Technical analysis can be a great help when analyzing financial assets across the global market, and cryptocurrencies are no exception to that.
Most traders to this day still rely on technical analysis specifically when analyzing cryptocurrencies with bigger market capitalization.
This is why some traders suggest that newbies need to learn technical analysis, even if they are not planning to be a trader.
One of the reasons is because through technical analysis, investors who don’t identify themselves as traders can also analyze when it is appropriate to buy or sell their holdings, especially when coupled with their fundamental analysis.
In this article, we will be talking about one of the key elements of technical analysis, which are chart patterns.
Understanding Chart Patterns
Chart patterns are patterns that usually can be seen in the chart movement of each financial assets, including cryptocurrencies.
The pattern can help identify the market trend, whether that certain asset will go down or go up in the future, which can be analyzed according to the chart’s timeframe.
There are a lot of cheat sheets that have been created by traders on the internet, one of the examples is a chart pattern cheat sheet that was created by HowToTrade, a website that teaches people how to trade financial assets.
When looking at chart patterns there are two certain things that usually traders look at, which are if the price is going to go up or go down.
But, when looking deeper into the analysis, there are two specific patterns that usually come around to indicate where the trend is going, which are the continuation patterns or the reversal patterns.
Continuation Patterns
Continuation patterns are usually when a trend is so strong and the transaction volume has not been on an overbought or an oversold volume.
You can combine this analysis with an indicator to look deeper into the transaction volume with tools such as the RSI Indicator.
When a trend is going strong and the volume is also going strong, that means that there will be a continuation of the current trend.
Continuation means that the price will continue to go in the direction that it is currently going, which means that when the price is going up it will continue to go up and if the price is going down it will continue to go down.
Continuation usually occurs when the trend is inline with an upcoming news, for example, when there is a data announcement of the US Economy that states that the interest rate will go up which usually makes the US Dollar go up, and crypto is currently going down, it usually means that there will potentially be a continuation pattern of the crypto market going down.
Reversal Patterns
Reversal patterns however, tells a different story, where it usually means that the crypto price will go into a different direction than its current direction.
This typically occurs when there is sudden news in the crypto market, for example, when the price is going up and then suddenly there is news of a huge crypto company going bankrupt, that usually indicates a reversal where the market will go down.
It also occurs when the transaction volume of an asset has gone into an oversold or an overbought condition.
Reversal patterns are usually better for trading rather than continuation patterns, because with reversals, traders can capitalize on a new trend which usually gives out more profit, rather than capitalizing on the existing trend, which is usually weaker.
But, note that reversals are riskier than continuations as there might be fakeouts that occur which usually leads to losses.
Conclusion
Overall, these patterns can be used for your daily analysis, but it is better to combine it with other analysis as well.
Remember that just like any other methods, this method is not always correct which is why it is better to also include proper risk management when using this analysis.
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