the necessary liquidity is collected to continue the trend movement. The same can be said about a downward (bearish) trend.
What is a trend?
At first glance, everything is simple and obvious, but in practice, many novice traders make grave mistakes when it comes to correctly and correctly identifying the current trend (be it local or medium-term). The golden rule says “Trade according to the trend!”. Yes, it is possible to trade corrective movements, but for this you need to have a clear understanding of what is happening and thoroughly feel the situation.
Let’s say you have correctly identified the current trend, but now how to find the entry point to a position (Long or Short)? This is where the hard part starts, and I will not be afraid of this word, it is a whole science called “Technical Analysis”. Let’s get to the point:
Trend Identification
The trend can be upward/bullish (updating highs without updating lows, increasing both lows and highs) or downward/ bearish (updating lows without updating highs, decreasing both lows and highs). Also very often there is an intermediate stage of Consolidation (flat/sideways), during which there is an accumulation or distribution of positions by a Large player.
The most important concepts are Support and Resistance.
Support and Resistance levels are clusters of strong lows and highs at which a price reaction is expected. If you reach a Support, you should expect a rebound in the upward direction. When “Resistance” is reached, a downward reversal is expected. Breakdown of the levels = a signal to continue in the current direction and strengthen the trend, respectively.
Basic Patterns in Trading
Patterns in trading are figures and patterns formed on the chart, which allow you to predict with high probability the further price movement on the market. In this guide, we will review the main working patterns and tell you how to use them in cryptocurrency trading.
Chart patterns are divided into reversal, trend continuation and bilateral (two-way) patterns. Reversal patterns speak about a probable change of trend (reversal down on an uptrend and up on a downtrend), trend continuation patterns speak about a probable continuation of the current trend in the same direction, and bilateral patterns can speak about both trend continuation and reversal, depending on the specific situation.
Let’s start with the most common reversal patterns that really work in practice:
1. a) “Head and Shoulders” (bearish) – one of the best reversal structures (down), formed at the maximums of the uptrend. On the chart it looks like a conditional “Head” and “shoulders” on the sides, and also has a “neck”. A breakdown of the neck level is the workout and confirmation of the pattern.
b) A similar situation on the opposite side is called “Inverted Head and Shoulders” (bullish) – a reversal structure (up), which is formed at the lows of the downtrend. On the chart it looks similar to the standard HAS, only inverted, respectively.
The signal for entry (optimal) into the position in both cases will be the breakdown of the “Neck” level. More risky entry can be considered in case of formation of “Right Shoulder” with mandatory stop. This structure has a very high probability of working out.
2. “Rounded bottom/top”, which can also be called “saucer” (The simplest reversal U-pattern). On the chart, a bullish structure looks like a U, a bearish structure looks like an inverted U, respectively.
The optimal entry will be the breakdown of the neck level. Often has an external similarity with HAS/HASUD, but there are no clearly defined “shoulders”. In practice it is not easy to trade this structure.
3. a) “Double Bottom” or W-pattern (bullish) is another reversal structure, which is formed at the lows of the downtrend. It looks like 2 equal lows on the chart. It is usually formed in the area of strong support and indicates the fading of the downtrend and a probable change of trend or transition to the correction phase in the form of an upward reversal.
When forming the second low, one should take into account the possibility of an impulse breakout with the purpose of taking out stops and collecting liquidity.
b) “Double Top” or M-pattern (bearish) is a mirror version of DD. It looks like 2 equal tops (highs) on the chart. It is usually formed in the area of strong resistance and indicates the fading of the upward movement and a probable change of trend or transition to the correction phase in the form of a downward reversal.
When forming the second maximum (top), one should take into account the possibility of an impulse breakout with the purpose of taking out stops and collecting liquidity.
c) “Triple Top” (bearish) and “Triple Bottom” (bullish) – by analogy with the above described patterns, the Triple Top is formed at the maximums of the uptrend, and the Triple Bottom at the minimums of the downtrend. Unlike the “Double” reversal structures, these patterns have 3 price highs and lows. They are stronger signals for a trend change or transition to the correction phase in the form of a reversal in the opposite direction to the current direction of movement.
The signal to enter (optimal) a position in all cases will be a break of the Neck level (intermediate level of the minimum on the bounce when tops are formed and the maximum on the bounce when bottoms are formed). A more risky entry can be considered during the final impulse breakout with a mandatory stop. These structures have a very high probability of working out.
