Bullish candlestick patterns

 Inverted Hammer Candlestick

Candlestick charts are an invaluable source of information for any trader. Despite the
overwhelming candlestick pattern variants, it is still crucial to understand its functions.
Supposed you’re analyzing the momentum or the market trend with an inverted hammer
candlestick, here’s how you properly read and to apply it strategically.
Generally, an inverted hammer is a type of candlestick pattern treated as a
possible trend-reversal signal. As it is a well-known bullish reversal pattern, it
mainly occurs at the end of a downtrend. The inverted hammer has a remarkable
shape and clear-cut chart position make it recognizable among the others.
The inverted hammer is a variation of the regular hammer pattern. Typically, it’s easy to
identify a hammer pattern though there are exceptions. Of course, there are instances
where the inverted hammer is mistaken as a shooting star pattern. They look almost
identical with a small real body and a long upper shadow, but it marks the possible
lowering turning point. That is why traders must be aware of everything about the
peculiarities of patterns.
How Does an Inverted Hammer Candlestick
Look Like?

The inverted hammer consists of three parts: a body and two shadows (wicks). A real
body is short and looks like a rectangle lying on the longer side. The upper wick is
extended and must be at least twice longer than the real body. However, the lower wick
is tiny or doesn’t exist at all. This pattern bears such a name because its shape
The Pros and Cons of an Inverted Hammer
Candlestick
There is no ideal pattern that will work at any time in any situation. The inverted hammer
is no exception. There are several obvious advantages of using this candlestick:

 It is not difficult to identify this pattern. It cuts a recognizable figure on a chart and
cannot be confused with other patterns.

 The chance for reward is relatively high.

But these advantages are accompanied by disadvantages as well. The main

disadvantage is common to all the strategies and scenarios. It may happen so that
pattern will fail for no reason, even correctly identified.
The inverted hammer candle may be a signal of a short-time spike but not a longer-
term trend. Also, sometimes the additional confirmation is desirable, and this results in
loss of profits.
Inexperienced traders can confuse this pattern with its bearish variant, the shooting
star mentioned above. They may miss the moment though the signal is evident.
Differences Between an Inverted Hammer and a
Shooting Star

The form of these two candles is identical. A real short body is a combination of a long
upper wick and a tiny lower wick (or no lower wick at all). Both can be regarded as a
possible trend-reversal signal. But, the only distinction between them lies in the position
they take in the chart.
The inverted hammer always appears as the final element of the downtrend. On the
contrary, the shooting star appears at the top of the trend and marks the possible
downward price movement. In a nutshell, these two patterns are similar in shape.
However, they provide traders with different signals.

 Bullish Engulfing Candlestick

Characteristics of the Candlestick Formation

The bullish engulfing candlestick pattern is a two-candle formation (candles A & B
below).

The first candle (A) must be a down candle, colored red on most charting packages (or
black if using a white/black color scheme). The size of the red candle can be large or
small. The key to the pattern is the size of the second candle.
The second candle (B) will need to engulf or overlap the first candle. Technically, this
means the opening price for the second candle must be lower than the closing price of
the first candle. However, in the crypto markets, there is no opening or closing of a
trading period. You can transfer coins 24 hours a day, 7 days a week.
Consequently, the second candle simply needs to overtake and engulf the first candle.
When Does a Bullish Engulfing Pattern
Appear?
The bullish engulfing candlestick pattern is a bullish reversal pattern found at the end of
a downtrend. When visible, this bullish pattern signals that the previous downtrend has
ended and a potential reversal trend (a new uptrend) is beginning.
First, there needs to be a correction of an upward movement. From January 2021 to
February 2021, Bitcoin’s uptrend resulted in a 100% price increase. Bitcoin then
experienced a partial correction, trending lower to February 28, 2021.

Second, there needs to be a kickoff to the resumption of the old uptrend. On February
28, 2021, Bitcoin rocketed higher after the partial retracement. The bullish candle
engulfed the previous candle, signaling a bullish reversal.
After Bitcoin carved the bullish engulfing pattern, the market extended higher by another
48%.

The chart above, involving Bitcoin, is a great example of what to look for in a bullish
engulfing pattern.
Notice how the wick on the right (green) candle ends below the wick of the left (red)
candle. This signals the market briefly traded lower before accelerating higher. This
brief penetration lower, though not required, strengthens the signal for the engulfing
pattern.
The engulfing pattern is confirmed as being completed when the second candle closes
above the opening of the first candle. At that point, the trader can open a bullish position
in the cryptocurrency with a stop loss just below the swing low of the engulfing pattern.

Pro Tip:
Sometimes, the market will consolidate because prices have just rocketed higher.
Conservative traders may wait for a breakout above the high of the right candle to occur
and then enter long into the position. A break above the high would confirm a
resumption of the uptrend. The significant risk would be set at the same area, just below
the swing low.
Advantages of Trading the Engulfing Pattern
The bullish engulfing pattern is followed by many traders primarily for a couple of
reasons.
First, the pattern is very easy to identify. Engulfing is a two-candlestick pattern in which
one of the candles produced is extremely large. As a result of the large candle, the
pattern is easy to spot on a chart, once you know what to look for.

Secondly, after the engulfing pattern is confirmed as being completed, you can receive
an attractive risk-to-reward ratio into the position.
The stop loss and risk level for trading can be placed at the swing low of the engulfing
pattern. This makes it relatively easy for traders to target at least twice the distance of
their stop loss, creating a 1:2 risk-to-reward ratio.
Tip #1: Horizontal Support for the Engulfing Candlestick
If the crypto market is in a strong uptrend, then we will see a series of higher highs and
higher lows on the price chart.
Each new higher high is breaking above an old high. After successfully breaking above
the old high, prices tend to consolidate and correct. Within the crypto market, it is
common for prices to retrace back to the old broken high.
In the example above, Bitcoin had gained 224% and needed to consolidate. It corrected
about 20% and landed near $10,120, which was a previous high price back in May and
June of 2020. A bullish engulfing pattern emerged, which was the start of a 500%
uptrend.
If a bullish engulfing candlestick pattern appears near an old broken high, then we have
a strong signal that the bullish trend is ready to resume.
Tip #2: Trend Line Support Near the Engulfing Pattern
It is quite common for the crypto market to scream higher without taking much of a
break. Therefore, the old highs and broken resistance may never come into play, yet the
market continues its upward trend.
Another tool to help you strengthen your engulfing signals is a bullish support trend line.
The bullish engulfing candlestick pattern provides its best signals after the market has
consolidated lower. If this consolidation is terminating and reversing at a bullish trend
line with a bullish engulfing candle present, then the market is giving you a strong
bullish signal.
In the image above, we see LINK trying to recover from the March 2020 pandemic sell-
off. As the uptrend began to take root, LINK carved a pattern of gaining, then
consolidating.
An uptrend line could be created with the ending points of the corrections. Sure enough,
LINK popped higher at the trend line, with a bullish engulfing pattern sending the altcoin
up 25% in a couple of days — and by nearly 8x over the next 4 months.
Tip #3: Moving Average as a Bullish Engulfing Pattern
Indicator
Many traders and large institutions keep a close eye on an indicator called the 200-
period simple moving average, as it provides technical support to the market.
If the crypto price chart corrects down to the moving average and the engulfing pattern
carves, this is a strong signal the trend may reverse higher.
In the image above, we are looking at Bitcoin on a 4-hour price chart. Bitcoin was
correcting its previous uptrend and tagged the 200-period simple moving average. At
that point, a bullish engulfing pattern appeared to kick off another trend of 250%.

 Cup and Handle Patterns

Characteristics of the Cup and Handle Pattern

The cup and handle pattern appears after a big rally where the market needs to pause
and catch its breath. The pattern consists of five key components, which then lead to a
breakout higher.
The first four components help shape the structure for the pattern’s name because they
form the outline of a cup with a handle.
 1. Strong uptrend to set up the potential pattern

2. Retracement of the previous rally

3. Rebound rally back up near the previous high

4. Drift sideways in pricing with a slant to the downside

5. 5. Volume needs to increase on the rally of #3, but drift lower in #4 (more on this
later)

charts.
Cup and High Handle
One of the characteristics of the cup and handle pattern is that the handle must form
within 10% of the old high. There are times when the market is extremely bullish and the
handle pushes slightly above the old high but remains within 10% of it. These situations
are considered to have a high handle.
In the above example, we see a cup with a high handle. The handle forms above the old
high, rather than below. The result of the pattern remains the same where it is a minor
breakout higher, but then prices trade sideways on declining volume to form the handle.
The pattern is confirmed when the market breaks above the highest price of the handle.
Intraday Cup and Handle
When William O’Neil first identified the cup and handle pattern, the focus was on daily
chart time frames. Now that charting software has made access to intraday charts
easier, variations of this pattern have emerged such that it can be found within intraday
chart time frames.
How To Identify the Cup and Handle Pattern
The cup and handle pattern starts with an uptrend, followed by a 30–50% correction.
Use the Fibonacci retracement tool to measure out the previous uptrend, then look for
the correction to retrace near the 30–50% zone.

After the market has retracted into the 30–50% zone, look for a rally to begin pressing
prices back toward the old high.
As prices approach the old high, a failed breakout traps both recent buyers and buyers
at the bottom of the base. Recent buyers see their small floating gain evaporate, and
buyers at the bottom of the base fear a double top reversal.
Both sets of buyers exit the market; as a result of this entrapment, these buyers are
nervous and slowly sell out, creating the handle of the pattern.

How To Use the Cup and Handle Pattern

The cup and handle pattern is an effective combination to flush out weak holders.
To trade the cup and handle pattern, wait for technical levels of resistance to break.
There are two areas where traders can buy the resistance break.
First, draw a resistance trend line encompassing the high prices of the handle. A break
at the resistance trend line is your signal to buy. The second opportunity to buy is a
break above the high of the handle. Waiting for a break above the handle’s high is a
more conservative approach, as you are seeking confirmation from the market that the
price is hitting new highs.
The risk and stop loss on the trade will be set at the low of the handle. This way, if the
breakout fails and falls back below the handle’s low, then you can close out the trade at
a small loss and move on to the next opportunity.
If the breakout is successful, then you can consider moving your stop loss to the
breakeven level, locking in the trade without experiencing a loss.
The target for the cup and handle pattern is fairly simple. Measure the distance from the
cup high to the cup low and project that same distance beginning at the handle’s low
point. So long as the handle remains in the upper half of the cup, this level of price
projection leads to an attractive risk-to-reward ratio on the trade.
Case Examples
Here is an example of the cup and handle pattern in a Bitcoin chart from 2019.
After rallying 25%, the market corrected lower approximately 50% on increasing bearish
volume. Then, the market rallied to come within 3% of the previous high.
At that point, the cup of the pattern was completed and the handle was about to begin.
The handle drifted lower on decreasing trading volume. The pricing of the handle
remained within the upper portion of the cup, so all of the necessary ingredients were
present for a bullish breakout.
Once the handle was finished, Bitcoin rallied higher on increasing volume, which led to
new highs.
Below is another chart, a cup and handle example for Ethereum.

After rallying 300% to begin 2021, Ethereum began consolidating the uptrend to form
the cup. The cup was relatively shallow, at nearly 30% of the previous uptrend. After
correcting, the price rallied back to near the old high to finalize the cup.
As the handle began to develop, its slight downward slope, coupled with decreasing
trading volume, was a big clue that this may be a minor consolidation. This was a
relatively long handle, but once it had finished, Ethereum rallied on increasing volume.

 Morning Star Pattern

What Is the Morning Star Candlestick Pattern?

A morning star pattern is a bullish reversal pattern that appears at the bottom of a
downtrend. It indicates that sellers have lost their momentum, and buyers have
taken control over the price in an uptrend.
It is a combination of multiple candlesticks with a U-shape, indicating a shift in the trend
direction. This pattern is very effective when the price moves down for a considerable
time, but a reversal of momentum seems at hand.
The morning star candlestick pattern is a combination of three candles with the following
characteristics:

 Day 1: A large bearish daily candle at the bottom of a downtrend.

 Day 2: A small candle, either bullish or bearish.

 Day 3: A large bullish daily candle.

The image represents what the morning star pattern looks like.

The formation of the morning star pattern.

The above image shows the exact formation of the morning star pattern in the price
chart. Day 3 opens with a bullish cap and closes higher above Day 2. Some common
aspects of this pattern are as follows:

 The morning star is a bullish pattern that appears at the bottom of a downtrend.

 A morning star pattern from a strong support level has the maximum probability
of working out.

 If the Day 3 candle is more significant than Day 1, the pattern is more robust.

 Day 2 should open with a bearish gap, and Day 3 should open with a bullish gap.

How to Identify a Morning Star on Crypto

Charts
In the above section, we’ve seen how the morning star pattern develops within three
days. Now let’s move to identify this pattern in any financial market.
Identify the Bottom (Ending of a Bearish Trend)
At first, you have to find a bearish trend that’s easy to spot on the chart by observing
lower lows in the price. However, finding the bottom is essential. In this case, the bottom
means the last part of the bearish trend from which bulls may regain momentum.
You can define the bottom using horizontal or dynamic support. You don’t have to wait
for confirmation from the support level. Instead, start monitoring the price as soon as it
reaches the support level.

The above image shows the price moving downward (downtrend) and reaching a
horizontal support level. We can therefore say that the price may have found a bottom.
Moreover, you can use dynamic support like 20 EMA to identify the bottom. If the gap
between the dynamic 20 EMA and price extends, the price has a higher possibility of
making a bottom and then reversing.
Find The Three Candles
As soon as the price reaches the bottom, we should find three candles as discussed in
the above section. Here the second candle should be smaller than the first candle and
should open with a bearish gap. However, the gap is not mandatory. This is because, in
some cases, the price may open without a gap due to less volatility in it.
If the second candle’s body remains within 50% of the first candle’s body, we can
consider the pattern to be valid. But the most important part of all is the third candle.

The third candle should appear with an impulsive bullish pressure, eliminating the price
action of the second candle. We can define the probability of the trade by looking at the
third candle as follows:

 If the third candle is more significant than the first candle: high probable trade.

 If the third candle is as same as the first candle: medium probable trade.

 If the third candle is lower than, or similar to, the second candle: crucial probable
trade.

When three candles appear with these conditions, we can consider the pattern to be
valid.
How to Spot Bullish Reversal Pattern Using the
Morning Star
This section discusses the strategy to identify the morning star pattern in the
cryptocurrency market using a real chart.
Previously, we’ve seen that the morning star is a bullish pattern that appears after a
strong bearish trend. Therefore, at first, you have to find a selling market that moves
down for a considerable time:

The above image is a BTCUSD daily chart in which the price moves down from $62,000
to the $51,912 event level, with a bearish pressure. First, however, look at the daily
bearish candle that hits the event level. It’s smaller than the previous candle and opens
with a gap.
Now let’s look at the image below:
Here we can see a strong bullish daily candle that eliminates the previous day’s selling
pressure and closes the candle above Day 1’s high. If we compare the last 3 days’
candle formation with the conditions for the morning star pattern, we see that they’ve
matched.
Look at the image below to see what happens next:

We can see that the price moves higher from the morning star pattern, ultimately
breaking above the previous swing high.
Next, we’ll look at how we can open a buy trade using the morning star pattern.
The aggressive approach is opening a buy-stop order above the third candle’s high,
with some buffer. Here, the third candle indicates that buyers have entered the market
by eliminating all the selling pressure. Now buyers are ready to take the price higher by
creating new and higher highs. Therefore, putting a buy-stop order will automate the
entry once the price moves higher on the next day. In that case, the ideal stop loss will
be below the second candle’s low, with some buffer.
The above image shows how the buy-stop order works, providing a 1:1.8 risk-to-reward-
based profit.
Another approach is the conservative one, in which traders wait for a correction before
opening the buy trade. In that case, they can open a buy trade from a 30% or 50%
correction of the third candle’s body instead of buying from the candle’s high.
The conservative approach has a better risk-to-reward ratio than the aggressive
approach, but there is a possibility of missing out on the trade. In addition, there’s no
guarantee that the price will correct lower after forming the morning star pattern.
Therefore, the optimum approach is opening the 50% position with the aggressive
approach and another 50% position with the conservative approach.
Morning Star vs. Evening Star: The Differences
The evening star is another similar technical indicator but signals bearish
reversal momentum. The evening star forms at the top of a price uptrend, signifying that
the uptrend is nearing its end where the potential reversal (bearish sign) is approaching.
The key highlight to the evening star is the ideal pattern rarely appears in technical
analysis. If it does, the signal is usually reliable, and a strong downtrend is on the way.
We’ve illustrated the evening star pattern in the image below.
The evening star pattern is a combination of three candlesticks with the following
characteristics:

 Day 1: A large bullish daily candle at the top of an uptrend.

 Day 2: A small candle, either bullish or bearish or neutral (Doji)

 Day 3: A large bearish daily candle

Now let’s move to the key differences between the morning star and evening star
candlestick patterns:
Morning Star Evening Star

Appears at the bottom of a downtrend. Appears at the bottom of an uptrend.

A combination of three candles: bearish, A combination of three candles: bearish,

bearish/bullish/neutral, or bullish. bearish/bullish/neutral, or bullish.

Morning star indicates that sellers have failed, Evening star indicates that buyers have
and buyers are dominating the market. failed, sellers are dominating the market.

From a significant support level, a morning From an important resistant level, the
star pattern indicates the potential for traders to evening star pattern tells traders to short
open long positions. a position.

How Reliable Is the Morning Star Pattern?

Morning star is a powerful candlestick pattern, and most price action traders use it in
their trading strategies. However, in financial trading, no pattern can guarantee you a
100% profit. Nevertheless, this pattern is very effective from the bottom, and it
represents a story about the market regarding buyers’ failure and sellers’ presence. As
a result, traders can easily understand what’s happening in the market — and make an
informed guess as to what may happen next.
Moreover, its reliability depends on how candles are forming. If the third candle
eliminates the price action of the first and second candles by engulfing the price action,
we can consider the buying possibility to be strong.
However, the morning star pattern has a lower possibility of working out from a random
place because there is no way to say that the current trend has weakened. Therefore,
the morning star success rate depends on the price trend, levels, candle formation,
and market sentiment. Therefore, traders should consider other factors besides the
candlestick pattern to increase its probability of success.
Even if you have a maximum probability of trading, there is a possibility of failure in
using this pattern. Therefore, make sure to follow a risk management system and
always use stop loss in every trade.
The Limitations
Like other candlestick patterns, the morning star has some limitations. Let’s have a look
at them:

 The morning star, a combination of three candlesticks, is often difficult to find on

a chart. If the price changes the trend direction before three days have elapsed,
there’s a possibility of missing the trade.

