Pattern trading, or formation trading, refers to making trading decisions based on standard chart patterns.
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 indeed move with some regularity. There are real fundamental cycles, 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 trade directly off the pattern. The correct approach is to treat the pattern as a more general information about the state of the market.
- For instance, the market is 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.
- Or, the market is ranging after a downtrend, we could be making a bottom - Wyckoff method could help here.
Most common patterns on crypto markets
- Bull flag / Bear flag
- Double bottom (on price or bbands)
- Three pushes to a high (again on price or bbands)
- Bart pattern / Inverse Bart pattern
- TK Lines Trading
Read our list of tools for crypto traders for more free and freemium options.