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Pattern Trading (Formation Trading) in Crypto

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What is pattern trading and what are the most common formation patterns to watch for in crypto.

Key Points

  1. What it is: method
  2. Tools that do it: #bitfinex 
Coinrule

Pattern trading, or formation trading, refers to making trading decisions based on standard chart patterns.

List of high-probability crypto charting patterns is at the bottom of this entry.

You will most often see pattern trading on “slower” markets such as stock markets, and a lot of crypto traders use formation trading as well. Again, usually on the “slower”, large cap crypto markets.

Pattern trading is notoriously linked with retail traders who go with someone else’s advice because they don’t know what they’re doing, and often lose. Specifically, vague patterns like “head & shoulders” are often mentioned in this way.

The fault lies not in the market patterns themselves though, it is in the way they are used.

Why do traders lose with pattern trading?

Markets do repeat their patterns with regularity.

There are real fundamentally based market phases. In crypto this could be the bitcoin halving for instance, and these do influence the market.

Another thing is the typical market participant - traders have their favorite markets to trade, people with similar focus or mentality flock to the same market, they will trade the market with almost the same mindset and that’s how regular patterns develop.

The mistake is to rely only on a pattern. As John Bollinger’s capital management company explains in their SEC disclosure brochure:

Technical analysis may involve the use of charts to identify market patterns and trends, which may be based on investor sentiment rather than the fundamentals of the company. The primary risk in using technical analysis is that spotting historical trends may not help to predict such trends in the future.

The better approach is to treat the pattern as a more general information about the state of the market.

  • Is the market trending or ranging firmly around a mean? Painting a Market profile will help you decide that, if you’re not sure.
  • Is a trending market bull-flagging? We are setting up for a steady uptrend and a bull cycle. You could look at ichimoku cloud and bbands high probability patterns for cues about your specific actions.
  • Is the market ranging after a downtrend? We could be making a bottom - Wyckoff method and even a quick look at Fibonacci would help here.

High-probability patterns on crypto markets

Weaker patterns that are better for short-term consideration:

Weaker patterns that are good to get a broad overview, but nothing specific:

Technical analysis that does not work with patterns and therefore combines well with pattern chart analysis:

Read our list of tools for crypto traders for free and freemium crypto trading tools.

Want to *really* learn crypto charting & technical analysis?

Hate to break it to you, but there's no trading school, no neatly structured course and no simple how to.
Read our articles to get familiar with the tools, but try everything hands on. Trading will press your emotions, you can only really learn it as you go.

All the good crypto charting tools and platforms are accessible for FREE in either TradingView app or at Bitfinex. Just start!

Get TradingView Signup at Bitfinex

 

Ichimoku Cloud for Crypto Trading - Ichimoku cloud strategies for crypto: Full indicator tutorial, including the controversial topic - Does it make sense to tweak Ichimoku Cloud settings for crypto trading?
Another better Coinmarketcap - with a heatmap tool - Bitgur has heatmaps of six different metrics: Not only price change of coins per time period but also neat stuff like unusual volume spikes.
How to read option charts: Market sentiment analysis based on crypto derivatives - Crypto options markets reflect the sentiment on the market and are small enough to split the whales from the retail. That makes them a useful tool for technical analysis.
Strategy: Technical Analysis past ATH with Fibs - Now that we are past ATH levels again, let's reiterate how things *really* work around here.
Wyckoff trading method for ranging markets - Fully reworked primer on ranging crypto markets. Includes Wyckoff method for market phases and recommended TradingView scripts.