 There is no guaranteed movement. Even if you follow all the rules, there’s a
possibility of hitting the stop loss.

 Trading in the daily or weekly chart requires a lot of patience and effort to find the
setup.

 In volatile market conditions, there’s a high probability of being stopped out at

breakeven.

 Three White Soldiers Pattern

What Are the Three White Soldiers?

The three white soldiers is a bullish candlestick pattern that occurs near the end
of a bear market. It signals the end of the prevailing downtrend. This candlestick
formation consists of three green candles that signal strong buying pressure
which leads to a trend reversal.
This is what the three white soldiers candlestick pattern looks like:
Most traders who use Japanese candlestick charting techniques know that price
action works better within the right context. Depending on where it develops within the
trend, the three white soldiers can also be viewed as a continuation pattern. If this
pattern forms in the middle of a bull market, it can act as a continuation pattern. When
the pattern forms at the end of a downtrend, it acts as a price reversal signal.
From a supply and demand perspective, the three white soldiers can help traders
identify a shift in market sentiment where buying pressure suppresses selling pressure.
Interpreting the Three White Soldiers
Candlestick Pattern
As previously mentioned, the three white soldiers is a bullish pattern. Its characteristics
include the following:

1. Three consecutive green candles with a large trading range

2. The candles are relatively the same size

3. The candlesticks have small upper and lower wicks

4. The second and last candle lows can’t go beyond the middle price range of the
previous day

5. The opening price of each candle is within the height of the body of previous
candle

6. The closing price of the second candle surpasses the first candle’s high
 7. The closing price of the third candle exceeds the second candle’s high

How to Use the Three White Soldiers to Identify

Entry and Exit Points
There are different ways to trade the three white soldiers pattern. Usually, there are two
approaches that anyone can use:

1. A buy position is open when the highest price of the three green candles is
broken, or

2. Buying the pullback

In other words, the three white soldiers pattern is used as an entry to establish a long
position. However, at the same time, traders who have been riding the prevailing
downtrend can use this price reversal signal as an exit point. Bears will often liquidate
their short positions when the three white soldiers pattern prints on the price chart.
The significant move higher that follows the three white soldiers pattern will often lead to
the overbought market. In this case, technical indicators can provide more insight into
what happens behind the curtain.
For example, the stochastic oscillator may have moved above 80, signaling overbought
readings. In this situation, the price trends inside a consolidation, giving time to the
stochastic oscillator to reset. These opportunities are great examples of buying on a
pullback.
Real Case Example
The daily chart for Bitcoin (BTC/USD) printed the following three white soldiers
candlestick pattern in February 2021 after a multi-day sell-off. In this example, the
prevailing trend is downward before the three white soldiers candlestick pattern leads
the price to a sharp bullish reversal.
The bullish reversal pattern is confirmed once the highest price of the three candles has
broken to the upside. Additionally, the stochastic oscillator reveals oversold conditions
for Bitcoin, warning traders of an imminent price reversal.
As you can tell, the price action itself — combined with the right context and other
factors that can support the bullish case scenario — has led to the success of this long
position.
Three White Soldiers vs. Three Black Crows:
Differences
The opposite pattern of the three white soldiers is the three black crows. The only major
difference between these two patterns is that the three black crows form at the end of
an uptrend. Unlike the three white soldiers pattern, which signals a trend reversal from
bearish to bullish, the three black crows candlestick pattern signals a trend reversal
from bullish to bearish.
Secondly, whereas three green candles represent the three white soldiers, the three
black crows pattern is represented by three consecutive red candles. They are also
relatively large in size, have small or no wicks, and the second and last candle highs
don’t go beyond the middle price range of the preceding candles.
The same caveats regarding candle size, location within the trend, and volume apply
equally to the three black crows and the three white soldiers.

 Hammer Candlestick

What Does a Hammer Candlestick Look Like?

The hammer pattern is a single candlestick pattern that has a small body. The body of a
hammer candlestick can be either:

 Green (bullish), where the close of the candle is higher than the open,

 Or red (bearish), where the close of the candle is lower than the open.

The candlestick color doesn’t carry much weight because the hammer candlestick
pattern will always show a bullish signal regardless of the candle’s body color.
The core event of a hammer candlestick happens in the lower shadow. Thus, the
success rate of the candlestick depends on how long the wick is, compared to the
candle’s body. Usually, a good hammer pattern should have a wick that’s two times
longer than its body, whereas greater length shows more exhaustion to the price with an
increased buying possibility.
Let’s have a look at the anatomy:
Above, we see a single candlestick with a more petite body and a long shadow. The
bearish wick represents sellers’ rejection, but as a trader, we need to know more. So
let’s have a look at what’s inside the hammer candlestick:

If the candlesticks in the above image were taken from a daily chart, it would represent
an intraday portion showing what’s inside the hammer. Here, the H4 candles lead to a
more reliable view of how sellers have joined the market and been beaten by buyers.
The Bullish Hammer
In the above section, we’ve seen that the hammer has a small body and a long wick.
But what are the other conditions?
The bullish hammer forms when the closing price is above the opening price, indicating
that buyers have become stronger in the market before the candle closes. The bullish
hammer’s success rate depends on the closing price and leg’s length. A longer wick,
combined with the closing price above the opening price, provides the most accurate
trade.
Hammer vs. Hanging Man
There are many similarities between the hammer and hanging man that might confuse
traders. The similarities are striking, as these are both single candle patterns that look
nearly identical.
The crucial distinction between the two patterns lies in their placement relative to the
previous trend. A hammer pattern forms after an extended downtrend, and suggests
that selling pressure is subsiding and buyers are rushing in. That sentiment is what
generates the longer wick to the downside. Thus, the hammer serves as a bullish
signal, especially if it appears near support.
While a carbon copy of the hammer, the hanging man appears after an extended
uptrend. The hanging man pattern forms as prices initially push lower, then immediately
rebound higher. After an uptrend, that price action suggests that buyers are losing
momentum and sellers are starting to enter the trade. Thus, the hanging man is a
bearish signal, particularly when it emerges near a resistance level.
Hammer vs. Inverted Hammer
Another cousin to the hammer pattern is the inverted hammer. Both formations are
bullish single-candle patterns, and price is expected to rally after they form.
The key difference between them is in their appearance. As its name suggests, the
inverted hammer looks like an upside-down hammer. In the inverted hammer the price
initially rises, but is promptly pushed back down. The closing price of the single candle
formation is near the opening price. The candle's body (red or green) holds no
significance in pattern analysis.
Both patterns emerge following a downtrend, and the signal is reinforced if the formation
materializes near support.
Hammer vs. Shooting Star Pattern
The shooting star is another Japanese single candlestick pattern that resembles the
inverted hammer. There are a couple of distinct differences between the hammer and
the shooting star.
The shooting star’s wick points out of the top side of the candle’s body. This formation
loosely resembles a star falling out of the sky. On the other hand, the hammer’s wick
trails from the bottom of the body.
As we’ve stated previously, the hammer appears at the end of a downtrend, whereas
the shooting star is formed at the end of an uptrend. As a result, the hammer is a
bullish candlestick pattern, while the shooting star is a bearish formation.
Hammer vs. Doji: The Differences

After a long downtrend, a hammer shows a buying opportunity. So does the Doji. Let’s look at
some differences between hammer and Doji.
Hammer Doji

Has a long shadow downside with a Has a long upper shadow and lower shadow
small body with a small body

Hammer candlestick indicates bears’ Doji indicates indecision about the price
failure in the price
 Has both red and green bodies Doji has a petite body; the red and green bodies
don’t have an impact

Hammer indicates a potential bullish Doji doesn’t provide enough clues about the
price reversal next trend’s direction

Hammer Candlestick Trading Strategies

Traders should understand the practical uses of the hammer pattern, along with other
indicators, to make a profit. You can rely on the hammer candlestick as a primary
element to formulate a trading strategy. Still, its accuracy can only be confirmed when
used with other technical indicators and technical analysis tools.
We’ll look at some of the trading strategies to use with the hammer pattern.
Strategy 1: Top-Bottom Strategy with Hammer
The global financial market cycles create and change market trends. Most of the
significant top-bottom results from strong fundamental news, but cryptocurrency also
depends on the global economic condition, regulation conflict, crypto acceptance, and
more. The first requirement of this strategy is to identify a strong downtrend that has
broken all near-term lows.

In the above image, a daily ETH chart, the price moves lower, breaking below the near-
term low of 1800.00.
As soon as the price makes a new low, it shows the first sign of upcoming bullish
pressure with an indecision candle. Later on, bears try to take the price lower but fail
and close with a bullish hammer.

The ideal entry for this trading strategy is a buy stop order above the hammer’s high
price, with a stop loss below the shadow with some buffer. In the above example, the
trade closes with a 1:3.57 R:R as soon as a bearish pin bar appears at the resistance
level.
Strategy 2: Support-Resistance Trading
Support and resistance levels work as a barrier to the price, and once the price breaks
above or below these levels, there’s significant price movement. However, the financial
market moves like a rubber band that barely breaks the support and resistance unless
there is significant news to break the chain.
Therefore, we’ll define the price trend using price action, and while making the trade,
we’ll use the hammer candlestick as an additional confirmation to the bullish trend.

The above ETH intraday chart indicates $2,332.97 working as both support and
resistance to the price. The price approaches the resistance and breaks this level with
intense buying pressure. Later on, the price comes lower to the support level, where
investors should wait for a confirmation to enter a buy.
The buy position becomes valid as soon as a hammer candlestick appears at the
support level — the stop loss below the shadow with some buffer. In the above
example, the trade closes with a 1:2 R:R as soon as a pin bar appears at the resistance
level.
Strategy 3: Intraday Trading with Moving Average
This approach is straightforward and highly profitable if the price is within a trend. First,
we have to identify that the overall market trend is bullish. Any bearish correction
indicates sellers’ profit-taking, after which buying pressure may resume.
The above image shows that the price moves where the dynamic 20 EMA is working as
minor support. In this context, the overall price direction is bullish, and any rejection
from the dynamic 20 EMA is a buying possibility.

The buy position is valid from the hammer candlestick high, where the stop loss is
below the shadow with some buffer. In the above example, the trade closes with a 1:2
R:R as soon as a pin bar appears at the resistance level.
The Pros and Cons of a Hammer Candlestick
Every candlestick has some strengths and weaknesses. No trading tool can guarantee
you a 100% profit within any financial market. The hammer is a single candlestick
pattern that needs additional confirmation to confirm its validity. Let’s look at its pros and
cons.
Pros
 The hammer pattern can show a reliable price trend in all financial markets,
including forex, cryptocurrencies, stocks, and indices.

 The hammer perfectly complements other price action tools, such as moving
average, support resistance and trend direction.

 Traders can use the hammer as both a trend continuation and reversal pattern.

 After a long bearish trend, the hammer has a higher possibility of showing a solid
market reversal.

 The hammer can have either a red or green body, which makes it easier for you
to spot reversals.

Cons
 Even if the candlestick appears after a long bearish trend, the price may move
down.

 Traders cannot rely solely on a hammer to obtain a strong price direction.

The Limitations of the Hammer Candlestick

Although the hammer is a profitable indicator, it has some limitations that a trader
should know before using it.
The hammer candlestick indicates buyers regaining the momentum after an asset
makes a new low. However, the buyers’ strength at the end of the day might be a
sellers’ retracement. Look at the image below.
Here we see a large sell candle appearing, after which the price moves up with a
correction. Therefore, when using the hammer trading strategy, monitor the speed of
the retracement. A quick rebound is a sign of reversal, while a correction may lead to
more selling pressure on the next day.
The placement of the hammer candlestick is also essential. If you’re a price action
trader and want to make a buy trade from every hammer pattern you see in the chart,
you might make incorrect decisions. A hammer is solid if found at the bottom of a trend.
However, finding a bottom is not an easy task. You can spot it by looking at the price
chart. Moreover, you can use other indicators, like the RSI or stochastic oscillator. If
these indicators support the hammer, you can consider its indication reliable.

 Triple Top Pattern and Triple Bottom Pattern

What Is the Triple Bottom Pattern?

A triple bottom is a chart pattern that occurs at the end of a downtrend. It is a
bullish candlestick pattern that consists of three failed attempts at new lows near
the same price and is confirmed once the price breaks higher above resistance.
The triple bottom pattern forms after prices have been correcting lower. The crypto
market begins to rebound but fails to follow through to the upside. Additionally, each
failed rebound is met with a failed attempt at new lows, and the market trades in a
sideways range. Sellers become completely exhausted, and the market rebounds a
third time, but with enough energy to break out higher.
The pattern looks like the letter “W” as the lows of the pattern form near the same price
level. Some traders would suggest the pattern takes the shape of a rectangle as well.
Both interpretations are valid, as the pattern is a bullish reversal setup.
Understanding a Bullish and Bearish Reversal Pattern
A bullish reversal pattern is a formation on a chart that suggests a downtrend or
correction will reverse, becoming an uptrend. There are three parts to a bullish reversal
pattern:

1. Correction lower

2. Reversal pattern

3. Confirmation of a break higher

Patterns like the hammer candlestick or bullish engulfing are other examples of bullish
reversal patterns.
The opposite of a bullish reversal pattern is a bearish reversal pattern. It has three parts
as well, corresponding to those of a bullish reversal:

1. Uptrend rally

2. Reversal pattern

3. Confirmation of a break lower

Patterns like the bearish engulfing or rising wedge formation are examples of bearish
reversals.
In addition to reversal patterns, there are continuation patterns. Continuation patterns
do not reverse but simply trade sideways before a breakout continues in the direction of
the original trend. Patterns like flags and pennants and the bear trap are examples of
consolidation patterns.
What Does the Triple Bottom Pattern Represent?
The triple bottom pattern is a bullish reversal pattern. This means that once you spot the
triple bottom chart patterns, you can anticipate a bullish rebound that eventually breaks
above the pattern’s high.
This is useful for long-term HODLers, as the pattern’s confirmation represents another
opportunity to add to your bullish position. The triple bottom pattern can also be used as
an exit signal for those traders who want to short the market.
The reliability of the triple bottom will depend on how close the actual pattern conforms
relative to the idealized one. If the actual market carves close to an idealized pattern,
then the results are fairly reliable.
What Is the Triple Top Pattern?
The triple top is a bearish chart pattern that tests the high of a price three times
before the price falls and breaks to new lows. As opposed to the triple bottom, it
appears at the end of an uptrend suggesting a likelihood of trend change.
The triple top chart pattern forms after a sustained rally. The buyers and whales are no
longer supporting the rally, and sellers are pushing prices down. However, sellers aren’t
strong enough to create a new downtrend initially.
A dramatic bull-versus-bear battle takes place, as each short correction is met with
another rally that fails near the old highs. Eventually, the bulls are exhausted and the
crypto market begins its correction, breaking below the recent support.
The triple top pattern looks similar to the letter “M,” except that there are three failed
attempts at new highs that are close to one another, creating three peaks.
The triple top looks somewhat similar to the head and shoulders pattern, except the
three highs price pattern, are somewhere near the previous same price level. In
contrast, a head and shoulders pattern will see the middle top exceed the highs to its
left and right.
The results of both the triple top and head and shoulders patterns are similar, as each
pattern implies a break below the support as a new downtrend is created.
The triple top pattern is quite useful for bullish traders, as the bearish pattern signals a
potential deep correction is coming. This allows bullish traders to adjust their stop-
loss and deploy their risk management strategy or close out a portion of their position to
lock in profits.
Since the triple top is a bearish reversal chart pattern, bearish traders may use the
pattern as a signal to enter the crypto market as a short seller. This would allow a trader
to profit if the price were to move lower as intended.
How to Spot Triple Top and Bottom Patterns on
a Crypto Chart
Triple top patterns can appear on any chart time frame, but they must form after an
uptrend. To identify a triple top, look for a large rally that’s topped with three failed
attempts at new highs.
The three failed attempts at new highs should print near the same price. If they deviate
significantly in price from one another, then there’s likely another pattern forming that’s
different from the triple top.
Let’s look at a specific example. In the Bitcoin 15-minute chart below, BTC rallies 9%
from $42,100 to $45,876 in a matter of minutes. This rally forms the uptrend and the
beginning of the triple top pattern.
Bitcoin fails to rally further and corrects back to $42,130, then begins another rally
attempt. This rally attempt fails at $45,800 in a bearish harami candlestick pattern and
corrects again to $44,628. This rally attempt is the second failure to form a new high.
After finding a bottom at $44,628, a third rally attempt starts, carrying to $45,694 before
failing and reversing lower.
These three failed attempts all reverse near the same price level between $45,694 to
$45,876. These amounts are all within 0.4% of each other.
The anatomy of a triple bottom is the opposite of a triple top.
Using the Bitcoin daily chart time frame as another example, three failed attempts to
new lows occur between May and July 2021.
On April 14, 2021, Bitcoin began a large and swift correction that found its first support
at $29,800. This low forms the first failed attempt of lower lows in the triple bottom
pattern.
Bitcoin then rallies to $42,444, which forms the high point of the triple bottom pattern. At
this price, Bitcoin then trades lower to $28,726, which forms the second low of the triple
bottom.
After rallying for a bit, another attempt at a breakdown fails at $29,258. This last low
becomes the final low of the triple bottom pattern. From this low, Bitcoin aggressively
rallies to new highs above the high of the pattern at $42,444.
What Happens After a Triple Bottom Pattern?
After the three low points of a triple bottom have formed, anticipate a bullish reversal to
break out to new price highs. To confirm the breakout higher, first identify the high point
of the triple bottom pattern.
The easiest way to identify the high point is to place vertical lines at the first and third
bottoms of the pattern. Then, identify the highest price point (or peak) between those
two vertical lines. In the chart below, the highest price between the three bottoms is
$42,396. Mark this high point with a horizontal line that extends to the right.
The sustained break above this high price point will alert the bullish trader the reversal
is underway — and even higher prices are likely coming. This confirmation isn’t 100%
foolproof, but it does provide a level of reliability that traders can count on to make
higher probability trades.
Other confirming factors can help support the case for a bullish break, such as
increasing volume on the upside movement, or expanding ranges of the bullish candles.
These conditions don’t necessarily have to be present for a bullish breakout to succeed.
However, their presence further confirms the likelihood of follow-through on the
breakout.
What Happens After a Triple Top Pattern?
After the three high points of a triple top have formed, anticipate a bearish reversal. The
bearish reversal chart pattern is confirmed when the price breaks below the low point of
the triple top.
To confidently identify the triple top pattern’s low point, mark a vertical line at high points
(1 and 3 in the illustration below). Then, identify the lowest price on the chart between
the two vertical lines. Mark a horizontal line at the lowest price point identified. Make
sure this line extends to the right. This triple top low point will become the price level
where we can confirm the pattern and its break downward in a new correction.
In the Bitcoin chart above, after failing at these three highs the largest cryptocurrency
starts a more robust downtrend. This pattern is confirmed when we see a new low
below the low of the triple top pattern. The lowest price between the three tops is
$42,130.
If the price fails to break below the low point of the triple top pattern, then the triple top
isn’t confirmed. Failure to confirm a break lower suggests that there’s another pattern
carving — and that you should avoid selling short.
How to Trade with the Triple Bottom Pattern
Once the three extreme price points of the pattern are discovered, confirming and
trading the pattern is fairly straightforward.
During the summer of 2021, Ether (ETH) was correcting lower to consolidate previous
gains. Standing back and looking at the daily chart, you can easily identify three low
points forming near the same price level.
The first low point is at $1,728, the second is at $1,697 and the third is at $1,716. The
three prices are separated by less than 2% of the respective previous prices.
Now, it’s time to set up the entry for the triple bottom pattern. To do so, we need
confirmation first. The triple bottom is confirmed once price breaks above the high point
of the pattern.
The high point of the pattern is found by marking the first and third bottoms with vertical
lines. Then, find the highest price point between the two vertical lines and mark this with
a horizontal line. In the ETH chart above, the high point of the pattern sits at $2,912.
Since the triple bottom is a bullish reversal pattern, we’ll establish a long position at the
breaking point. This means we want to go long at $2,912.
The stop loss is used to limit the losses on the trade and will be placed below the entry.
A conservative stop loss can be placed at the lowest point of the triple bottom pattern.
The lowest price point of this ETH triple bottom pattern is $1,697.
On a confirmed breakout higher, the market generally travels the same distance to the
high point as it does to the low point of the triple bottom pattern.
The length of the triple bottom pattern is $1,215 ($2,912 high minus $1,697 low =
$1,215).
If we add $1,215 to the breakout price of $2,912, then an initial target is placed at
$4,127.
Therefore, the stop loss will be placed at $1,697 and the take profit level at $4,127.
Limitations of the Triple Top and Bottom
Patterns
A confirmed triple top or bottom pattern can be reliable, but neither one can be 100%
accurate.
A challenge that inexperienced traders may face is impatience. Beginners may see
three failures near the same level and open their position accordingly. The limitation of
such a decision is that the pattern hasn’t been confirmed. Entering into the position
prematurely opens the door to a failed pattern — and a losing trade in the account.
Additionally, a trend direction tends to follow volume. If a breakout is occurring on a lack
of volume, then it may fail. On the other hand, a breakout occurring on increased
volume benefits the break and suggests we may see follow-through to the target.
Lastly, smaller cryptocurrencies have much less liquidity than large cryptos such as
Bitcoin and Ether. This means there’s a greater chance that breakouts won’t follow
through on these smaller cryptocurrencies, simply due to the size of their tokens.
Due to these limitations, a trader needs to implement a stop loss on every trade to
ensure the account isn’t destroyed, should the market move against them.

