Get the weekly summary of crypto market analysis, news, and forecasts! This Week’s Summary The crypto market ends the week at a total market capitalization of $2,17 trillion. Bitcoin continues to trade at around $62,300. Ethereum experiences no changes and stagnates at around $2,400. XRP is down by 2%, Solana by 1%, and Dogecoin by 3%. Almost all altcoins are trading in the red, with very few exceptions. The DeFi sector decreased the total value of protocols (TVL) to around…
A Beginner’s Guide on Head and Shoulder Patterns in Crypto Trading
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We are over a decade now, and cryptocurrencies and blockchain technology are entirely in the limelight. However, one thing that remains a puzzle to many is how to maneuver this attractive nightmare. First, blockchain technology presents itself as one complex technology whose features unlock unprecedented capabilities across almost all sectors. Cryptocurrencies then take their place as a global topic for discussion as digital assets carrying the potential for creating overnight dollar millionaires.
There’s, however, one major downside, volatility, which is why many people are still losing huge chunks of money even as others reap big from them. These expert traders rely heavily on charts for their technical analysis, so we try to understand one of the common chart patterns, the head and shoulders pattern.
What are Head and Shoulder Patterns?
A head and shoulders pattern is usually a technical formation on cryptocurrency charts that signifies a trend reversal is near. The pattern is easily identified on charts as it is typically a baseline with three consecutive peaks of different heights. The middle peak is the highest, referred to as the head, while the lower left and right peaks form the shoulders.
What Makes a Head and Shoulders Pattern?
Trading charts form different patterns, which all carry a vital message for crypto traders. Before you can trade, it is essential to understand the movements in terms of the shape and the reasons behind the rallies and lows. For instance, a deep understanding of the head and shoulders pattern would help you understand different actions and trading decisions.
The head and shoulders pattern carries five attributes: uptrend, left shoulder, head, right shoulder, and neckline.
The Uptrend
The uptrend is the very first sign of the beginning of a head and shoulders pattern. It is the earliest trend in the entire pattern, and traders may not know what will follow. The price of the asset is usually rising until it gets to the point of exhaustion. Generally, traders should expect a massive reversal if an uptrend lasts longer.
The Left Shoulder
After exhaustion, the prices start to fall and even go below a new high low. The left shoulder is formed at this point, but traders still have to wait before determining a neckline.
The Head
The price starts to rise again from the new high and low. It marks the beginning of a short bullish rally, where the price shoots higher, becoming the pattern’s head. The price then falls substantially and breaks the previous low. The new high low provides the basis for drawing the neckline and the beginning of a wave of a bullish rally to form the right shoulder.
The Right Shoulder
The beginning of the right shoulder makes everything clear about a head and shoulders pattern. It signifies that buyers are tired, and the market could be preparing for a reversal. Its beginning makes it possible to draw the neckline, although it would be best to take it as a rough draft since the pattern is yet to be completed.
The prices rise steadily but do not break the preceding peak before they start to fall.
The Neckline
At this point, the pattern is complete, and the head and two shoulders are visible. It is the right time to draw the neckline support, a key element in trading breakouts. The neckline is usually marked by connecting the lowest points of the troughs.
Trading the Head and Shoulder Pattern
The best entry point for the head and shoulders pattern is when the price breaks the neckline support. Traders should have appropriate risk management strategies such as the stop-loss order. You can place the order just above the shoulder for a rising pattern and below the shoulder for a falling pattern. Traders can also make profit estimates by measuring the distance between the peak of the head and the highest low and subtracting the pattern’s height from the neckline breakout point.
Traders should, however, be aware that the head and shoulders pattern does not initially signify a bullish or bearish trend until the price breaks out. n, then, the price must break below the neckline and continue to fall to confirm a reversal. Conversely, if the pattern forms but the price fails to break below the neckline and instead begins to rally, the upward price trend continues.
The head and shoulders pattern could also form an inverted chart. The inverse head and shoulders pattern is usually an inverted normal pattern. It starts by creating a valley rather than a left shoulder, followed by an extended deeper valley, then another shallower valley. In the inverted pattern, traders put a long entry order above the neckline. Then, the target profits are calculated by measuring the distance between the highs and lows, just like in the normal pattern. The inverted pattern is confirmed when the price breaks above the neckline and keeps rising.
Summing Up
Btc
Bitcoin
$62.547
price
price
0.84959%
price change
From the explanation above, it is conclusive that the head and shoulder pattern could signify the end of a downward or upward trend. Therefore, it would be best for traders to wait for the price breakout before moving. Above all, traders should remember to use the neckline to know the time for an entry or exit and the right shoulder for stop-loss limit orders. The pattern’s height is the parameter for profit estimates, although this is simply an estimate.
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Adam Robertson
@Adamjr
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