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In this new technical analysis series, we will learn some of the basic chart patterns and terminologies that can help us in our technical analysis before we venture into trading a particular crypto asset. For today, let’s discuss two similar patterns today - 1. Double top and bottom patterns, 2. Head and shoulder patterns are common technical indicators, often used in confluence with other technical indicators. The patterns indicate the collective sentiment of the buyers and sellers.
Double Top Pattern - A double top pattern resembles the letter ‘M’ and is formed when two consecutive rounding tops occur. It indicates that the traders are retesting local highs and is a bearish reversal indicator. The second rounding top is slightly lower than the first one indicating sellers are getting exhausted. The resistance occurs early, and the price breaks below the neckline support.
This pattern is more useful in longer time frames and when the market is nearly a possible end to its bull run. Traders can open a short position below the support when the price action is under a retest and rejection.
Double Bottom Pattern - This pattern resembles a ‘W’ and is formed by two consecutive rounding bottoms. It is a bullish reversal indicator, and traders can expect a trend reversal only when the price breaks above the neckline resistance.
A sudden increase in volumes followed by a breakout above the neckline resistance should be enough for traders to go long while trading a double bottom pattern.
As shown in the figure above, a head and shoulder pattern is formed when three peaks occur consecutively, representing a head and two shoulders. The pattern represents a baseline with three tops, with the middle top higher than the adjacent tops. These peaks should ideally stand on a baseline or neckline, common to all. A head and shoulder pattern indicates a bearish signal after the end of an uptrend.
The pattern occurs when bulls are trying to move the prices up, as displayed by two higher highs (HH) and one lower high (LH) in the diagram, but fail to do so, and volumes decline. It is one of the most popular and reliable chart patterns used by traders. It provides very strong signals. Once the price breaks below the neckline, followed by an increase in trading volumes, the traders are free to go short.
The head and shoulder pattern can also occur in reverse form, as represented in the image below. We call this the inverse head and shoulder pattern. The pattern indicates a bullish reversal after a bearish phase. Traders interested in opening long positions look for this pattern on the chart.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.