 Falling Wedge Pattern

Is a Falling Wedge Pattern Bullish or Bearish?

A falling wedge pattern is bullish, although it appears after a bearish trend. It signifies
that bulls have lost their momentum, and bears have temporarily taken control over the
price. As a result, the price starts to make new lower lows, but at a corrective pace.
Crypto prices rarely move in a straight line. Rather, like most assets they tend to zigzag,
with swing lows and highs forming, even if the price remains within a trend. Therefore,
investors often experience temporary bearish correction within bullish trends, giving rise
to patterns like the wedge, triangle, flag or channel.
These are signs that buying pressures are being reduced due to profit-taking. The
uniqueness of the falling wedge pattern is that it can produce a higher accuracy of trade
than a traditional descending channel.

Although both the descending channel and falling wedge are bullish reversal patterns,
the falling wedge has better accuracy than the descending channel, whose price
corrects lower by maintaining an equal distance between swing highs and lows.
On the other hand, with the falling wedge, swing levels squeeze toward each other,
which is a sign of a deeper correction. Before making a trading decision, investors
should focus on where the major trend is heading and how volumes are performing.
Pros and Cons of Falling Wedge Patterns
Let’s look at the pros and cons of the falling wedge pattern:
Pros
 The falling wedge pattern frequently occurs in financial markets.

 The falling wedge pattern works as both a trend reversal and trend continuation
pattern.

 Finding stop-loss and take-profit levels is easy.

 This pattern offers a good risk-to-reward ratio.

Cons
 The falling wedge needs additional confirmation when opening a trade.

 This pattern has a weaker accuracy rate in lower time frames.

 Novice traders often become confused when distinguishing between the falling
wedge and other price patterns.

How to Identify Falling Wedge Patterns

A price pattern on a cryptocurrency chart isn’t randomly formed. Instead, it represents a
story about buyers’ and sellers’ activity. Likewise, the falling wedge pattern, which
occurs after a bearish trend, represents a narrative about what bulls and bears are
doing — and what they might do next.
A bullish trend forms after a significant event by encouraging buyers to long an asset
with the hope of future price appreciation. However, it’s often difficult for investors to
hold this position for a long time. They usually book a profit after getting some benefit,
often adding more positions when the price is discounted. As a result, the bearish
wedge pattern that we see after a bullish trend is partially the result of buyers’ profit-
taking. Once the profit-taking is over and the price finds a dip, investors will begin to buy
again.
The trading approach with the falling wedge pattern is to find when the correction is over
and the bullish trend is likely to resume. The global financial market is driven by
institutional traders who need liquidity. There have to be enough buyers to sell and
enough sellers to buy. Therefore, patterns like the falling wedge indicate that
institutional traders who’ve created the bullish trend might open another buying position,
resuming the trend after a discount.
The above image demonstrates a falling wedge pattern appearing after a bearish trend.
Bitcoin’s price moves sharply lower from $64,000 to $30,000, but despite strong selling
pressure, it doesn’t break below $30,000. As a result, the price remains corrective and
forms a falling wedge. In this pattern, a new lower low and lower high are formed as the
price remains within converging trend line support and resistance.
Besides swing levels, investors should monitor how the volume is changing. As the
price moves to a consolidation phase, the volume should reduce due to less trading
activity. However, once the breakout happens, it should be supported by higher volume.
The above image shows the same BTC/USD chart with the trading volume added. Here
we can see that the volume is higher at the beginning of the falling wedge pattern, but
volume bars start to move lower as the wedge pattern extends. Once the price moves
up from the wedge pattern with a bullish breakout, the volume begins to rise again.
How to Trade Falling Wedge Patterns
A falling wedge is a reversal pattern, but investors can use it as both reversal and as
continuation of a trend.
Falling Wedge Continuation Patterns
The price of a cryptocurrency moves by creating swing lows and highs. As a result,
investors experience minor bearish swings within a major bullish trend. Therefore, a
reversal from a minor swing level is ultimately a continuation of the major trend.
Let’s have a look at the image below:

In the above image, the major bullish trend is marked in green where the price is
moving up by creating higher highs. However, when we look inside the bearish
correction, we see the falling wedge pattern begin to form, with the major trend
resuming after a breakout. Therefore, although the falling wedge pattern appears after a
bearish trend, it’s still within the long-term bullish trend.
The above image gives a practical example of a wedge pattern as the continuation of a
bullish trend on a real chart. Here, the BTC/USDT market trend is bullish, when a falling
wedge breakout from the minor bearish swing resumes the trend and makes new,
higher highs. Therefore, the trend continuation is confirmed once the price moves above
the falling wedge with a bullish candle.

The image above shows how to open a buy trade from the falling wedge breakout. In
this method, the buying setup is valid as long as the price remains above the wedge
pattern’s low. In addition, the stop-loss should be below the swing low, with some
buffer.
As the falling wedge pattern is a strong bullish continuation pattern, it often produces
more profits. Therefore, traders can hold the buy position until the price reaches any
significant resistance level.
Falling Wedge Reversal Patterns
With cryptocurrency trading, a falling wedge reversal pattern from a significant price
level may provide more profits than it would in traditional markets. However, finding the
right pattern from the ideal location is important.
The falling wedge pattern appears in a swing low, indicating that bears are losing their
momentum. Therefore, the first sign of a highly profitable wedge pattern is to find it after
a considerable downward movement. It’s hard to determine whether the bearish trend
will continue or reverse, so finding the pattern at a bottom increases the probability of a
trend reversal.
Look at the chart to see a strong downtrend at the beginning which is losing momentum
at the bottom.

The above image explains how we can measure the strength of a bearish trend by
looking at swing lows. If bears become unable to make new lower lows with a long
distance, it’s a sign that they’re losing momentum.
Therefore, to trade the falling wedge pattern as a major market reversal strategy, we
need to ensure the following confirmations:

 The falling wedge pattern appears at the bottom of a downtrend.

 The downtrend has become weaker before forming the wedge pattern.

 There are at least three touches at trend line levels of the falling wedge.
  Price reaches an important demand zone, from which bulls usually open their
orders.

Let’s see how the falling wedge pattern works on a real chart:

In the above daily LTC/USDT chart, the price collapses from the $400.00 resistance
level but loses its momentum at $105.00. Meanwhile, the price forms a wedge pattern,
as supported by the decrease in volume. As a result, once the bullish breakout occurs, it
shifts the trend from bearish to bullish.
The trading approach of the falling wedge reversal pattern is similar to the continuation
system. The trading entry becomes valid when the price moves above the falling wedge
pattern with a strong bullish breakout. Again, the stop-loss should be below the support
level, with some buffer. Trading in higher time frames often allows traders to hold the
gain for years. However, taking some profits from strong resistance levels is important.
The above image shows how to open the buy trade from the support level using the
falling wedge pattern. The image clearly shows that the volume decreases with the
wedge formation, which is a sign of lower trading activity. However, once the price
breaks above the SL level, the volume starts to rise.
On the other hand, there is no guarantee that the price will come back to the support
level after breaking above the falling wedge. In that case, traders can open the first buy
entry immediately after the breakout, and the second entry after completing the
correction.
Falling Wedge Patterns and Other Bullish
Reversal Patterns
The falling wedge pattern is one of the bullish reversal patterns which form after
downward pressure. However, there are many patterns which work like the falling
wedge. Therefore, traders should know the key differences between the falling wedge
and other patterns in order to better understand its trading accuracy.
Falling Wedge vs. Descending Triangle
Falling wedges and descending triangles look similar, and can confuse traders
attempting to choose the correct pattern. The biggest similarity between the falling
wedge and descending triangle is in their implications for price, allowing investors to
understand what’s happening in the market and what might occur next.
These patterns usually appear after a bearish trend and indicate that bulls and bears
are both losing their momentum. However, the price direction after the two patterns isn’t
the same. Any bearish breakout after a descending triangle increases the possibility that
the existing bearish trend may continue.
In the descending triangle, the price moves forward with lower highs forming, indicating
that bulls are losing momentum. However, there are no lower lows formed, which
signifies that sellers’ dominance remains unchanged. This repeated testing of the
horizontal support indicates that the level is becoming weaker. Once the price moves
below the descending triangle pattern, it will likely extend the existing bearish trend.
Now, let’s move to the trading approach using the descending triangle pattern:

 Find a downtrend.

 After forming a swing low, the price should move higher with a corrective
momentum of less than 38% of the initial bearish trend.

 Instead of extending the bearish movement, the price squeezes to a level

between equal lows and lower highs.

 Once the price breaks below the equal lows, the descending triangle breakout is
confirmed, and investors can open a bearish position after the bullish correction.

Based on the above example, let’s distinguish the key differences between the falling
wedge and descending triangle:

 The falling wedge has both lower lows and lower highs, while the descending
triangle has equal lows.

 The falling wedge appears in a downtrend and indicates a bullish reversal. On

the other hand, a descending triangle appears after a bearish trend and indicates
a probable continuation.
  The descending triangle doesn’t start from the beginning of a trend, so it has less
profit potential than the falling wedge.

Falling Wedge vs. Bull Flag

The bullish flag pattern forms after a bullish trend, and moves lower by maintaining an
equal distance between swing levels. It indicates that bulls are taking profits and they
might continue the momentum. During the bull flag formation, the trading volume should
dry up and push higher on the breakout. Identifying the bull flag in the price chart
involves some complexity, as it contains several components. Traders need to have a
clear understanding of bull flag components and trading approaches.
Let’s look at the approach to trading with a bull flag pattern:

 Find an uptrend (flag pole).

 After forming a swing high, the price should move downward in a sloping
consolidation.

 The overall retracement of the flag pattern shouldn’t be more than 50% of the
major bullish trend, with the high pattern having a 38% to 50% retracement.

 The flag pattern becomes ready to trade once the price breaks above the upper
channel boundary with a bullish candle breakout.

 After the breakout, wait for a considerable correction and rejection to confirm the
entry.
The above image represents the key differences between the bull flag and the falling
wedge pattern. Although both of these patterns work as bullish trend continuations,
there are some key differences that a trader should know:

 The bull flag forms after a long bullish trend, but the falling wedge appears at the
bottom of a downtrend.

 The bull flag maintains an equal distance between support and resistance levels,
while the falling wedge squeezes the price between converging trend lines.

 As the falling wedge appears in a downtrend and initiates an uptrend, it has a

higher profit potential than the bull flag pattern.

 Dragonfly Doji Candlestick

The Dragonfly Doji is regarded as a reversal pattern that shows up at the bottom
of downtrends and anticipates a rebound or a rally. The ideal Dragonfly should
have an invisible body and a long lower shadow. Thus, the pattern indicates that
the open, high, and close prices are relatively at the same level.
What Does a Dragonfly Doji Look Like?
When analyzing the chart, all traders can quickly determine a Dragonfly as it represents
a T-shaped pattern. It has a very long lower shadow, while the open, close, and high
tend to be at the same level. However, the ideal Dragonflies are quite rare. But the
primary condition is that the open and close should be very close to each other, while
the high must coincide with the close or at least draw a very short upper shadow. Here
is what the pattern looks like on the chart:

As a rule, the Dragonfly Doji is normally at the bottom of downtrends, though there are
exceptions. If it shows up at the top of an uptrend, it doesn’t necessarily suggest
a bullish or bearish signal. That’s because the next few candles usually decide the
subsequent price move.
How to Trade With the Dragonfly Doji?
Although Dragonfly Doji is commonly used for stock trading, trading crypto with
Dragonfly is not as hard. If you observe the Dragonfly Doji at the bottom of a downtrend,
you can interpret it as a strong buy signal. However, when the pattern shows up in other
circumstances, it merely suggests a local price rejection.
Most strategies involving the Dragonfly Doji require the pattern to form at the bottom of
a bearish move. When this primary condition is met, traders will try to find the right
moment to open a long position, anticipating a trend reversal. Elsewhere, those who
have active short positions would seek to close them.
Even though the Dragonfly Doji provides a relatively accurate signal, it is imperative to
glance at several technical indicators, such as the moving averages and one of the
oscillators, be it Stochastic or the Relative Strength Index (RSI). The momentum
indicators will confirm whether the price has entered the oversold level and is ready to
rebound.
Besides the mentioned indicators, traders would prefer to open positions amid higher
volume, boosting the reliability of the Dragonfly Doji.
Another critical aspect that you should consider is the lower shadow’s size – the longer
it is, the more relevant the bullish signal is.
Trading at the Bottom of a Downtrend
Trading the Dragonfly pattern at the bottom of a downtrend is the main scenario. So, it
would be best if you were more interested in entering the market when this condition is
met in the first place. If you observe a Dragonfly showing up following a bearish move,
be prepared for a trend reversal.
However, don’t rush to go long right after the candle closes, as the bears might
repeatedly try to break the newly formed support. Instead, it’s a better choice to open
the long position after the first candle that closes above the Dragonfly Doji’s high.

You can set the stop loss of the long position right below the low of the Dragonfly. As for
the take profit, traders would set a target that doubles the size of the pattern. If you are
afraid to miss the chance for greater profits, you can set a trailing take profit to benefit
from a potential longer-term rally.
Make sure to check one of the oscillators, whether you’re comfortable with the RSI or
Stochastic. If the price is in the oversold zone (below 70% for the RSI or below 80% for
Stochastic), then the Dragonfly Doji signal is even stronger. The signal shows that it’s
more relevant when the volume is high.
In the example below, we have a Dragonfly pattern that is not perfect but comes at the
bottom of a bearish move and coincides with Stochastic’s oversold level. Indeed, it
anticipated a trend reversal.
Trading at the Top of an Uptrend
On rare occasions, the Dragonfly Doji might form in a bullish market. If this happens, it
doesn’t make sense to get ready for a trend reversal. Mainly because the pattern may
end up with the continuation of the uptrend. In this case, the Dragonfly may
demonstrate the bullish move has recovered its previous rhythm and may go on for a
while. You can open a long position providing that the next candle closes higher than
the Dragonfly, while other technical indicators also favor a bullish move. Still, the
Dragonfly is a weak signal in this case, and most traders would choose not to enter the
market at all.

For example, the trading pairs were in the middle of an uptrend, with the Stochastic
pointing to the overbought level. The conditions for a trend reversal were there. But the
uptrend continued after a wild fluctuation when the Dragonfly came out. After the
Dragonfly, bears have tried a reversal indeed, but bulls came back stronger. It would
help if you opened the long position after the first candle closes above the Dragonfly in
cases like this.
The Constraints of a Dragonfly Doji
The Dragonfly Doji is widely used as a bullish signal. But few traders would risk opening
positions based on the pattern alone. That is because the Dragonfly is a weaker signal
than a combination of technical indicators. Here are the main limitations of the patterns
you should take into account:

 Ideal Dragonflies where the open, high, and close are precisely at the same
level are very rare. That is why traders would operate with slight variations of
Dragonflies, which may impact the signal’s accuracy.

 Dragonflies that form amid lower-than-average volume should be ignored.

 Dragonflies can work best after bearish moves only. They don’t provide accurate
signals after uptrends, even though they usually point to continuing the bullish
move.

So, to improve the accuracy of a Dragonfly signal, it is imperative to use other technical
indicators. At least one oscillator can do the trick.
Patterns Similar to Dragonfly Doji
The Dragonfly is part of the category of candlestick patterns— Doji candlestick. So,
naturally, it shares similarities with other Dojis or even patterns outside the Doji group.
Thus, it is essential to understand how to differentiate the Dragonfly from others, as the
signals may be different. Some examples of similar patterns to the Dragonfly Doji are
the Pin Bar, aka the Hammer, and the Hanging Man.

