Advanced Patterns in Crypto Trading
Last updated
Last updated
Trading cryptocurrencies, like trading any other asset, is a venture that can be both rewarding and risky. To navigate this challenging yet exciting landscape, traders have to understand and interpret numerous signals and patterns. While many traders are familiar with basic patterns such as the 'head and shoulders' or 'double top,' there are advanced trading patterns that offer potentially greater insights.
In this article, we will delve into some of these advanced patterns, specifically tailored for the cryptosphere, explaining their formation, implications, and how to trade them effectively.
Harmonic patterns take the geometric price patterns to the next level by utilizing Fibonacci numbers to define precise turning points. They can provide opportunities for traders to identify highly probable future price movements in cryptocurrencies.
Named after H.M. Gartley, who introduced it in his book "Profits in the Stock Market" in 1932, the Gartley pattern, also known as '222,' is one of the most traded harmonic patterns. It appears when the price has been moving in a certain direction, but then starts to retrace, and forms two distinctive peaks or troughs.
Traders use Fibonacci retracements to identify potential reversal points. If the pattern is bullish, they will look to buy at point D. If the pattern is bearish, they will look to sell at point D.
The Crab pattern is another harmonic pattern which has a high reward-to-risk ratio compared to other harmonic patterns. The main difference between the Crab pattern and other harmonic patterns is that the AB leg retraces to 0.886 instead of 0.618.
The Butterfly pattern is similar to the Gartley pattern but with a longer XA leg and the AD leg extending beyond the starting X point, giving it a 'butterfly' appearance. The Butterfly pattern is unique in that it provides a trade setup where the risk is small compared to the potential reward.
Elliott Wave Theory is a method of technical analysis that looks for recurrent long-term price patterns related to persistent changes in investor sentiment and psychology. The theory identifies impulse waves that set up a pattern and corrective waves that oppose the larger trend.
Each cycle consists of eight waves. The first five are motive waves, while the last three are corrective waves. The theory operates on the premise that the markets may exhibit a wave pattern that can be used to predict price direction.
Applying Elliott Wave theory is subjective and takes practice, but it can be instrumental in providing a roadmap for the crypto trader.
Wolfe Waves form naturally across all financial markets. It is a natural rhythm of the market, providing precise entry, exit, and profit targets. A Wolfe Wave is composed of a 1-2-3-4-5 wave formation, with 2 and 4 being the retracement waves seen in the dominant, well-established trend. The 5th wave breaks this trend line.
What makes Wolfe Waves quite unique is the presence of a specific Wolfe Wave line called the Estimated Price at Arrival (EPA) line. This line estimates where price will move on the breakout, and it can be very useful in setting profit targets.
Ichimoku Kinko Hyo, or simply Ichimoku, is a trading system that originated from Japan. It provides more data points, which offer a more comprehensive price action story.
Ichimoku includes multiple lines:
Tenkan-sen: This is the fast moving average.
Kijun-sen: This is the slow moving average.
Senkou Span A: This represents one of the edges of the Ichimoku Cloud.
Senkou Span B: This forms the other edge of the Cloud.
Chikou Span: This is the lagging line.
The cloud (Kumo) is the space between Senkou Span A and Senkou Span B. A bullish signal occurs when price moves above the cloud, while a bearish signal occurs when price moves below the cloud.
Ichimoku may look confusing at first glance, but it offers rich and detailed information about support and resistance, trend direction, momentum, and potential buy and sell signals.
Developed by Richard Wyckoff, this method is based on price action and the belief that the market price reflects the sum total of all the various pathways and transactions carried out by other market participants. Wyckoff’s theory, often applied to stocks, can also be beneficial in crypto trading.
The method consists of a series of tests and signals, and is broken down into a series of phases:
Accumulation phase: Smart money steps into the market and begins to buy.
Markup phase: Price increases due to demand outpacing supply.
Distribution phase: Smart money starts to sell, and the market enters a consolidation.
Markdown phase: The price falls as supply outstrips demand.
In each phase, there are numerous signals and tests to confirm the current phase and predict the subsequent one, offering trading opportunities.
While advanced trading patterns may appear complex at first, the deep insights they provide into market dynamics can significantly enhance your trading arsenal. These patterns help traders anticipate significant moves and profit from them. However, they should not be used in isolation. Fundamental analysis, risk management, and emotional control are still the most vital aspects of successful trading.
Cryptocurrency markets are particularly volatile, and even the most advanced technical patterns may sometimes fail to predict their wild swings. Thus, understanding these advanced patterns is just one piece of the puzzle. You should always diversify your strategies and remember to trade only with what you can afford to lose. Happy trading!
