Pattern trading, or formation trading, refers to making trading choices primarily based on standard chart styles.
Which crypto markets are best for pattern trading
You’ll most customarily see pattern trading on slower markets consisting of inventory markets, and plenty of crypto traders use formation buying and selling as well.
Pattern trading is notoriously connected with retail traders who trade patterns out of ignorance, and often lose.
For the most part this is accurate with patterns like “head & shoulders” that are too vague to use reliably.
Why is it that crypto traders lose with pattern trading? Markets do repeat their shapes with regularity. Market stages and seasonality exists.
In crypto this can be the bitcoin halving as an example. It repeats every 4 years with perfect regularity. Every time the halving brings about a supply shock. As long as Bitcoin is relevant to anybody, halving is bound to have some effect.
The fault lies not in patterns trading though, it’s in the way patterns are used.
The number one danger in using technical analysis is that recognizing historic developments might not help to expect such developments within the future.
Better approach is to treat the pattern as a trend roughly showing the state of the market.
- Is the market trending or ranging firmly round a median?
- Is a trending market?
- Is there a bull-flag?
- Is the market ranging after a downtrend?
And so on.
There are specific patterns and techniques developed to help you read specific situations.
Think of technical patterns as of a filter.