Hammer and Hanging Man Doji Candlestick. CC: Babypips

Dragonfly vs. Hanging Man vs. Hammer
It would be best if you were careful not to confuse the Dragonfly with the Hammer,
which looks similar but has a larger body. Still, they both anticipate bullish reversals, so
it won’t be a problem if you confound them.
The Hanging Man also has a short body and a long lower shadow. However, unlike the
Hammer, it forms in bullish markets and anticipates a bearish reversal. Thus, it is vital
not to confuse the Hanging Man with the Dragonfly Doji because they may provide
different signals, as the latter suggests the continuation of an uptrend. If the body of the
candle is visible, the chances are that it is not a Dragonfly.

Bearish candlestick patterns

 Bear Flag Patterns

What Is a Bear Flag Pattern?

A bear flag pattern is a formation that is usually distinguishable on the
candlestick chart. It is formed from the flag pole, which is the steep downward
move before the pullback, and the flag itself represents the actual retracement.

As it is a trend extension, the bear flag chart is regarded as a trend continuation pattern.
Initially, the price pattern will trend downward until a new support level is formed.
This is when the flag emerges in the form of an upward consolidation channel. After a
while, the price breaks below the support level of the flag and continues the bearish
trend. This signals cryptocurrency traders to open short positions so they may benefit
from the price decline.
Does Pattern Analysis Work on Crypto?
How to Identify the Bear Flag Pattern
The bear flag pattern has two key elements: the pole and the flag. Other elements to
pay attention to are the volume indicator and the breakout. Here is what you should look
for on the chart:
First, you have to determine the flag pole, which coincides with the initial price decline
driven by strong bearish momentum. At this point, the downward movement can be
steep, while the volume indicator may ascend.

 Next, the bear flag can be seen in the form of a consolidation channel that comes
after the price decline. This is when the price movement starts to pull back, as
the channel is looking upward.

 There are two potential outcomes: Either the price movement continues to move
upward or it breaks below the channel and retakes the general downtrend. In the
first scenario, we don’t get the flag pattern at all, as the downtrend is reversing.
However, if the second scenario occurs, we can go short after the price breaks
below the flag’s support.

 Finally, when the price breaks below the consolidation channel (the flag), we can
place Sell orders. Most traders use the flag pole to measure the profit target. In
other words, the distance of the flag pole can be used to calculate how far the
price pattern may decline. However, more conservative traders can rely on a
more compact profit target, which equals the height of the flag channel.

To recap, here are the main elements of the bear flag pattern:
  The flag pole, which is the preceding bearish move

 The bear flag, which is the consolidation channel looking upward

 The breakout, which happens when the price breaks below the flag’s support;
and

 The price target generally equals the distance made by the flag pole.

Bear Flag and Bull Flag Patterns Explained

The bull flag pattern is the evil twin of the bear flag pattern. It shows up in bullish
markets. The two patterns have similar structures. The only major difference refers to
the trend direction. The bull flag pattern appears during an uptrend. Thus, the bull flag’s
pole represents an ascending line.
The flag itself is looking downward and it represents a temporary correction. Once the
price breaks above the flag’s resistance line, traders are interested in opening long
positions. The rules of the stop-loss and the take profit are practically the same, only
inverted.
One of the secondary differences between bear and bull flags is the volume. When the
bull flag pattern shows up, the volume tends to increase during the pole and then drop
during the consolidation. Nevertheless, the behavior of the volume indicator during the
bear flag pattern is not the same. The indicator also increases during the flag’s pole, but
it tends to sustain the same level rather than decline.

What do Flag Patterns Indicate

The flag shows that an existing trend has reached the oversold (in the case of a
downtrend) or overbought (in the case of a bullish trend) level. The market needs a rest.
Thus, after a steep price movement, the price will move in the opposite direction for a
while.
Once the pullback is over, the price continues to move in the direction of the current
trend.
To get a better signal, it makes sense to combine the flag pattern with one of the
oscillators. For example, you can use the Relative Strength Index (RSI). In a bullish
market, the flag elements following the pole might show up during the overbought level.

RSI chart of BTCUSD

How to Trade Crypto With a Bear Flag Pattern
As compared to other chart formations, trading with the bear flag pattern is quite easy to
comprehend. You can rely on the dynamics of the flag chart pattern alone to come up
with a strategy to profit from the bearish market. Here are the key aspects of the
standard trading system based on the flag pattern:
Entry: The flag is a continuation pattern, but that doesn’t mean you should place the
short order right after the price breaks below the flag’s support. Instead, you should wait
for the confirmation of the downtrend to avoid a false signal.
Traders typically wait for a candle to close below the flag’s support line and then go
short during the next candle. Patience and discipline are very important, particularly for
day traders, especially when trading volatile cryptocurrencies.
Stop-Loss Order: If the price is moving in an opposing direction, you should use
a stop-loss order to limit potential losses. Traders typically place the stop-loss order
above the resistance line of the flag.
For example, let’s say that we trade Bitcoin on the hourly chart. If the lower line of the
flag is at $42,000 and the upper line is at $43,000, you would be interested in placing
the stop-loss order above $43,000.
Take Profit: As mentioned above, conservative traders tend to use the distance
between the flag’s parallel trend lines to set the profit target. In our example, the
difference between the two lines is $1,000, so we will add this amount to the price at the
breakout entry point, which is $41,800. Thus, our price target is $40,800.
More aggressive traders can use the flag’s pole (without the flag itself) to set the price
target. However, the price might find a support level earlier than that. A good
recommendation is to check previous strong support levels. If there are any, they can
work this time as well, defying the pattern’s prediction.

What Happens If There Is a Breakout?

Before placing an order, you should watch for the evolution of the bear flag pattern until
the breakout point. A breakout occurs when a price movement exceeds the defined
support or resistance level. The retracement of the flag should not be higher than 50%
compared to the pole.
Ideally, the pullback should be less than 38% of the flag’s pole. If the breakout occurs
during these conditions, you should be ready to go short. As mentioned, be sure to look
out for a candle to close below the flag’s support, and open the short position during the
next candle.
To succeed in trading with flag patterns, it’s wise to always use volume as a guide when
making a decision on your entry and exit point of a target price. This will help you to
confirm the breakout and to speculate as to the momentum after it.
Is Bear Flag a Reliable Indicator?
Yes, the bear flag is considered one of the most popular price action patterns, along
with double top, and head and shoulders. Still, it doesn’t mean that all of the signals it
provides will be 100% accurate, especially when you trade cryptocurrencies. To limit
potential losses in case the price defies the pattern’s rules, use risk management
techniques. The stop-loss is one of the most basic yet powerful risk management tools
that you may implement. Another great method is to follow the 1% rule, which suggests
that you should not spend more than 1% on a single trade.
Three Benefits of the Bear Flag Pattern
Here are the main advantages of the bear flag pattern:

 Versatility: The bear flag pattern can be used in all markets, including
cryptocurrencies. When trading Bitcoin or altcoins, you can identify the pattern on
all time frames, such as H15, H30, H1, H4, and D1. The pattern is preferred by
both day traders and swing traders.

 Clear entry and stop-loss rules: One of the greatest advantages of the bear
flag pattern is that traders know exactly when to open the short position, where to
place the stop-loss, and what profit to expect. There are also two main profit
targets that should be considered by more conservative traders.

 Risk/reward ratio: traders get a favorable risk/reward ratio when trading the
bear or bull flag. While no one can guarantee that the chart formation will work
every time, a trader can consider generating consistent profits with a long-term
strategy.

Risks of Using Patterns

As with any pattern or technical analysis strategy, a trader should be aware of the risks
accompanying trading patterns. Here are the main downsides of the formation:

 Complexity: The pattern seems to be visually clear and simple, but in reality, it is
much more difficult to handle. This poses a challenge for beginners.
Nevertheless, if you practice in a demo account, you can become more
competent with spotting patterns for trading opportunities.

 Risk: Sometimes the retracement can last longer than expected. If the flag is
larger than 50% of the pole, do not rely on the pattern, as the risk of failure is
much higher. However, even when the pattern seems ideal, the price might not
follow the rules—especially in the case of cryptocurrencies, which are more
volatile and unpredictable. Sometimes the price can rebound right after breaking
below the flag’s support, triggering the stop-loss. Still, that should not discourage
you. To get better signals, you can use technical analysis indicators and watch
the volume.

 Gravestone Doji Candlestick

Gravestone Doji Candlestick: What Does It Mean?

Intermediate
Candlestick

Trading

Dec 11, 2020

Day traders and swing traders who’re starting their trading journeys would consider strategies
that revolve around technical indicators. While this is not a wrong approach, some candlestick
patterns can provide accurate signals that might boost profitability. One of these patterns is the
Gravestone Doji candlestick, which can be observed quite often on the candlestick chart.

A Gravestone Doji is a bearish candlestick pattern with a very short or preferably

invisible body and a long upper shadow. Ideally, the open, low, and close prices
should be relatively at the same level. It usually appears at the top of an uptrend
and anticipates a trend reversal. The longer is the upper shadow where the more
bearishness should be expected.
The Gravestone Doji usually shows up where the resistance level is forming, which can
be used for future reference whenever the price comes back to test the same level
again.
What Does a Gravestone Doji Look Like?
As mentioned, the Gravestone has a very long upper shadow, while the body is at the
very bottom of the candlestick, suggesting that the open, close, and low prices coincide.
Thus, we get an inverted T-shaped pattern. Ideal Gravestones are relatively rare, but
the close and open should be very close if not at the same level. Here is what the
pattern looks like on the chart:

While the Gravestone Doji should be seen close to the top of uptrends, you can
sometimes find it at the bottom of a downtrend, though this is a rare occurrence. In this
case, you should not consider it to be bullish. Instead, interpret it as a trend continuation
signal, as the downtrend potentially has more room until finding the oversold zone.
How Does a Gravestone Doji Form?
The Gravestone Doji forms when the price closes at relatively the same level where it
opened, providing that the open coincides with the low or at least the two are very close.
This pattern occurs when bulls have enough strength to push prices upward, but they’re
suddenly out of steam and return to previous levels after hitting an area of strong
resistance.
Bulls face strong opposition when the Gravestone is at its high, and the selling pressure
pushes prices back to the opening price during a given period. That suggests the
market participants rejected the bullish rally, and a potential downtrend is just around
the corner.
On the contrary, right after a Gravestone Doji, traders would either open short positions
or close their existing long positions. The pattern helps traders better visualize the
resistance level, which can be tested again in the near future, especially when the price
makes another bullish attempt.
As a rule, Gravestone Dojis would show up at the top of uptrends. However, if you can
sometimes encounter it at the bottom of an ongoing downtrend. Don’t be confused
about it – it’s still a bearish signal that anticipates trend continuation. In this case, bulls
tried to reverse the bearish trend but failed, and the price is likely to continue its
downward move.
How to Trade With the Gravestone Doji?
When analyzed separately, the Gravestone Doji might suggest local price rejection. But
if it forms at a confluence level near the resistance zone, it acts as a strong sell signal.
If the Gravestone Doji appears at the top of an uptrend, traders would be interested in
opening short positions. Those who have open longs would close them. However, it is
crucial to base your decision on additional technical indicators rather than on the
candlestick pattern alone. You can use a slow and a fast-moving average along with
momentum indicators, such as Stochastic or the Relative Strength Index (RSI), to
assess whether the price has entered the overbought level.
As a rule of thumb, traders will also check the volume. A higher volume increases the
reliability of the Gravestone Doji.
The shadow’s size is critical – a longer wick would make this pattern more relevant as a
trend reversal signal.
Trading Gravestone Doji at the Top of an Uptrend
If you spot a Gravestone Doji forming after a bullish move, you should be ready for a
price reversal. In fact, you should expect this pattern at the top of uptrends most of the
time. However, it doesn’t make sense to open a position right after the pattern, as the
uptrend might make another attempt to break the newly formed resistance. Instead, be
ready to enter the market with a short position after the first candlestick closes below
the Gravestone Doji’s low.
The stop loss of the position should be set right above the high of the pattern, while the
take profit target should be double the size of the Gravestone Doji. Alternatively, you
can set a trailing take profit to take the most from the bearish move.
It’s also to check the RSI or Stochastic – if the price is in the overbought zone (above
70% or 80%, respectively), then the Gravestone Doji’s signal is even more relevant. The
same is true if the volume is high.
In the example below, the Gravestone that came after an uptrend was followed by a
retreat. When the pattern showed up, the Stochastic lines crossed, and the indicator
was leaving the overbought zone.

Trading Gravestone Doji at the Bottom of a Downtrend

Sometimes the Gravestone Doji might show up in a bearish market, but this is a rare
occurrence. In this case, you should not treat it as a trend reversal signal because it
might now end up with a bullish move. Most of the time, it suggests that the bearish
move is about to continue; hence, it makes sense to open a short position. Bulls who
anticipate the reversal of a bearish trend should not go long after spotting this pattern in
the middle of the downtrend.
In the example below, the GBP/USD pair has formed a steep downtrend, and the
market has been in the oversold level for a while. The prerequisites for a rebound or at
least a sideways move were there, but then the Gravestone Doji showed up. After the
pattern, bulls have attempted a reversal. But the bears came back stronger and
countered with an even lower price. Of course, this trend is applicable to cryptocurrency
trading.

In this case, you should have opened a short position after the first candle that closed
below the Gravestone Doji, with similar stop loss and takes profit targets as discussed
above.
Constraints of a Gravestone Doji
Even though the Gravestone Doji is regarded as a bearish signal, you should not open
positions based on this pattern alone. There are some limitations that you should
consider:

 Ideal Gravestones in which the open, low, and close are at the same level are very rare.
Usually, traders spot imperfect Gravestones whose body is a bit visible, or the lower
shadow is a bit visible.
  Gravestones work best after uptrends. They should not be viewed as reliable signals
after downtrends, even though they generally suggest the continuation of the bearish
trend.

 Gravestones accompanied by lower-than-usual volume are not reliable.

All in all, you should also use other indicators to get more accurate buy and sell
signals.

 Head and Shoulders Pattern

Head and Shoulders Pattern: What Is It &

How to Trade With It?
Intermediate

Candlestick

Trading

Jan 26, 2021

Understanding the head and shoulders chart pattern may seem very convoluted at the
beginning. Still, it helps novice and even advanced traders understand the market and
speculate based on logic. Most traders seek from this chart pattern the defined areas
that allow anyone to set risk levels and take profits specifically.
But, are they reliable to spot trend reversals? Here’s what you must understand and
learn how to apply them to predict a bullish to bearish trend reversal critically.
What Is the Head and Shoulders Chart Pattern?
The head and shoulders chart pattern refers to a bearish reversal formation on
the candlestick chart to help traders identify a reversal coming after a trend has
ended.
While the bullish setup incurred that it is an inverse head and shoulders. In a
chart formation, they usually appear as a baseline with three-peaks. This pattern
usually shows up at the end of an uptrend and signals its reversal.
You may wonder how this pattern got its name. Well, it’s not because of the famous
shampoo brand – the pattern actually resembles a head and two shoulders (left and
right shoulders). Basically, it represents a baseline with three tops, in which the middle
top is higher than the other two, which should be ideally positioned on the same line.
That baseline is called the neckline, and it is responsible for triggering the bearish
signal. So, if the price breaks below it, we’re free to go short.
Here’s how it looks like:

The head and shoulders formation is one of the most popular chart patterns along with
other variants like double tops and bottoms and triangles, among others. Traders regard
this formation as one of the most reliable patterns that provide very strong signals. Still,
if you combine it with some technical analysis indicator, especially an oscillator showing
the overbought level, the pattern will become even more relevant.
Identifying the Head and Shoulders Pattern
It’s very important to identify the head and shoulders pattern correctly. Otherwise, you
may end up trading against the general trend. As you already know, the pattern has the
following elements:
  Left shoulder;

 Head;

 Right shoulder;

 The neckline that triggers the bearish signal.

It’s important to understand that the neckline might not always be a straight line. In fact,
most often, it will be tilted in one direction or another. But typically, if the slope is down,
it produces a more reliable signal.
The Components of the Head and Shoulders
Pattern
The Head and Shoulders pattern has several elements that make it unique and
distinguishable on the chart. Understanding its components is crucial because you don’t
want to confuse it with other chart formations. Basically, it can be deciphered when a
peak (shoulder) is formed, followed by a higher peak (head), and a lower
peak (shoulder.) While the neckline exists when the two lowest points of the two
troughs are connected.

Still, here’s what you should pay attention to:

Prior Trend
The first thing you should consider is the prior trend, which typically should be bullish.
Usually, the longer the uptrend lasts, the higher probability of a significant reversal that
can be exploited by bears. The uptrend leading to the head and shoulders pattern
shows signs of weakness, as the bulls cannot sustain it anymore.
Left Shoulder
After facing some resistance, the uptrend forms a high and then pulls back for a while.
After finding some support, it bounces back to the potentially continued uptrend. So this
is how the left shoulder is formed, though we can’t figure it out in real-time. It may look
like the price action is forming a double top, for example.
Head (Top)
During the rebound following the left shoulder, the price breaks the previous high but
faces another resistance. Despite the temporary rally, bulls cannot make it, and the
price is pulling back for a second time, leaving the higher high behind. That is when the
head of the head and shoulders pattern is formed.
However, the second pullback ends at relatively the same level where the first support
showed up – this is the neckline that starts to shape. At this point, we have the left
shoulder and the head of the pattern.
Right Shoulder
As mentioned above, the second pullback finds strong support near the neckline region,
and then the price has a final shot to continue the uptrend. However, after facing
resistance at the same level where the first high was formed, bulls give up, and the
price is retreating for the third time. This longer process suggests that the bullish move
is exhausted.
The third high represents the right shoulder. Ideally, the left and right shoulders should
be relatively the same level, but the pattern will still be relevant even if there is a slight
deviation.
Neckline
We have already defined the neckline, but this is when it becomes crucial as it
separates bulls from bears. In other words, if the price is breaking below this support
line, then we can open a short position with a high degree of confidence.
What Is the Inverse Head and Shoulders
Pattern?
The head and shoulders can also form in the opposite direction. The inverse head and
shoulders follow a bearish move and signals that the market is about to reverse.
As the name suggests, it is the same pattern formation but only upside down. Thus, you
should be interested in opening long positions when spotting this pattern on the chart.
During the inverse head and shoulders formation, the first thing you can see is a valley,
which is the first low of the pattern. After a relatively long-term downtrend, the price is
finding support and bounces back for a while. Eventually, it faces local resistance, and
bears try to push prices lower, managing to break below the first low for a while.
The second valley is lower and represents the head of the inverse pattern. After the
head, the price bounces back for a second time but cannot break above the neckline,
which at this time acts as resistance. That is when the market forms the third low, which
is the second shoulder.
Finally, bulls manage to break the resistance after a third attempt, which is when
cryptocurrency traders go long. The price target is calculated similarly; you should
measure the distance between the neckline and the lowest low and then add the result
to the breakout price to get the price target you aim for.
Pattern Signals
Head and Shoulders is a bearish pattern that appears during the exhaustion of an
uptrend. Thus, it would help if you treated it exclusively as a signal to go short. There is
also the inverse head and shoulders pattern. In the case of the latter, traders will get a
bullish signal.
Pattern Timeframe
The great thing about the head and shoulders pattern is that it can be used on different
timeframes. However, it works best for swing traders, and it can also be of great help for
day traders. Fast-paced strategies like scalping don’t work well with this pattern. All in
all, it makes sense to check the head and shoulders if you use timeframes larger than
M15.
How to Crypto Trade With the Head and
Shoulders Pattern?
The great thing about the head and shoulders pattern is that it can be used with any
asset type. That said, it makes sense to use it when trading cryptocurrencies because
they are highly volatile and require some well-defined tools to help you read the market
and smooth out volatility noise.
Before entering the market, you should let the head and shoulder pattern unfold and
complete itself. If the pattern is still in the middle of the process, don’t try to make
assumptions on the neckline’s potential breakout and don’t open any position earlier
than that. The market can change its direction in the blink of an eye, leaving you with an
open position in the wrong direction.
Instead, the first thing you should do is to wait patiently and monitor the market.
Meanwhile, you can plan your trade ahead of time and be ready to act when the price
breaks the neckline.
You should also check the other factors that may make you consider changing the
stop and profit targets. For example, you should start by looking at the previous
support levels, which can become your price target for the sell order.
Conservative traders can sometimes stay patient when the neckline is broken and wait
for prices to retrace above the neckline level or close to it. However, there is a risk of
missing out on the trading opportunity while waiting for a retracement. So, the general
consensus recommendation is to open a position right after the candle’s close that
breaks below the neckline. Still, you should be aware of the false break risk as well.
What most intriguing about this pattern is the ease of setting the take profit and stop-
loss orders. To manage the risk, set a stop loss slightly above the highest top, which
is the pattern’s head. In the case of the inverse pattern, you should place the stop loss
right below the lower low. As for the take profit target, we have explained in detail how
to calculate it.
Benefits of the Head and Shoulders Pattern
Here is why you should at least try trading the head and shoulders pattern:

 This time-tested chart formation provides the most powerful reversal signals out
there. Traders consider it to be one of the most reliable technical analysis
patterns.