4. The pattern “Adam and Eve” is a rather reliable and accurate structural pattern, a kind of “Double Bottom” and “Double Top”. It is initially considered a Bullish reversal pattern, which is formed at the lows of a downtrend and signals an upward reversal, but a Bearish variation (inverted structure) is also encountered. On the chart, “Adam” looks like the letter V and “Eve” looks like the letter U (in a bearish formation, the letters are inverted, respectively).
In the case of a bullish structure, the optimal entry signal will be a breakdown of the resistance level, in a bearish structure – a breakdown of the support level. Risky entry can be sought when the second top/bottom is formed, which is “Eve”, stop is mandatory. The potential target is the height of the structure (H) from the breakdown level. “Adam and Eve” is a strong reversal pattern and has a very high probability of working out.
5. The pattern “Diamond” or “Diamond” is a reversal structure that can be formed both at the highs of the uptrend and at the lows of the downtrend. In practice, it is not so often encountered, but in case it is worked out, it can start a major movement.
On the chart it looks like a quadrangle, within which there is a mirror-like price movement. The signal to enter the position will be the breakdown of the figure in the opposite direction relative to the current trend. Potentially possible movement (target) is considered equal to the height (H) of the “Diamond”, at least.
6. Wedge pattern:
A wedge can be Ascending or Descending. An ascending wedge is formed on a bullish trend and may signal the probable end of the trend movement and a downward price reversal. A descending wedge is formed in a bearish trend and may signal the probable end of a trend movement and an upward reversal of the price.
When forming the last maximum/minimum, one should take into account the possibility of impulse breakout in order to take out stops and collect liquidity before the beginning of the reversal movement.
The real working trend continuation patterns include the “Cup with handle” pattern – as the name suggests, the structure looks very similar to this type of crockery. In a bullish trend, the “Cup” looks like a U-shaped upward correction, while the “Handle” also looks like a U or parallel channel. In a bearish trend, the pattern looks like a mirror image, it is called “Upside-down Cup and Handle”.
The optimal entry into the position will be at the breakdown of support/resistance level. Risky entry on the formation of the “Handle” with a mandatory stop-loss. Sometimes this pattern is tried to be attributed to the category of reversal patterns, but in practice, the true “Cup with a handle” will continue the trend, and in the case of reversal is considered as a reversal “U-pattern”.
Bilateral(bidirectional) patterns:
1. The pattern “Three Indians” or “Three Movements” or “Three Touches” is one of the simplest but effective patterns of classical technical analysis. The pattern can be both reversal and continuing trend movement, can be both bearish and bullish.
In each case, the pattern is applied depending on the strength of the current trend. When there are all signs of fading trend movement, “Three Movements” acts as a reversal structure. In case of development of a strong trend movement, the pattern can become a signal for its continuation in the same direction.
The optimal entry into a position is considered after the third touch of the trend line. It is also worth considering the possibility of impulse breakouts of the trend line (especially at the 3rd point) in the form of a hairpin (candlestick shadow).
In a bullish model, the trendline is held BELOW the price.
In a bearish model, the trendline is above the price.
2. Triangle with Flat Top (Ascending) patterns – a bullish structure. And “Triangle with Flat Bottom” (Ascending) – bearish structure. Both patterns can be both reversal patterns and trend-following patterns.
The optimal entry into a position in all cases will be on the breakdown of the horizontal line of resistance (bullish pattern) and support (bearish pattern). It is also possible to open a position on the retest of the horizontal line. Stop loss is placed behind the sloping trend line of the pattern. In practice, such triangles are quite common and have a high probability of working out. Working out in the opposite direction is extremely rare.
3. Of course, let’s not forget about the classic figures: “Flag” and “Rectangle”. Why do we refer them to the category of bilateral patterns? Because in today’s realities they can easily work both ways and both continue the trend and reverse it.
In the case of the “Symmetrical Triangle” (aka “Pennant”) the situation is even more interesting – in today’s market it can be dangerous to trade this pattern, as it is particularly prone to various manipulations – this pattern is one of the best opportunities for liquidity manipulation by a large player.
A similar thing can happen with figures such as Flag/Rectangle/Wedge, but it usually happens less often on them.
Conclusion
Graphical patterns help a trader to correctly predict the further development of market movements. Technical analysis patterns do not guarantee 100% performance, but they have a high probability. At the same time, in order to be one step ahead, one should always take into account the possibility of certain manipulations from a major player. Technical analysis in combination with fundamental analysis opens a more detailed picture of the market for a trader and forms a clearer understanding of the situation, which allows making competent trading and, most importantly, profitable decisions.
I wish you success and huge profits! Let luck be on your side!
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