Pattern trading, also referred to as formation trading, generally refers to an aspect of technical analysis, where you reach trading decisions based on chart patterns. It works on the basis that certain formations of market price movements on a chart will regularly repeat themselves. These distinctive crypto charting patterns are identified by connecting common price points over a given time frame.
Pattern trading is a useful tool, but one that should be used with caution. With technical analysis, you are examining charts containing historical data, but past trends will not necessarily be accurate in predicting future market patterns.
Pattern or formation trading is best used to gain general information relating to price movements so you can get a snapshot of what is happening on the crypto market. Different approaches will suit different market scenarios. For example, if the market is ranging, following a drop, without a clear direction, you may want to use the Wyckoff method, an approach that involves finding patterns that make it simpler to establish market bias.
There are a wide range of technical analysis tools and strategies that you can use to identify patterns and get a clearer picture of the market direction. Today, we are going to take a closer look at some high probability patterns.
High probability trading techniques refer to the use of specific strategies that provide a statistically significant likelihood of success, over a series of trades. When it comes to pattern trading, this is achieved through technical analysis, by identifying high probability trend setups that indicate a broader trend.
High probability pattern trading involves using chart patterns, a series of price actions that create a unique formation on the chart, as a signal of the probable future asset direction. The name often indicates the shape on the chart, such as the flag, cup and handle, head and shoulders, double top, double bottom, rectangle, triangle, pennant, wedge and more.
It is important to be able to identify when a trend is at its peak momentum or dying out so that you can know the type of position to open for a high probability trade. The best way to achieve this is to look for the point where the contrary movements are no longer substantially bigger than the trend average.
Pattern trading, as the name suggests, is all about recognizing and responding to chart patterns. Your trading will be most profitable when you are able to identify when a pattern is likely to continue and when it has started to lose momentum. For the highest probability of success, you will want to time opening your position for as soon as the momentum of the reversal starts to wane, and the price moves in the direction of the main, over-arching trend.
One great way to identify trends, and see what price movements are on the horizon, is through a combination of Bollinger Bands and RSI.
Bollinger Bands are a technical analysis tool for examining the price and volatility of an asset over time to determine the best time to enter or exit a trade. The bands are commonly used to identify whether an asset has been overbought or oversold. If the price continuously touches the upper band, it has been overvalued and if it keeps hitting the lower band, the reverse is the case.
In contrast, the relative strength index (RSI) is a momentum indicator. This means that calculates the magnitude of recent changes in the price of an asset to determine whether it has been overbought or oversold. If the RSI reading climbs above 70 then your digital asset may be deemed to have been overvalued. Conversely, a reading below 30 indicates that the asset has been undervalued.
When both types of technical analysis tool converge, this is a solid signal that the market is about to adjust.
When combined with Bollinger Bands, the RSI indicator serves to either support or undermine a price trend. For example, let’s say that your chosen cryptocurrency hits the upper Bollinger band price, while simultaneously getting a 70+ RSI reading, there is a high probability that your chosen digital asset has been overbought and now would be a good time to sell. Equally, if the price of your asset drops to touch the lower band and enters RSI territory of under 30, this is an excellent indication that the asset is undervalued, making it a great time to buy.
If all this technical analysis just seems far too… technical, you may wish to simplify your investing and use an automated trading system. In allowing your trading to be automated, you are saving a great deal of time in front of a screen, analyzing charts, and managing your trades Here at ArbiSmart, our crypto arbitrage algorithm does the analysis and implements the strategy on your behalf.
Crypto arbitrage works by taking advantage of price disparities between exchanges. These are brief windows, in which a coin is available at different prices simultaneously. ArbiSmart’s algorithm tracks 35 different exchanges at once, 24/7, to identify price discrepancies. It automatically buys the coin on the exchange where the price is lowest and then sells it on the exchange where the price is highest to earn a profit.
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Since crypto arbitrage isn’t impacted by sudden shifts in market direction, you can continue to earn a steady, reliable return even in a crypto bear market. Price differences will continue to occur with the same regularity whatever is happening to the price of Bitcoin and Ethereum, making it a popular hedging opportunity for digital asset holders.
If you want to learn more about technical analysis or a variety of other crypto topics, from yield farming and stablecoins to hard forks and wallet security, check out the wide range of articles available on the ArbiSmart blog.
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