 The head and shoulders can be used with any market and trading asset,
including cryptocurrencies.

 It’s relatively easy to identify on the chart once you understand its elements and
practice it a few times.

 The pattern has well-defined risk and profit-taking levels, which is excellent for
beginners.

The Limitations of the Head and Shoulders

Pattern
While the head and shoulders are considered a reliable pattern, it is not perfect. In fact,
no pattern is ideal, as the market is unpredictable. Here are several drawbacks that you
should consider:

 Beginners may find it challenging to identify the pattern on the chart because
they are not always ideal.

 The price can pull back and retest the neckline, which may confuse novice
traders.

 You have to wait until the whole pattern is completed, which may require a long
time, especially in the case of swing traders.

 The pattern cannot guarantee profits. The stop loss may sometimes be triggered,
but this is true about any chart formation.
 Dark Cloud Cover Pattern

 What Is a Dark Cloud Cover?

 The Dark Cloud Cover is a bearish two-candlestick pattern in which the first
candle is a large bullish range. It is followed by a bearish second candle
with gaps higher on the open but closes in the lower half of the first
candle’s price range.
 Technical traders use the Dark Cloud Cover pattern to signal the start of a
potential correction. If identified correctly, crypto traders can use the signal to exit
long trades or possibly enter short positions.

 The Dark Cloud Cover pattern looks like two opposing candlesticks, a large
green bullish candle followed by a large red stick. Most of the price action
undertaken by the green candle is unwound when the red candle is completed.
 This price action indicates a developing bearish reversal in the market. Buyers
appear to hold control initially, but then sellers step in and retrace a lot of the
progress made.
 The net effect of these two candles is that much buying power is utilized, but only
to drive the price a little higher. Buyers are losing momentum, and the market is
at risk of further consolidation — or outright reversal.
 The Dark Cloud Cover candlestick pattern can be found in all markets, but it’s
especially useful in identifying reversals on crypto charts. In addition, this
candlestick formation can be spotted on all chart time frames.
 How to Identify a Dark Cloud Cover Pattern
 The structure of the two-candle Dark Cloud Cover pattern is fairly simple.


 1 — Larger than an average bullish green candle

 2 — The gap higher on the open of the second candle
 3 — Large bearish red candle that retraces at least 50% of the first candle
 The first candle is a bullish green candle with a larger price range than the
average candle on the chart. This is important to the setup of the pattern, as it
indicates a large amount of buying interest in the market.
 The second candle will gap higher on its open, then work lower, finishing in the
lower half of the first candle’s body (previous candle). This price action suggests
an exhaustive bullish move, as the price is quickly retraced lower.
 More aggressive traders may consider opening a short trade on the open of the
next candle. For traders who opened an existing long position in the market, this
bearish Dark Cloud Cover pattern signals the possibility of exiting all or part of
the long trade.
 When looking for the Dark Cloud Cover pattern in crypto charts, it’s important to
note that gaps within the candlestick charts are a rare occurrence. This is due to
the 24-hour trading that’s available for crypto. In essence, there is no open or
close trading in crypto, which is the most common reason price gaps appear on
charts.
 To accommodate this nuance within crypto, you want to see a large-bodied red
candle that retraces more than 50% of the large-bodied green candle which
comes right before it.
 Pattern Criteria
 Aside from the three critical elements of the Dark Cloud Cover pattern noted
above, other criteria strengthen the signal.
 First of all, the candlestick pattern is bearish, so it works best at the end of an
uptrend. If the market is moving lower, then this pattern occurs doesn’t provide a
good risk-to-reward ratio opportunity.
 Secondly, you may find oscillators and other technical indicators displaying
overbought values, as the trend has been strongly planted to the upside. As
these oscillators turn lower, they’re likely to diverge from the price action,
creating a lower high on the oscillator but a higher high on price.


 At this stage, the uptrend is still in force but has weakened substantially. This
could be due to a wave relationship or resistance level looming overhead. Either
way, the market tries to rally one last time, but that rally is met with strong
resistance — and a big red candle carving the Dark Cloud Cover pattern.
 The Dark Cloud Cover pattern above suggests the market is changing from an
uptrend to a downtrend. A break of support will confirm the trend has changed,
opening the door for a deeper correction.
 Crypto traders use the pattern with other technical signals to enter into new short
positions or exit signals to close out long positions.
 Price Action/Context
 The Dark Cloud Cover pattern by itself is a simple two-candle pattern. However,
identifying it correctly on a crypto chart requires careful consideration of other
criteria.


 Here is an example of an 8-hour Ether chart. ETH was in a strong uptrend with
nearly 100% gains, but those gains started to slow down in early May 2021.
 During this uptrend, the Relative Strength Index (RSI) oscillator was consistently
in overbought territory. However, the rally lost momentum as RSI began showing
lower highs while Ether’s price continued to all-time highs.

 Shortly thereafter, the Dark Cloud Cover candlestick pattern appears. The first
green candle shoots higher to new all-time highs. Then the second candle of the
 pattern, the red candle, closes in the lower half of the range of the first green
candle.
 This indicates that the uptrend is losing its momentum, signaling a downturn.
However, the market is at all-time highs, so it is difficult to tell for sure that a
bearish reversal pattern would show or be sure trend reversal is approaching.

 A trader will want to add a trend line that encompasses the uptrend to gain an
additional sense of when the market’s mood is changing from uptrend to
downtrend. Where the trend line breaks, the trader will have confirmation that a
correction is at hand.
 You can also look to horizontal levels of support and wait for price action to break
it. Then you can initiate a short position or use the opportunity to exit long
positions.


 Once the trend line is broken, ETH begins a sharp correction that drains about
55% of the value out of Ethereum. This correction was forecast with the
combination of the Dark Cloud Cover candlestick pattern, RSI divergence, and a
support trend line break.
 How to Trade the Dark Cloud Cover Pattern
 Once you’ve spotted a Dark Cloud Cover pattern, trading it is fairly simple. There
are multiple ways to trade, based on whether you’re a more conservative or
aggressive trader.
 The more conservative approach allows you to witness additional trend
confirmations before entering short. The more aggressive approach puts you in
the short trade quicker but with greater potential to act on a false signal and get
stopped out of the trade.
 Let’s explore each of these approaches on a recent Dark Cloud Cover for Bitcoin.


 Before the pattern manifests, we need to see a prior uptrend. From July 16 to
August 17, 2020, the price of Bitcoin rallies 38%.

 Next, we need to see a larger-than-average bullish candle driving higher to form

the first candle of the pattern. The second candle of the pattern needs to retrace
at least 50% of the price range of the first candle.
 In the example above, the second candle of the pattern finishes near the lower
portion of the range of the first candle. Both candles are carved with larger-than-
average bodies.

 At this point, the market is giving us clues about a potential turn lower or perhaps
a pause in the uptrend. We can look to other classic technical analysis indicators
for confirmation.
 The glaring clue above is the formation of the Dark Cloud Cover pattern at a
strong level of horizontal resistance. On August 6, 2019, Bitcoin’s price rallies
were reversed at $12,342.50, creating a horizontal resistance level.
 Astute market participants are watching as this bearish Japanese candlestick
pattern occurs near this important level of resistance.
 Additionally, we can see the RSI oscillator diverging against Bitcoin’s price. This
is yet another bearish symptom, suggesting the market may turn lower.


 At this point, the opportunity appears strong, so an aggressive trader can initiate
a short position on the open of the next candle. The stop loss would be placed
just above the recent swing high, which is likely to be the high of the pattern.
 Traders look to target at least twice the distance to their stop loss. This gives the
trader a 1:2 risk-to-reward ratio.

 There are times when clues to a turn lower aren’t as strong, and the trader may
want to be more conservative in their setup. Conservative traders can look for a
break of a support trend line to provide the confirmation needed to initiate a short
trade.
 The trade setup would be similar to the aggressive approach, where the stop loss
is placed just above the swing high in the same place. However, the entry price
 will be lower as we await additional levels of confirmation. This means our target
price also needs to be lowered to maintain the 1:2 risk-to-reward ratio.
 Dark Cloud Cover vs. Bearish Engulfing:
The Differences
 To a newer trader, the Dark Cloud Cover may resemble the Bearish Engulfing
candlestick pattern. Indeed, they possess some similarities, but there are a
couple of differences.
 The similarities are that both candlestick patterns are two-candle formations
created after an uptrend. However, there are two general differences between
them.

 First, the Dark Cloud Cover requires the candle price ranges to be larger than
average. Within the Bearish Engulfing pattern, the first candle has no size
specifications.
 Additionally, the second candle of the Dark Cloud Cover pattern needs to cover
only 50% of the first candle. In the Bearish Engulfing, the second candle must
completely engulf the body of the first candle. Therefore, the Bearish Engulfing
pattern has to overlap 100% of the first candle, which could be small, but the size
of the candles in the Dark Cloud Cover will be larger than average.
 Is the Dark Cloud Cover Pattern Reliable?
 By itself, the pattern only suggests the potential for consolidation or a lower turn.
Therefore, the trader needs to seek out confirmation signals from other technical
analysis tools.
 For example, not all Dark Cloud Cover patterns will form near resistance. But if
they do, it provides a strong signal. All forms of resistance apply, whether trend
line resistance, horizontal resistance, or a Fibonacci retracement level.
 Additionally, this pattern tends to appear after an uptrend. Therefore, the
indicators and oscillators will signify overbought. If the pattern appears while your
indicators are flashing a sell signal, then that combination of confirmations
strengthens the signal.
  Again, the Dark Cloud Cover pattern can appear on all time frames of crypto
charts. The longer time frame charts tend to offer more reliability than shorter,
minute charts because the former’s risk-to-reward ratios tend to be better.
 The Bottom Line
 The Dark Cloud Cover is a Japanese candlestick pattern that is easy to spot on
all time frames of crypto price charts. When correctly identified, this pattern can
easily be used to set up your entry and exit signals.
 However, taken in isolation, the pattern can generate false signals. It is best for
you to confirm the signals with technical indicators and further confirm the trend
with fundamental analysis. Whether you’re a novice trader, always trade
responsibly and do your due diligence to assess the market sentiment before
jumping into the crypto bandwagon. That is especially extreme price
fluctuations do happen in the crypto market.

 Shooting Star Candlestick

What Does a Shooting Star Pattern Look Like?

There are essentially four parts that make up the perfect shooting star pattern. We’ve
illustrated them in the image below.

A shooting star candlestick pattern starts with a large uptrend of the price at point 1.
This helps set a trap for the bullish traders, as they may experience FOMO on the trend.
The next candle in the trend is where the traders get trapped. First, the FOMO on the
uptrend kicks in as more traders enter the market by the influence of an uptrend. This
creates the beginning of what appears to be a large bullish candle (point 2).
Then, the uptrend abruptly reverses and begins to retrace most of the recent price gains
at point 3.
The candle formation is confirmed when it closes near the opening price, leaving behind
a small body at point 4. The color of the candle body does not matter, as it could be red,
green, black or white.
In technical analysis, the most important aspect of the candle pattern is the very long
upper shadow, a little to no lower shadow, and a relatively small real body near the
day’s low. This wick needs to be very long, generally about two to three times the length
of the body of the pattern.
Shooting Star vs. Inverted Hammer
At first glance, the shooting star candlestick pattern looks a lot like the inverted hammer
pattern. In isolation, they are essentially the same pattern. However, the biggest
differences between these patterns are where they appear and what to expect of the
outcome.

The shooting star formation appears after an extended uptrend. Once the shooting star
forms, then prices correct lower to begin a new downtrend.
On the other hand, an inverted hammer occurs at the end of a downtrend. Once the
downtrend exhausts, buyers try to push the market higher but are unsuccessful, and the
market retreats lower, creating a large wick to the upside and a small candle body.
Once the single candle inverted hammer pattern is finished, the market will rally,
creating a new uptrend. Thus, confirming a reversal pattern.
In essence, these two single candlestick patterns are identical, but their location in
response to the previous trend distinguishes the shooting star from the inverted
hammer.
Shooting Star vs. Hammer Pattern
The shooting star and the hammer pattern are great technical indicators that signify the
opposites. The significant difference between these two patterns is that the shooting
star candlestick appears to have a long upper shadow (wick) to the upside with a small
lower body. The shooting star appears at the end of an uptrend, and its presence
implies that the market is about to correct lower.
The hammer candlestick pattern has a long lower shadow with a small upper body. The
hammer pattern appears at the end of a downtrend, and its presence implies that the
market is about to rally into a prevailing uptrend.
Identifying a Shooting Star Pattern
The essence of the shooting star pattern is a bullish trap that pulls long traders into a
bullish trend as they anticipate more highs, only to see the market abruptly reverse
lower. This pattern becomes even more effective when it appears near other important
price levels of resistance.
Appearing near resistance applies more fuel to the pattern’s strength, as long breakout
traders who are experiencing FOMO anticipate the break.

Near these resistance levels, breakout traders will push the prices higher to create a
short squeeze. However, if the breakout doesn’t continue higher, then the sellers step
in, forcing the market lower. As the pricing moves down, the stop losses of the breakout
traders are hit, triggering additional selling pressure to the price.
This creates a false breakout higher, which leaves behind a long wick to the upside.
Therefore, the key ingredients to look for in the shooting star candlestick pattern
include:

 Uptrend — a steady increase of the trend in prices

 Long wick — a swift bearish reversal creating a long wick to the upside, which is
2–3x the length of the body

 Small body — the candlestick pattern has a small body of any color

Shooting Star Pattern During an Uptrend

As we’ve seen, the shooting star pattern is a single candlestick pattern that signals a
potential correction coming in the market. The signals are stronger when the pattern is
spotted after an uptrend, as it alerts the trader to the potential of a new downtrend.
It is technically not a shooting star pattern when this pattern occurs in the middle of a
trend or after a downtrend. If the shooting star is witnessed in a downtrend, the result of
the pattern may not be a continuation of the downtrend. As a result, shooting stars in
the middle of a trend or after a downtrend should be ignored.
Indicators to Confirm the Signal
A shooting star formation does not require other indicators to spot it. However, other
indicators can be used to confirm and strengthen the signal the shooting star pattern
presents. Two of the most common indicators are Fibonacci retracement levels and
other resistance lines, such as horizontal and trend line resistance.
Fibonacci retracement levels are hidden support and resistance levels, as they may not
be obvious to new or intermediate crypto traders. The Fibonacci retracement tool can
be applied to a price chart, revealing levels where a market might reverse.
When a shooting star pattern appears near one of the important Fibonacci retracement
levels, then the signal of the shooting star is strengthened.
In March 2021, Ethereum rallied about 25% to reach the 50% Fibonacci retracement
level. Ethereum then tried to rally above that level, only to be rejected and pushed back
down. This price action left behind a long wick to the upside, which was more than three
times the length of the candle body, confirming the shooting star pattern. This formation
suggested that a correction may be on the horizon.
Sure enough, Ethereum fell about 13% over the next couple of days. If a shooting star
pattern appears after an uptrend near a common Fibonacci retracement level, then you
have a confirmation signal to the pattern.
Fibonacci retracement levels are simply hidden levels of support and resistance.
Therefore, other forms of resistance are more obvious to traders, and they help
strengthen the shooting star signals, too.
Horizontal resistance is a previous swing high extrapolated horizontally to the right on
the chart. Above, we can see Bitcoin reaching a high in late May 2021, creating a
horizontal resistance level. Later on, in June 2021, Bitcoin rallies to meet this horizontal
resistance, and a shooting star candle pattern appears.
This pattern is most likely the result of bullish traders getting trapped into buying recent
new highs. Bitcoin pushes higher slightly above the resistance level, only to see the
bears take back control and push pricing lower.
This is a bearish combination that suggests a downtrend may begin. Once this pattern
appears near resistance, Bitcoin prices fall nearly 30% over the next week to reach a
new low just below $29K.
Using Shooting Star Candlestick Pattern to
Spot a Bearish Reversal
The shooting star candlestick pattern can signal a bearish reversal. There are two ways
to trade the signal, depending on whether you’re a more conservative or aggressive
trader.
First, if a trader is already positioned to the long side when a shooting star candle
pattern appears, then the formation may signal that it’s time to exit the trade or tighten
the stop loss. The candlestick pattern provides a clue about a potential trend change,
and the long trader will want to consider locking in profits before the market corrects
lower.

