One of the main challenges of cryptocurrency trading, and trading in general, is to predict price trends accurately. More than simple trend prediction, predicting trend reversals can be extremely profitable to traders, since it allows entering the market at the exact moment where the trend is about to reverse. In technical analysis, a price pattern that signals a trend reversal is called a reversal pattern. This article will let you know what a reversal pattern is, how to use reversal patterns at your advantage for cryptocurrency trading. We'll conclude with a small paragraph on the most popular reversal patterns that might help your cryptocurrency trading.
A reversal pattern is a technical analysis term that refers to a specific formation on a price or a candlestick chart that suggests a change in the price direction of an asset is about to take place. There are many different types of reversal patterns, but they all share one common goal: to indicate when the current trend is likely to reverse.
Most reversal patterns form over several periods or bars on a chart and are not based on the movement of a single bar or two. As such, they can be used to help traders anticipate a change in trend and take appropriate action. For example, if a trader is long an asset and sees a reversal pattern form, they may choose to close their position and go short instead.
Identifying a reversal price pattern offers a signal that the trend is about to reverse. If the reversal pattern is spotted after an uptrend, it might be a good time to sell or to go short. Conversely, if a reversal pattern is spotted after a downtrend, it signals that prices are about to go up again, and that it might be a good time to buy or go long. However, using reversal price patterns - or any other technical analysis tool or indicator - alone never is a good idea. Traders will get better signals and better results if they confirm reversal patterns with other technical analysis indicators.
RSI is a momentum indicator that measures the magnitude of recent price changes to help determine whether a security is overbought or oversold. A trend reversal pattern following a downtrend in conjunction with a RSI below thirty can be considered as a strong trend reversal signal.
MACD is a trend-following indicator that uses the crossing of two exponential moving averages to signal when a security is in a bullish or bearish trend. Traders can wait for the MACD to provide a bullish or a bearish signal to enter or exit the market.
When used together, reversal patterns and RSI or MACD can help traders more accurately confirm reversal price patterns.
Some of the most common include head and shoulders, double top/bottom, and triple top/bottom.
The head and shoulders price pattern (and the reverse head and shoulders pattern) is one of the most reliable reversal patterns and is often used to identify tops and bottoms in the market. The pattern is made up of three consecutive peaks (the head) with two lower troughs (shoulders) between them. The head and shoulders pattern is confirmed when the price breaks below the neckline, which is the line connecting the lows of the two shoulder troughs.
Double tops/bottoms are another common reversal pattern that can be used to identify potential turning points in the market. The pattern is made up of two consecutive highs (double top) or two consecutive lows (double bottom) that are separated by a trough. The double top/bottom is confirmed when the price breaks above/below the peak/trough that separates them.
The triple top/bottom is similar to the double top/bottom, but consists of three consecutive highs/lows instead of two. Like the double top/bottom, it is confirmed when the price breaks above/below the peak/trough that separates them.