Secondly, if the trader is more aggressive, they may want to jump into a short position
at the first symptom of a potential turn lower. After the pattern forms, the trader would
enter short on the open of the next candle.
The stop loss would be placed just above the candlestick’s wick high. The trader would
look to take profit at a distance at least twice the size of the risk.
There’s nothing wrong with identifying with this aggressive trading style, as long as you
understand the additional risks. For example, this approach includes a greater chance
of getting stopped out of a trade. The market could reverse against your position and
rally higher to tag your stop loss, causing you to eat a losing trade.
The benefit of the aggressive style of trading is its entry price. Due to the early entry into
the position, the entry would be at a better (higher) price, making it easier to reach a
good risk-to-reward ratio trade.
If you want a more conservative approach to trade with the shooting star candlestick,
consider using a support trend line as the trigger.

Once the shooting star pattern appears, draw an upward sloping support trend line.
Then, as the price crosses below the trend line, enter short into the position. The stop
loss would be placed just above the wick’s high, and the target should be at least twice
the distance from the stop loss to the entry price. This way, you can maintain a positive
risk-to-reward ratio on the trade.
The benefit of using the more conservative approach is that you should receive fewer
false signals. The downside is that the width of your stop-loss is much wider than with
the aggressive approach. This means that the market needs to travel farther for you to
maintain a positive risk-to-reward ratio.
Limitations
The shooting star candlestick pattern is effective for identifying potential bearish turns in
the market. However, the pattern should not be relied upon exclusively for trade signals,
as it does come with limitations.
First of all, the shooting star pattern can be applied to any chart time frame — but it’s
more effective on daily and weekly charts. If the pattern is spotted on a minute chart,
there’s a greater possibility of it being a false signal because less trading information is
going into the creation of each candle.
Secondly, the shooting star is a single candlestick pattern that inevitably requires fewer
data to create relative to other patterns. For example, the bearish engulfing pattern is a
two-candlestick pattern, and the evening star is a three-candlestick pattern. These
patterns require more candlesticks and, thus, more data to create them.
Lastly, smaller cryptocurrencies have less trading volume taking place. Therefore, if the
shooting star pattern is spotted on smaller-sized cryptocurrency charts, there’s a greater
chance that a false signal is forming. Though the shooting star can be used for any
cryptocurrency, it’s best used to identify bearish pivots on the larger ones.

 Rising Wedge Pattern

Rising Wedge: Causes and Indications

The rising wedge pattern is generally observed after long trends, which means it can be
quite useful for cryptocurrency trading. For instance, if a crypto trend has moved too far
too fast, the wedge pattern may appear as a warning signal of an upcoming trend
reversal.

Strong trends are the result of an imbalance between buyers and sellers. At each price,
buyers and sellers are transacting. If there’s an imbalance with a lot of buyers and no
sellers, then the price must readjust quickly to higher levels, which will hopefully attract
more sellers into the marketplace.
If the higher pricing fails to draw in more sellers, then the price will continue to quickly
readjust higher. This swift readjustment creates strong uptrends that begin to attract
more buyers, who fear missing out on a powerful trend (known as FOMO, or fear of
missing out).
Once this strong trend has developed, and large crypto whales are no longer interested
in buying, the price will begin to correct, drawing in the FOMO buyers. Each new high
sees another correction, drawing in more buyers.
At this point, the rising wedge pattern has formed and the market is ripe for a large
correction.
What Does a Rising Wedge Indicate?
The rising wedge — also called an ascending wedge — is a bearish reversal pattern.
This means that after the pattern completes, you can expect the market to reverse
direction. As the rising wedge pattern trends upward, a bearish reversal looms nearby,
changing the trend’s direction from upward to downward.
The opposite of a reversal pattern is a continuation pattern. Continuation patterns
manifest as an interruption of the larger trend. Reversal patterns, however, form at the
end of trends, after which the market changes direction.
There are some similarities between a wedge pattern and a triangle pattern that may
confuse crypto traders. However, there are differences that allow the trader to
distinguish one from the other so they can better determine the market’s next path.

Wedge and triangle patterns both have triangular shapes because of the converging
resistance and support trend lines that contain them. The major difference is that
wedges form in the direction of the larger trend — upward or downward — while
triangles form sideways, or horizontally. In the rising wedge example above, both the
resistance and support trend lines are converging as they ascend. Similarly, the falling
wedge has resistance and support trend lines that are converging as they descend.
Still, the triangle pattern has converging resistance and support trend lines, but the
resistance trend line is either descending or horizontal, while the support trend line is
either ascending or horizontal.
As a result, wedges are reversal patterns, while the triangle is a continuation pattern.
What Happens After the Rising Wedge Pattern Appears?
The rising wedge appears at the end of a trend. Therefore, the next move after the
ascending wedge pattern forms is a bearish reversal.

The bearish reversal can be confirmed when the market falls below the support trend
line. On many occasions, the market will correct back to the level of the origin of the
rising wedge pattern.
Spotting a Rising Wedge Pattern on a Crypto
Chart
The rising wedge pattern appears after a long and mature uptrend, signaling a potential
reversal.
From Sept 2020 to Jan 2021, the ETH rocketed from around $300 to $1,300 in a long,
strong uptrend.
The next example has two illustrations in it.
First, notice how the price action turns sideways in late January 2021. This is a triangle
pattern with converging horizontal and ascending trend lines. Newer traders might
mistake this pattern as a wedge. However, although it looks like a wedge, the resistance
line is basically horizontal-to-downward sloping. This is a dead giveaway of a
continuation triangle pattern — not a rising wedge.
Once this pattern completes, ETH begins to rally at the start of a rising wedge pattern.

Beginning Jan 31, ETH price begins to rally in choppy waves — i.e., when new highs
are formed, then immediately met with a corrective trend. These choppy waves make
upward progress, but it’s slow and overlapping.
When you see these choppy and overlapping waves, the next step is to add your trend
lines to the pattern.
The resistance trend line is drawn so that it covers the high points of the choppiness.
The resistance trend line should slant higher, as the prices are making a series of
higher highs. If the resistance trend line isn’t slanting higher, then this isn’t a rising
wedge pattern — and some other pattern is forming.
Once the upward sloping resistance trend line is in place, it’s time to draw the support
trend line. This is drawn connecting the low points of the choppiness. The support trend
line should also slant higher, as the pattern stair-steps upward, forming higher lows. If
the support trend isn’t angled higher, then some other pattern is forming, different from
an ascending wedge.
Now, if you have both support and resistance lines angled higher, then check to see if
they’re converging. At some times this convergence is more obvious than at others. The
easiest way to determine if the two trend lines are converging is by extending each of
the lines to the right. If they cross each other in the future, then they’re converging —
and this is a rising wedge pattern. If they don’t eventually intersect, then some other
pattern is forming.
Confirming a Rising Wedge Pattern
Within an ascending wedge valid pattern, you’ll find the following:

 Choppy and overlapping waves

 Higher highs and higher lows

 An upward sloping resistance trend line

 An upward sloping support trend line

 Resistance and support trend lines that converge and intersect when
extrapolated

If you spot a pattern with each of these ingredients, the chances are strong that you’re
looking at an ascending wedge pattern.
There are a couple of other items you might see as well, though these are guidelines
and not guarantees.
Divergence with an Oscillator
Add an oscillator to the bottom of your chart, such as the relative strength index (RSI)
indicator. If the RSI is showing divergence, it’s another clue that this is a rising wedge
pattern.

Oscillator divergence is created when the price makes a higher high, yet the oscillator
makes a lower high. The price is said to be diverging from the oscillator, as the two
aren’t in sync.
Volume Tends to Fall
Another clue you may be witnessing an ascending wedge pattern may be found in the
cryptocurrency’s volume.
If the volume is falling as the wedge pattern advances, then this indicates bullish whales
are no longer supporting the price. In circumstances like this, the market is mature for a
reversal.
How to Trade with a Rising Wedge Pattern
One of the most obvious and lucrative rising wedge patterns in crypto was formed by
Bitcoin going into April 2021. You may recall that Bitcoin was in a monster uptrend from
the March 2020 pandemic low into 2021 high. It rose nearly 1,600% over this period,
with bullish predictions forecasting immediate trends up pricing.
When rosy market sentiment is making traders feel positive with forecasts of
skyrocketing price levels, that is an ideal spot for the ascending wedge pattern to
appear. Rising wedge patterns are notorious for appearing at the end of large rallies
that have carried on for too long.
After completing the bulk of the rally in early January 2021, Bitcoin began to correct for
the last part of the month. Beginning in late January, Bitcoin rallied again, but this rally
becomes choppy and overlapping.
The rally begins to lose momentum, and divergence with the RSI indicator appears,
symptomatic of rising wedge patterns.
The resistance and support trend lines within the pattern fit the definition, as both are
rising and converging. Each of these clues is present to signal the trader that a top is
forming — and to be on the alert for a bearish reversal.
Trading the bearish reversal is quite easy. As the trend is shifting from up to down, the
trading opportunity is to short sell the market or close out of your long positions.
The trigger for the short entry will be a break of the support trend line. Some traders will
wait for the candle to break and close below the trend line before entering the trade.
Other traders sell short once the price has breached the trend line by a specified
amount, like 50 or 100 points.
Still, it is preferable to selling short once a specified level below support has broken.
The reason is that crypto markets tend to fall and crash fast. If you wait for the candle to
close, you could be missing out on a better entry point.
Once support breaks, the market is giving you a big clue: the mood of the uptrend is
beginning to change to that of a downtrend.
The stop loss for a short trade will be placed just above the recent swing high. If the
market breaks the support trend line and rallies up to new highs, then some other
pattern is playing out and the rising wedge has failed.
Most of the time, successful rising wedge patterns will see the market correct back to
the original level of the formation. In this case, the pattern begins on January 27, 2021,
at $29,250. Therefore, a successful rising wedge pattern will drive Bitcoin prices lower,
back to $29,000.
In hindsight, we can see that this pattern has played out well: within one month of the
signal confirmation (by mid-May), Bitcoin corrects back to the origination of the pattern.
Limitations of the Pattern
Though the rising wedge pattern can signal excellent short sell opportunities, the pattern
is not 100% accurate and there are some limitations to be aware of.
First of all, the ascending wedge pattern can carve rather quickly, yet it’s difficult to
confirm until the pattern has progressed nearly 2/3 of the way to completion. This
means you’ll need to constantly review the market to make sure the clues and
indications of the rising wedge are present.
Once the pattern is displaying many of the specified markers, then you can set up the
short-sell trade opportunity as trend line breakout below the support levels. Though the
pattern is easy to spot, it can be a challenge to catch it while it’s forming, as you
typically won’t see the clues develop until most of the pattern is complete.
Secondly, smaller cryptocurrencies are susceptible to bad ticks and an occasional bad
feed. These situations show up as extremely long wicks on the price chart patterns.
When you see these wicks, it can be challenging to accurately discern what pattern is
forming.
More commonly, smaller cryptocurrencies don’t have enough liquidity to maintain stable
pricing. As a result, you’ll get quick price aberrations that can create long wicks. This is
more likely to occur on smaller chart time frames.
In these situations, changing over to a line chart that is one or two chart frames smaller
than your current one would be a better option.
That is because the line chart tends to remove the noise, enabling you to see the core
pattern. Sizing down a couple of chart time frames will help you focus on the subwaves
of the larger pattern.
In the Tezos (XTZ) example above, we have a 1-hour chart time frame. Several wicks
can make a pattern look like a rising wedge. When you switch over to a line chart, the
patterns become clearer and you can quickly discern which ones are and aren’t an
ascending wedge.
However, when you switch to a line chart and size down the time frame, be careful not
to size down too much. Minute chart time frames begin to lose their lucrative risk-to-
reward ratios, as the spread cost of the trade tends to eat up any potential profits.

 Hanging Man Candlestick

What is a Hanging Man Candlestick Pattern?
The Hanging Man is a candlestick pattern (bearish candlestick) that appears at
the top of a bullish trend and provides a bearish reversal pattern. After a long
bullish trend, this pattern is a warning that the trend may reverse soon, as the
bulls appear to be losing momentum. Although this pattern is not an indication of
a trend change, it generates a message that the price has already made a top.
In a price chart, the Hanging Man candlestick pattern provides a warning sign for buyers
who want to hold the price for further gain. For buyers, it helps to manage the trade by
getting out of the market with a profit, ensuring some gain. On the other hand, for
sellers, it indicates a possible entry point, contingent on other confirmations.
Let’s see what the Hanging Man candlestick pattern looks like:

It has both bullish and bearish bodies but provides the same price direction by
appearing at a significant resistance level or swing high. This candlestick pattern
provides a story of the entire day’s price action, helping traders to anticipate the future
price direction based on the past price action.
Interpreting the Hanging Man Candlestick Pattern
The Hanging Man looks like a hammer, as its opening and closing price remain closer
with a long wick downside. For the pattern to work, the wick should be at least twice as
long as the body.
Price action traders are familiar with this type of pattern in a swing low. However, it
introduces a different story about the market, which is important to understand.
Although the Hanging Man has a long bearish wick like a hammer, it is still a bearish
signal. The bearish wick indicates extreme bearish activity during the day that has failed
to hold until closing.
After the selling pressure, it’s important to understand how the daily candle is closing. If
the closing price is higher than the opening price, it will be a bullish hammer. On the
other hand, if the closing price is below the opening price, it will be a bearish hammer.
Note:
Although the Hanging Man pattern is valid for both bullish and bearish bodies, it is more
potent with a bearish body than with a bullish one. In the bearish pattern, buyers take
the price higher before the daily closing, and the bearish close is a sign that bears are
stronger.
The Hanging Man does not provide a sell signal, yet it signifies possible bearish
pressure in the price. Traders can use the RSI indicator to confirm the overbought
condition at the Hanging Man to confirm the signal. Still, when two or more indicators
provide the same price direction, traders can rely on it. More specifically, it’s essential to
know how the next candle is forming. In general, any bearish daily candle after a
Hanging Man pattern increases the possibility of upcoming selling pressure.
How Does the Hanging Man Correlate to Trend
Reversal?
Trend trading is the most profitable trading style in any financial market. When big
financial institutions and large investors join the market, a trend forms. On the other
hand, the price in any financial market moves like a zigzag, with swing highs and swing
lows forming. Any reversal candlestick formation from these swing levels provides the
primary idea of price action trading.
Understanding Trend Reversals
Trend reversal happens when an opposing party enters the market and tries to change
the price direction. However, the most significant sign of trend reversal is volatility at
swing high/low. This volatility is a result of the pull between buyers and sellers, with an
indecisive momentum. Later on, once the direction is set, the price is ready to move
toward the opposite direction.
The basic concept of counter-trend trading is to find signs of buyers’ and sellers’ activity
before setting the price direction. Candlestick patterns like the Hanging Man indicate
sellers’ footprint after a bullish swing. However, as the price moves with the swing low
and swings high, you can use this candlestick pattern for both trend and counter-trend
trading.
How to Spot a Hanging Man Pattern
The Hanging Man is a trend reversal pattern with a long wick downside. Identifying this
pattern is easy, as it has a small body and a long wick. However, traders may struggle
to find the most profitable location of this pattern. Remember that this pattern works well
from the top of a swing, and identifying the swing requires good basic knowledge about
price trend, support, resistance, and market momentum.
Although the Hanging Man pattern is a single candlestick, the trend-changing event
happens once the candle is closed and the next bearish candle appears. While
searching for the pattern, make sure to follow these guidelines:

 It appears at the top of an uptrend.

 The Hanging Man has both bullish and bearish bodies.

 The shadow should be at least two times taller than the body.

 A Hanging Man pattern with a bullish gap increases the selling possibility.

 Traders should use other indicators besides this pattern to get the best results.

Identify Enter and Exit Points with the Hanging

Man Pattern
The primary requirement for the pattern is that it should appear after a bullish trend. In
the cryptocurrency market, price moves by creating bullish and bearish swings. Finding
a bullish trend requires multiple higher highs in the price.
Step 1
The above image is an example of an uptrend. The price is moving up by creating new
highs. Although the price has some bearish candles, the bullish pressure remains
strong. The primary indicator of a Hanging Man pattern is a bullish trend, such as this
one, in which a corrective force in the bullish trend has a higher possibility of taking the
price lower.
Step 2

After that, identify the Hanging Man pattern at the top of a bullish trend. If this
candlestick opens with a bullish gap, it’s a positive sign for sellers, but not mandatory.
Remember that a valid/complete pattern should have a wick that’s at least twice as long
as its body. In addition, any Hanging Man pattern from a significant resistance level is
also valid.
Step 3
Traders should wait for a bearish candle after the Hanging Man pattern develops before
opening a sell trade. After the pattern appears, the bearish daily candle indicates that
sellers have a higher possibility of initiating a downtrend.
The aggressive approach of making a trade based on this pattern is to open a sell stop
order below the candle’s low. Usually, the stop loss is placed above the candlestick
pattern, with some extra buffer to protect yourself in case of false breakouts. At the
same time, the take profit will be based on the trend’s strength and nearby support
levels.
Step 4
Success in cryptocurrency trading depends on how you manage trades. The global
financial market becomes uncertain when any unexpected move occurs. Although
you’re trading a Hanging Man pattern from a swing high with a proper sell entry, there’s
still the possibility of losing money.
Example of Hanging Man in a BTCUSD Chart
First, let’s see how a bullish trend forms for BTCUSD before the Hanging Man pattern
appears.
In the above image, we can see that the price moves higher by creating higher highs.
Then, as soon as the pattern forms at $64,000, the price changes its direction. Here the
change in direction is confirmed as soon as the price makes a bearish daily close after
the formation.
The next day, if the price moves above the Hanging Man’s high, the bearish possibility
will be invalidated. Therefore, the stop loss should be above the candle’s high, and the
take profit will be based on near-term support levels. However, traders can use multiple
take-profit levels to minimize the risk associated with the market.
Hanging Man vs. Hammer vs. Shooting Star:
The Differences
These three patterns are almost similar and may confuse traders. However, if you
understand the core logic of each pattern, you can easily differentiate them.
 The
comparison of the hammer, hanging man, and shooting star candlestick.
In the above image, we see the visual representation of these candlestick patterns. The
Hanging Man and Hammer look similar, but the trend from opposite directions. On the
other hand, the Hanging Man and Shooting Star provide the same price direction,
though there is an important distinction between their structures: the Hanging Man has
a long shadow below the body, while the Shooting Star has a long upper shadow.
The Hanging Man and Shooting Star appear at the top of an uptrend. Both bodies have
a long wick, at least two times longer than their bodies. On the contrary, the Hanging
Man and Hammer provide a trend reversal signal, in which the key difference is the
nature of their trend.
Each of these candlesticks provides a reliable result in the daily chart, as every one of
them can show the entire price action of the day. Traders can use these patterns in
intraday trading, but it may require additional confirmations from other dependable
indicators.
How Reliable is a Hanging Man Pattern?
The Hanging Man is a profitable price reversal indicator that appears after a bullish
trend. However, there is no guarantee that the price will rebound after forming this
pattern. It provides the highest accuracy from a significant resistance level with a
volatile bullish trend. Moreover, after a Hanging Man pattern forms, traders should wait
to see how the next candle forms. The pattern is valid if the next candle is bearish and
closes below the Hanging Man’s shadow.
On the other hand, this pattern may fail from any random place, as demonstrated in the
image below:
Overall, the success of the Hanging Man in trading depends on how traders utilize this
candlestick with an appropriate trading strategy. Traders can use this pattern as an
additional confirmation to reduce risk.
Indicators to Confirm the Signal from a Hanging
Man Candlestick Pattern
The Hanging Man pattern does not provide any sell signals, so traders should consider
other tools, like price action or other indicators, to increase trading probability.
The formed pattern from a significant resistance level may work as an additional
confirmation of upcoming bearish pressure.
In the above image, the Hanging Man pattern develops near a resistance level on this
ETH/USD Chart. As soon as the candle low is broken, the price moves lower with an
impulsive bearish pressure.
Another approach is to use a moving average indicator to find the price swings. A
moving average (MA) shows the average price of the last specified period of candles,
and it moves with the price. Therefore, if the gap between the price and the MA
extends, the price and the MA have a higher possibility of coming together to minimize
the gap.

In the above image, we can see the gap between the 20 EMA and the price expands
while the price forms a Hanging Man pattern near a resistance level. Subsequently, the
price moves lower toward a dynamic 20 EMA, proving a 1:2 risk-to-reward ratio.
Closing Thoughts
The Hanging Man formation is a single candlestick pattern that appears at the top of an
upward trend and signals a potential change in the trend direction. Although this
candlestick is similar to the Hammer and Shooting Star, there are some key differences
in price direction and formation. This pattern is validated once it forms from a significant
resistance level and its daily low is broken.
Still, traders should closely monitor price action using other candlesticks to increase the
trading probability. Moreover, strong trade management and strategic trading strategies
are required in order to get a reliable outcome from any candlestick-based trading.

 Bear Pennant Pattern

 What Is a Bear Pennant?

 A bear pennant is a chart trading continuation pattern in which, after a
strong move lower, prices pause and consolidate briefly, then break down
further, resuming the larger correction. The pattern gets its name from the
consolidation, which often looks like a pennant as prices wedge together before
breaking down further. The bear pennant pattern is the opposite of the bull
pennant chart pattern.
 

 A bear pennant is formed when a cryptocurrency falls significantly, yet buyers

believe it’s not inexpensive enough yet. The buyers hold out and don’t buy. The
traders who are short become nervous and exit the position by buying it back. As
a result, the crypto’s price increases a little, but on weak volume.
 Over time, the volume during this consolidation period tends to be weak. The
cryptocurrency seems to mindlessly bounce within a range, making no progress.
After a short period of time, the buybacks cease and the trading volume tends to
fall as the last traders are shaken out. When volume fades, the sellers show up
again and continue to push the market lower, resuming its downtrend.
 

 A bear pennant has a lot of similarities to a bear flag in technical analysis. Both
patterns are consolidating a downtrend, which then leads to a further break lower
in price. However, there’s a slight difference in their shape. The bear flag has a
rectangular look in the consolidation phase, while the bear pennant resembles a
triangle.
 Analysts debate whether the bear pennant or bear flag is the more powerful
pattern. On the one hand, the triangular shape of the bear pennant suggests
there are hardly any buyers in the market, which tends to lead to shorter
consolidation periods. On the other hand, the rectangular shape of the bear flag
is effective at “faking out” potential buyers, trapping them into selling as the
downtrend picks up momentum.
 The debate will continue, but make no mistake: both patterns point to strong
bearish downtrends coming.
 What Does a Bear Pennant Look Like?
 There are three phases to a bear pennant. The crypto market will experience a
large, strong and deep correction. Oftentimes, the correction will appear
relentless, as if it won’t stop (point 1 in the below diagram).
 Then, all of a sudden, the downtrend stops, and a small rally begins to develop.
Unfortunately, the rally doesn’t have a lot of strength or volume to sustain it and
quickly fades away. At this point, the rally has retraced less than 1/3 of the
decline, and definitely remains in the lower half of the original decline (point 2).
 The short-term rally soon fades to another correction. The decline is as weak as
the rally and the cryptocurrency begins to trade in a sideways range. There’s one
distinctive feature of this sideways movement: the upper and lower boundaries of
the range become compressed as time passes. When you draw trend lines along
 the outer edges of the consolidation, they converge to form the shape of a
contracting triangle (point 3).


 This triangle is critical to defining the pattern, which leads to a strong continuation
lower. During this consolidation, trading volume contracts as well. The fight
between the bulls and the bears looks more like a truce: both bulls and bears
simply don’t show up anymore and stick with their positions as the consolidation
drags on. At this point, the pattern looks like a triangle on the bottom of a stick,
and the bearish trade is set up.
 Eventually, the consolidation leads to a breakout lower as the sellers come back
in full force, just as strong as they were in the initial correction (point 4). This is
partly due to the buyers who thought they were buying cheaply: now, they have
to turn around and sell in a strong down-trending market. The imbalance of
sellers versus buyers is so large that price readjusts rapidly lower. Sometimes,
 the length of the secondary downtrend can be as large as the first correction,
where the consolidation marks the midpoint of the entire decline.
 Indicators to Confirm a Bear Pennant
 The best indicators to confirm a bear pennant are its shape, as well as where the
pattern forms within the previous downtrend. There are some additional
indicators that can be used to help confirm the bear pennant, but those
indications may not be the most accurate. A correct bear pennant pattern should
have a contracting triangle shape rather than a rectangle shape.
 Shape and Location
 We previously discussed how the shape of the bear pennant must be a triangle
at the bottom of a stick. The triangle portion of this pattern has to appear in the
lower half of the stick, most likely within the lower third of it.
 The duration of the triangle will be brief, as the market is getting ready to unload
in a deeper correction.
 Volume
 Volume can provide a big clue about the validity of the bear pennant pattern.
Usually, the initial decline occurs on a lot of trading volume. Then, as the
cryptocurrency consolidates during the triangle pennant portion of the pattern,
the volume will fall as both buyers and sellers stand aside.

 As the triangle completes, volume tends to pick up again as the market corrects
towards much lower levels. Remember, trends tend to follow volume. Therefore,
a consolidation on weakening volume suggests the rally is likely temporary, and
will be completely retraced.
 Lack of Range Expansion
 When a cryptocurrency is in a fast trend, volatility tends to pick up. We can
measure the volatility as a function of the high and low of each price period,
which is called a range. When the range expands, it indicates volatility is on the
rise and that the cryptocurrency is likely to trend in a specific direction. When the
range falls, it indicates consolidation is likely taking place with little net
movement.


 To determine if the range is expanding or contracting, add the average true

range (ATR) indicator to the bottom of your charts with a one-period setting. If the
subsequent line on the chart is rising, that indicates increased volatility. If the line
is falling, it suggests decreasing volatility.
 How to Trade with the Bear Pennant
 Once you’ve identified a bear pennant, congratulations — because you’ve
completed one of the toughest parts to trading the pattern. The subsequent trade
can be rewarding, as the setup is quite simple and fairly straightforward.
 Identifying a Bear Pennant Pattern on a Crypto Chart
 After a long and steep rally, ETH topped in May 2021 and began to collapse. In
about one week’s time, ETH corrected 25% to the low on May 16. This steep
 correction was the first phase of the bear pennant pattern. Let’s refer to the chart
below.


 ETH then briefly rallied off the low, but the rally didn’t last long or extend very far.
The ETH rally retraced 38% of the May downtrend, placing it in the lower portion
of the sell-off.
 

 Ethereum begins to chop around sideways, making no progress either to the

upside or downside. This sideways chop occurs on contracting volume. The
candlestick ranges contract. The trend lines shaping the outer edges of the
pattern contract, too.
 This formation creates an ideal setup for a bear pennant trade.
 Opening a Short Sell Position
 After spotting the pattern, it’s time to plan the trade’s entry.
 

 The easiest entry point is the lowest point of the pattern. Set an entry order to sell
short if the market falls to new lows. Placing an entry at the pattern’s low point
allows you to confirm that ETH is ready to trade to lower levels. If it does, you
tend to see an explosion lower, leading to another large downtrend.
 Placing a Stop Loss
 The stop loss will be placed above the pattern near the recent highs.
 

 The best place for a stop loss is just above the resistance trend line of the
pattern. That way, if ETH does rally above the resistance line, then the bear
pennant pattern is voided, suggesting another pattern has been unfolding.
 Knowing Where to Take Profit
 On many occasions, the bear pennant is at about the halfway point of the
decline. You can simply measure out the first decline, then project it at the end of
the bear pennant near the last touch of the resistance trend line. The Fibonacci
extension tool is very handy for helping you measure out situations like these.
 

 For ETH in the chart above, this places a take-profit target near $2,300.
 In fact, a few days later ETH did fall hard, bottoming at $1,850.
 Pennant Patterns vs. Triangle Patterns:
Differences
 What’s the difference between pennant patterns (bullish and bearish) and
triangle patterns? At first glance, they’re very similar and overlap in a lot of areas.
The pennant pattern does include a triangle-like shape during the consolidation
phase. However, the main difference is what happens before and after the
triangle — and how long the triangle itself lasts.
 

 Leading into the bearish pennant pattern, there’s a deep and strong correction.
Then, the pattern consolidates into a triangular formation. However, with a
regular triangle pattern, there doesn’t have to be a strong trending move
preceding the triangle.
 Secondly, after the triangle in a pennant pattern forms, it’s very clear in which
direction to expect the pennant to break. It will break in the direction of the
preceding trend, which — in the case of a bearish pennant — is to the downside.
With a regular triangle, the breakout might happen to the upside or downside.
 The third main difference between a pennant pattern and a triangle pattern is
how long they last. The triangle portion of a pennant tends to be shorter in
duration than that of a typical triangle pattern. The swiftness of the pennant’s
triangle happens because the emotions of the correction are high, and traders
aren’t buying into the consolidation of the downtrend en masse. In contrast, a
regular triangle pattern can last years, and be preceded by small trends.
 Limitations of the Bear Pennant Pattern
 An effective pennant can tip you off to a powerful trend with a good risk-to-reward
ratio trade. However, not all developing pennants are 100% accurate.
 If the triangle consolidation phase becomes prolonged, then the possibility of a
continuation lower lessens. This means the likelihood of an outright reversal
increases, which can frustrate bearish traders.
 One way to avoid this frustration is to wait for a breakdown below the lows of the
triangle, rather than trying to time a short sell entry at the triangle’s high.
 Another limitation of the bear pennant pattern is that if you follow it on a minute
chart, the data coming in from other confirming indicators may be flawed. There
simply isn’t enough data feeding into the volume or ATR indicator to produce
 obvious signals. As a result, a smaller chart time frame may not show
confirmation of the pattern, even if it eventually plays out.

 Evening Star Pattern

 What Is an Evening Star Candlestick

Pattern?
 An evening star candlestick pattern is a three-candle formation used in
technical analysis to identify bearish reversals. It consists of a large green
candle, a second small-bodied candle, and a third large red candle.


 The first candle of the evening star pattern is a large green candle, which
suggests the bulls have complete control, pushing the market to a new high.
 The next candle continues to run up to higher levels, but the strength behind the
move is lacking, so the candle has a smaller body. Ideally, the second candle
should gap higher on the open, but since crypto trades continuously — 24 hours
a day, 7 days a week — gaps are rare on price charts.
 As the market begins to sell off, it produces a large red candle. Often, the gains
witnessed by the first candle have evaporated by the time this third candle
completes.
 These three candles together provide crypto traders with important clues about
larger trends for the crypto market. The evening star pattern is generally found at
the end of an uptrend, signifying the kickoff to a bearish reversal.
 Strengths and Weaknesses of the Evening
Star Pattern
 The evening star is an effective pattern, making it a favorite of crypto traders as it
helps them identify a bearish turn in the market.
 One unique aspect of the evening star is that it requires three candles to
generate. This makes the formation easier to identify because the candles must
take a specific shape.


 Additionally, crypto traders like the evening star because it helps them exit a bull
market to protect profits. Once the pattern is confirmed, a trader closes all or a
portion of their position.
 If the trader feels a larger bear trend is going to unfold, they can consider
opening a short-sell position with a stop-loss placed above the high of the
pattern. Prudent risk management suggests targeting twice the distance from the
entry to the stop-loss to generate a 1:2 risk-to-reward ratio.
 There is no pattern or indicator that’s foolproof, and the same holds true for the
evening star. Just because the pattern appears doesn’t mean that the next price
move is going to be a downtrend. There are occasions when the evening star
pattern may generate false signals and the market might actually rally.
 One way to minimize the number of false signals is to more completely
understand the pattern, its shape, and how to trade it — which we’ll explain
further below.
 How to Easily Identify Evening Star Patterns
 The evening star formation is relatively easy to identify because there are three
candles working together to tell you a story. The context and backdrop of the
 story are that the pattern appears after the market has already experienced an
uptrend.
 The first candle of the pattern appears with a large green (or white) body to
extend the current uptrend. Toward the end of strong trends, FOMO can kick in:
as the trend accelerates, traders and investors jump on board, afraid of missing
out.


 As the first candle closes, the second candle continues initially with another slight
gain. However, the strength from the previous candle is losing momentum. Many
of the traders have joined the trend and the buying power is diminishing.
 As a result, the market produces a small-bodied candle as the battle between the
buyers and sellers is fairly even. At this point, the candle could be red or green.
Either one is okay, as it’s more about the small range of the candle, relative to
the previous green bar.
 However, it’s critical that this small-bodied candle punches a new high above the
first candle. It’s this small-bodied candle that resembles a star in the night sky,
giving the formation its name.
 Then the third candle appears. Ideally, the third candle begins correcting lower,
holding below the high of the second candle. The bullish momentum has
completely dissipated from the first two candles, and the sellers take over while
the buyers are nowhere to be found. As a result, the market corrects lower, fairly
swiftly, erasing nearly all of the gains for the previous two candles.
 How to Trade Evening Star Patterns
 Once the evening star pattern is identified, it’s fairly easy to use the formation to
help you enter into new positions — or help you exit out of an existing trend. The
 evening star candlestick pattern signals a bearish reversal. Therefore, it can be
used to initiate new short-sell positions.


 In the daily BTC/USD chart above, we see the price moving up to meet the
resistance at a previous swing high. Bitcoin’s price drives the first candle of the
evening star pattern higher to meet this resistance level.
 Then, the second candle jumps to a new high, but there aren’t enough buyers for
the breakout higher to follow through, leaving behind a smaller-bodied candle. As
the third candle begins to form, sellers emerge, driving Bitcoin’s price lower and
starting the leg of another correction.


 Once this pattern is spotted, especially near previous resistance, it signals a bear
trend is about to take over. A trader would enter short on the opening of the next
candle, while placing a stop-loss just above the high of the pattern.
 To establish the target zone, take the distance between the entry to the stop-loss
and multiply it by two. This product will be the distance to your target from your
entry.


 A couple of days later, Bitcoin corrected lower, reaching the target established by
the pattern.
 Using the evening star pattern to initiate new short positions isn’t the only way to
implement a strategy. For traders who are positioned to the long side, the
appearance of an evening star candlestick formation will signal the potential for
the uptrend to terminate and reverse, starting a new downtrend.


 In late February 2021, a trader positioned to buy the dip would be riding the trend
higher. LINK/USDT has increased by about 40% over the past couple of weeks,
reaching a new high on March 3.
 However, LINK/USDT drives even higher in what appears to be a breakout
attempt, forming the first candle of the evening star formation. The second candle
consolidates those gains, and the breakout attempt fails to follow through,
leaving behind a smaller-bodied candle.
 As the third candle forms, LINK/USDT begins to correct even further, nullifying
the breakout and sealing it as a false break higher.


 Once this pattern is completed, especially near the previous swing high from
March 3 (which was acting as resistance), then we have multiple confirmations
signaling the kickoff to another correction. At this point, the long trader may
decide to close their position to lock in profits.


 After the evening star pattern is confirmed, LINK/USDT corrects 23%. The
evening star pattern can be effective at helping traders exit long positions, as it
signals a bearish reversal may be nearby.
 How Reliable Is the Evening Star Pattern?
 By itself, the evening star pattern is a simple formation alerting us to the kickoff of
a new correction. There are other technical analysis tools that can help increase
the strength of the signal generated by this pattern.
 As we’ve previously noted, when the pattern appears near resistance, it
generates a stronger signal. Resistance is the area on the chart where buyers
stop buying and sellers start selling. Levels of resistance can be determined in
advance of the evening star pattern’s creation.
 As a result, if the evening star formation appears near where the level of
resistance has formed, there’s a stronger signal that a bear correction is about to
begin.
 There are multiple types of resistance which can be generated on a chart. One of
the easiest to identify is a horizontal level of resistance. Our previous illustrations
 using Bitcoin and LINK, above, show how powerful the evening star pattern can
be when combined with horizontal resistance.
 Another easy form of resistance that can be determined on a chart is a moving
average.


 Above, we have a 4-hour price chart for Bitcoin with a 50-period simple moving
average included. As Bitcoin’s price breaks below the moving average, it briefly
rallies to reach the underside.
 The evening star candlestick pattern appears right at the moving average,
signaling a deeper correction is likely to continue. Bitcoin ends up correcting
another 7% over the next day.
 Evening Star Pattern vs. Other Trend
Reversal Patterns
 There are several other bearish reversal patterns which crypto traders follow.
Let’s look at how the evening star pattern compares to the head and shoulders,
bearish harami, and triple top patterns.
 Evening Star vs. Head and Shoulders
 The head and shoulders pattern is a popular reversal pattern followed by crypto
traders. There are several differences between the head and shoulders pattern
and the evening star.


 The evening star pattern develops in three candles, while the head and
shoulders may take more candles to develop. Actually, it’s impossible for the
head and shoulders pattern to develop in fewer than five candles. The head and
shoulders pattern actually forms three smaller tops within the larger pattern, and
therefore needs more candles to complete the pattern.
 On the other hand, the evening star pattern will take the shape of one rounded
top.
 As a result, it’s possible for the evening star to be a portion of the head and
shoulders pattern, but the head and shoulders pattern cannot be a part of the
evening star.
 Evening Star vs. Bearish Harami
 The bearish harami is another favorite pattern among crypto traders. However,
there are distinct differences between it and the evening star.


 The biggest difference between these popular candlestick formations is that the
evening star forms in three candles, while the harami forms in two.
 Additionally, the high point of the evening star pattern is the second candle. On
the other hand, the high point of the harami is in the first candle.
 Of course, the second candles of both the evening star and bearish harami are
small-bodied candles. However, the evening star’s second candle becomes the
high point of the pattern, whereas the second candle of the harami gaps lower to
form inside the body of the first candle.
 Evening Star vs. Triple Top
 There are a few differences between the evening star and triple top patterns.

 First, the triple top pattern takes place in a sideways range. This means that price
is trading sideways as each of the three tops is formed. On the other hand, the
evening star is created after an uptrend, not in a sideways range.
 Secondly, the triple top requires a minimum of five to six candles to create. The
evening star pattern is a small three-candle formation.
 Finally, the evening star candlestick pattern could be included within the triple top
pattern, but never the other way around. The triple top is the larger pattern, and
requires three tops to form, whereas the evening star is just one rounded top.
 The Bottom Line
  The three candles of the evening star candlestick pattern make it easy to spot
and identify on a market chart. The evening star can help traders exit a bullish
market or establish new short-sell trading opportunities. Sometimes the evening
star can generate false signals, but when combined with other forms of technical
analysis, such as horizontal resistance, it can reliably be used to signal a new
downtrend.

 Triple Top Pattern and Triple Bottom Pattern

What Is the Triple Bottom Pattern?

A triple bottom is a chart pattern that occurs at the end of a downtrend. It is a
bullish candlestick pattern that consists of three failed attempts at new lows near
the same price and is confirmed once the price breaks higher above resistance.
The triple bottom pattern forms after prices have been correcting lower. The crypto
market begins to rebound but fails to follow through to the upside. Additionally, each
failed rebound is met with a failed attempt at new lows, and the market trades in a
sideways range. Sellers become completely exhausted, and the market rebounds a
third time, but with enough energy to break out higher.

The pattern looks like the letter “W” as the lows of the pattern form near the same price
level. Some traders would suggest the pattern takes the shape of a rectangle as well.
Both interpretations are valid, as the pattern is a bullish reversal setup.
Understanding a Bullish and Bearish Reversal Pattern
A bullish reversal pattern is a formation on a chart that suggests a downtrend or
correction will reverse, becoming an uptrend. There are three parts to a bullish reversal
pattern:

1. Correction lower

2. Reversal pattern

3. Confirmation of a break higher

Patterns like the hammer candlestick or bullish engulfing are other examples of bullish
reversal patterns.
The opposite of a bullish reversal pattern is a bearish reversal pattern. It has three parts
as well, corresponding to those of a bullish reversal:

1. Uptrend rally

2. Reversal pattern

3. Confirmation of a break lower

Patterns like the bearish engulfing or rising wedge formation are examples of bearish
reversals.
In addition to reversal patterns, there are continuation patterns. Continuation patterns
do not reverse but simply trade sideways before a breakout continues in the direction of
the original trend. Patterns like flags and pennants and the bear trap are examples of
consolidation patterns.
What Does the Triple Bottom Pattern Represent?
The triple bottom pattern is a bullish reversal pattern. This means that once you spot the
triple bottom chart patterns, you can anticipate a bullish rebound that eventually breaks
above the pattern’s high.
This is useful for long-term HODLers, as the pattern’s confirmation represents another
opportunity to add to your bullish position. The triple bottom pattern can also be used as
an exit signal for those traders who want to short the market.
The reliability of the triple bottom will depend on how close the actual pattern conforms
relative to the idealized one. If the actual market carves close to an idealized pattern,
then the results are fairly reliable.
What Is the Triple Top Pattern?
The triple top is a bearish chart pattern that tests the high of a price three times
before the price falls and breaks to new lows. As opposed to the triple bottom, it
appears at the end of an uptrend suggesting a likelihood of trend change.
The triple top chart pattern forms after a sustained rally. The buyers and whales are no
longer supporting the rally, and sellers are pushing prices down. However, sellers aren’t
strong enough to create a new downtrend initially.
A dramatic bull-versus-bear battle takes place, as each short correction is met with
another rally that fails near the old highs. Eventually, the bulls are exhausted and the
crypto market begins its correction, breaking below the recent support.
The triple top pattern looks similar to the letter “M,” except that there are three failed
attempts at new highs that are close to one another, creating three peaks.

The triple top looks somewhat similar to the head and shoulders pattern, except the
three highs price pattern, are somewhere near the previous same price level. In
contrast, a head and shoulders pattern will see the middle top exceed the highs to its
left and right.
The results of both the triple top and head and shoulders patterns are similar, as each
pattern implies a break below the support as a new downtrend is created.
The triple top pattern is quite useful for bullish traders, as the bearish pattern signals a
potential deep correction is coming. This allows bullish traders to adjust their stop-
loss and deploy their risk management strategy or close out a portion of their position to
lock in profits.
Since the triple top is a bearish reversal chart pattern, bearish traders may use the
pattern as a signal to enter the crypto market as a short seller. This would allow a trader
to profit if the price were to move lower as intended.
How to Spot Triple Top and Bottom Patterns on
a Crypto Chart
Triple top patterns can appear on any chart time frame, but they must form after an
uptrend. To identify a triple top, look for a large rally that’s topped with three failed
attempts at new highs.
The three failed attempts at new highs should print near the same price. If they deviate
significantly in price from one another, then there’s likely another pattern forming that’s
different from the triple top.
Let’s look at a specific example. In the Bitcoin 15-minute chart below, BTC rallies 9%
from $42,100 to $45,876 in a matter of minutes. This rally forms the uptrend and the
beginning of the triple top pattern.
Bitcoin fails to rally further and corrects back to $42,130, then begins another rally
attempt. This rally attempt fails at $45,800 in a bearish harami candlestick pattern and
corrects again to $44,628. This rally attempt is the second failure to form a new high.
After finding a bottom at $44,628, a third rally attempt starts, carrying to $45,694 before
failing and reversing lower.
These three failed attempts all reverse near the same price level between $45,694 to
$45,876. These amounts are all within 0.4% of each other.
The anatomy of a triple bottom is the opposite of a triple top.
Using the Bitcoin daily chart time frame as another example, three failed attempts to
new lows occur between May and July 2021.
On April 14, 2021, Bitcoin began a large and swift correction that found its first support
at $29,800. This low forms the first failed attempt of lower lows in the triple bottom
pattern.
Bitcoin then rallies to $42,444, which forms the high point of the triple bottom pattern. At
this price, Bitcoin then trades lower to $28,726, which forms the second low of the triple
bottom.
After rallying for a bit, another attempt at a breakdown fails at $29,258. This last low
becomes the final low of the triple bottom pattern. From this low, Bitcoin aggressively
rallies to new highs above the high of the pattern at $42,444.
What Happens After a Triple Bottom Pattern?
After the three low points of a triple bottom have formed, anticipate a bullish reversal to
break out to new price highs. To confirm the breakout higher, first identify the high point
of the triple bottom pattern.
The easiest way to identify the high point is to place vertical lines at the first and third
bottoms of the pattern. Then, identify the highest price point (or peak) between those
two vertical lines. In the chart below, the highest price between the three bottoms is
$42,396. Mark this high point with a horizontal line that extends to the right.
The sustained break above this high price point will alert the bullish trader the reversal
is underway — and even higher prices are likely coming. This confirmation isn’t 100%
foolproof, but it does provide a level of reliability that traders can count on to make
higher probability trades.
Other confirming factors can help support the case for a bullish break, such as
increasing volume on the upside movement, or expanding ranges of the bullish candles.
These conditions don’t necessarily have to be present for a bullish breakout to succeed.
However, their presence further confirms the likelihood of follow-through on the
breakout.
What Happens After a Triple Top Pattern?
After the three high points of a triple top have formed, anticipate a bearish reversal. The
bearish reversal chart pattern is confirmed when the price breaks below the low point of
the triple top.
To confidently identify the triple top pattern’s low point, mark a vertical line at high points
(1 and 3 in the illustration below). Then, identify the lowest price on the chart between
the two vertical lines. Mark a horizontal line at the lowest price point identified. Make
sure this line extends to the right. This triple top low point will become the price level
where we can confirm the pattern and its break downward in a new correction.
In the Bitcoin chart above, after failing at these three highs the largest cryptocurrency
starts a more robust downtrend. This pattern is confirmed when we see a new low
below the low of the triple top pattern. The lowest price between the three tops is
$42,130.
If the price fails to break below the low point of the triple top pattern, then the triple top
isn’t confirmed. Failure to confirm a break lower suggests that there’s another pattern
carving — and that you should avoid selling short.
How to Trade with the Triple Bottom Pattern
Once the three extreme price points of the pattern are discovered, confirming and
trading the pattern is fairly straightforward.
During the summer of 2021, Ether (ETH) was correcting lower to consolidate previous
gains. Standing back and looking at the daily chart, you can easily identify three low
points forming near the same price level.
The first low point is at $1,728, the second is at $1,697 and the third is at $1,716. The
three prices are separated by less than 2% of the respective previous prices.
Now, it’s time to set up the entry for the triple bottom pattern. To do so, we need
confirmation first. The triple bottom is confirmed once price breaks above the high point
of the pattern.
The high point of the pattern is found by marking the first and third bottoms with vertical
lines. Then, find the highest price point between the two vertical lines and mark this with
a horizontal line. In the ETH chart above, the high point of the pattern sits at $2,912.
Since the triple bottom is a bullish reversal pattern, we’ll establish a long position at the
breaking point. This means we want to go long at $2,912.
The stop loss is used to limit the losses on the trade and will be placed below the entry.
A conservative stop loss can be placed at the lowest point of the triple bottom pattern.
The lowest price point of this ETH triple bottom pattern is $1,697.
On a confirmed breakout higher, the market generally travels the same distance to the
high point as it does to the low point of the triple bottom pattern.
The length of the triple bottom pattern is $1,215 ($2,912 high minus $1,697 low =
$1,215).
If we add $1,215 to the breakout price of $2,912, then an initial target is placed at
$4,127.
Therefore, the stop loss will be placed at $1,697 and the take profit level at $4,127.
Limitations of the Triple Top and Bottom
Patterns
A confirmed triple top or bottom pattern can be reliable, but neither one can be 100%
accurate.
A challenge that inexperienced traders may face is impatience. Beginners may see
three failures near the same level and open their position accordingly. The limitation of
such a decision is that the pattern hasn’t been confirmed. Entering into the position
prematurely opens the door to a failed pattern — and a losing trade in the account.
Additionally, a trend direction tends to follow volume. If a breakout is occurring on a lack
of volume, then it may fail. On the other hand, a breakout occurring on increased
volume benefits the break and suggests we may see follow-through to the target.
Lastly, smaller cryptocurrencies have much less liquidity than large cryptos such as
Bitcoin and Ether. This means there’s a greater chance that breakouts won’t follow
through on these smaller cryptocurrencies, simply due to the size of their tokens.
Due to these limitations, a trader needs to implement a stop loss on every trade to
ensure the account isn’t destroyed, should the market move against them.
The Bottom Line
The triple top pattern is a bearish reversal formation that can alert traders to an
upcoming correction. Additionally, the triple bottom pattern can signal the kickoff to a
new bull rally.
The triple top and bottom patterns have their limitations, so be mindful to wait until a
formation is confirmed when using it to trade with larger market cap cryptocurrencies.

Other candlestick patterns

 Harami Candlestick – Has both bullish and bearish candlestick

 Hammer Candlestick – Has both bullish and bearish candlestick

 Double Top and Double Bottom – Has both bullish and bearish candlestick

What Is A Double Bottom?

The double bottom pattern forms when two price bottoms are positioned at
relatively the same level while a neckline acts as a resistance. This pattern shows
up at the end of a downtrend and signals its reversal.
Typically, traders would usually wait for the price to break above the neckline to go for a
long position. Still, you should only go long if you’re confident because there are
chances where you’ll end up trading against the trend.
The key to using a double bottom pattern is the longer the duration between the
two lows in the pattern, the greater the probability that the chart pattern will be
successful. That also translated to the fact that this technical analysis indicator is more
suitable for long-term trades as it supports the exploitation of recurring patterns.
Still, there are mistakes you should avoid for a more accurate analysis. That said, when
a double bottom is used correctly, the results are quite impressive, but it can also be
detrimental when you’re not careful. So, how does it work, and how do you even spot
them?
Identify a Double Bottom Pattern
Determining a double bottom is not as difficult once you lay hold onto the fundamentals.
It is one of those patterns that shows up regularly, visible, and provides a decent signal.
The pattern is differentiated with its three main characteristics:

 First low – this is when the price bounces back for the first time;

 Second low – this is the second price rejection.

 Neckline – this is the temporary resistance that forms between the bottoms.

Here is the market psychology behind this formation:

 First low – during the first low, the market rebounds and creates a swing low.
You may think that it’s a common retracement showing up in a downtrend.

 Neckline – during the retracement, the price reaches a point of resistance and
then goes back to test the newly formed support again. The local resistance is
what we call the neckline.

 Second low – bears are eager to see whether the first bottom provides enough
support. If the price breaks below the first low, we don’t have a double bottom
anymore. However, if the second bearish attempt fails near the support formed
by the first low, then we can observe the pattern clearly. Still, it’s too early to
enter the market.

 Break of neckline – once the market rejects the second low as well, the price is
rebounding again. If it manages to break above the neckline, which we previously
defined as resistance, then crypto traders would be interested in going long, as
bulls are in control from now on.

That’s it! That is how clear and straightforward the double bottom pattern is.
To recap, the Double Bottom Pattern (W-shaped) tells us the existing bearish trend has
likely bottomed out, and the price is about to reverse.
How to Use the Double Bottom?
We have already described the main course of action, but there is more to know. For
example, when you trade the double bottom, you should determine the patterns whose
gaps between the lows are larger. Such patterns are likely to be spotted easily, which
increases the chances of neckline breakout and thus a reversal.
So how does it work?
Breakout Techniques
When trading the double bottom, most traders would enter the market right after the
price breaks above the neckline, but you can try a different approach.
Instead of waiting for a clear breakout to form, you can stay calm and watch the market
a bit – the price can potentially reverse lower right after breaking above the neckline.
You want to see a visible strength from bulls instead of hesitation. So here is how you
can proceed:

 Identify a double bottom pattern in formation;

 Let the price action break above the neckline;

 Wait for a regional pullback – this may be a chain of range candles.

 Go long when the price breaks the swing high, which coincides with the neckline.

In other words, you should not hurry to open the buy order when the price is breaking
above the neckline but instead wait to see whether there is a pullback. This way, you’re
making sure that when you enter the market, bulls are strong enough.
When to Use Double Bottom?
You can trade the double bottom whenever you spotted it, especially when the existing
bearish trend reached the oversold level. For this, you can employ technical analysis
indicators like the Relative Strength Index (RSI) or Stochastic.
A good note is that the two lows might not always be at the same level. More often, the
second bottom might go lower as bears try harder to break below the previous low. But,
if the price manages to bounce back from the second low, the pattern remains valid and
is worthy of your consideration.
Please be wary that sometimes when such a pattern shows up, bears are trapped, as
they go short right after the price breaks below the first low. That is signaling bulls
because bears are demoralized when the price bounces back.
Also, when the second bottom is lower than the first one, it makes sense to check
whether the pattern doesn’t form a bullish divergence with the RSI, which will be an
even stronger signal for you.
What Is The Double Top Pattern?
The double top is a bearish reversal pattern that signals the end of an uptrend. It is
formed by two price highs form at the same level and a neckline that acts as local
support. Traders would wait for the price to break below the neckline, after which they
open short positions.
Identify a Double Top Pattern
You can observe double tops quite often, though some of them might not be ideal. The
pattern consists of three main elements:

 First high – this is when the price retreats for the first time;

 Second high – this is the second price rejection.

 Neckline – this is the temporary support that appears between the high.

How to Use the Double Top?

When the market reaches the overbought level, it might face resistance and form the
double top pattern. It starts with the first high when the price retreats until finding local
support. At this time, you can’t detect the pattern. After the first top, the price pulls back
until the support (neckline) and then bounces back to test the newly formed resistance
again. If the price can’t break above it, it’ll form a second high. That is when traders
wary of the trend and should get ready to short when the price breaks below the
neckline.
You can use the same breakout techniques as in the case with double bottoms but with
inverted rules.
Are Double Bottoms and Double Tops Suitable
for Crypto Trading?
Definitely yes! These two patterns are universal, and they work well in all markets,
including cryptocurrency. Still, the frequency of these patterns showing up might be
lower than in the forex market, for example. However, they have the same relevance
once you spot them on the chart.
Cryptocurrency traders rely very much on technical analysis, and the chart patterns can
provide the most powerful signals, mostly when used in combination with technical
indicators. Still, crypto traders should be more cautious, given that cryptocurrencies are
more volatile and unpredictable.
Double Top vs. Double Bottom: Differences
There is no fundamental difference between the Double Top and the Double Bottom,
except that they are a total opposite. In other words, what’s right for bulls in the case of
the Double Bottom, the same is true for bears in the case of the Double Top, as the
latter is a bearish reversal signal.
The double top is made up of two highs positioned at relatively the same level and a
neckline, which at this time represents local support.
When trading cryptocurrencies on large timeframes, the approach for each of the two
might differ, as the double bottoms should appear more often given that the crypto
market is striving to expand.
The Pros and Cons
The great thing about the two patterns is that they are effective on multiple timeframes,
be it M15, H1, H4, or D1. Thus, both day traders, swing traders, and even position
traders can use them. They are also universal patterns that work well with stocks, forex
pairs, commodities, and cryptocurrencies.
Just like any other technical pattern, they have their metrics, but it also comes with
drawbacks. The main disadvantage is that neither the double top nor the double bottom
can guarantee that the newly formed trend will consolidate. For example, in the double
bottom case, bears might find the courage to push prices lower for the third time and
even try to break below the support. Thus, traders should use risk management tools
like the stop loss.
Mistakes to Avoid
One of the main mistakes of those who trade the double bottom is to go long
immediately after the price breaks above the pattern’s neckline. In this case, if you’re
not cautious, you might end up trading against a larger trend. If the market is in the
middle of a strong bearish move and forms a “small” Double bottom pattern, it will most
likely ignore it and continue its general downtrend.
To avoid it, you should add Moving Average (MA) with period 20. If the price is below
the MA, you should not buy the neckline breakout. When trading the double top, the
price should not be above the MA with the period 20.
All in all, if you follow the mentioned rules, you’ll most likely succeed with these patterns
even if you are a beginner. However, make sure to practice them on a demo account
before trading with real funds.

 Spinning Top Candle – Has both bullish and bearish candlestick

 Marubozu Candlestick Pattern – Has both bullish and bearish candlestick

 Tweezer Bottom Pattern – Has both bullish and bearish candlestick

 Continuation Patterns – Determining a continuing trend