Module 4: Technical Analysis for Crypto
Chart Patterns
Chapter 12 of 16 · about 6 minutes
12.1 Shapes in the chart
Mint saw a chart posted with "head and shoulders confirmed" written across it, and a target far below the current price. Another post showed "bull flag" with a target far above.
"Where do these shapes and targets come from?" Mint asked.
"Chart patterns are larger versions of the candlestick stories from Chapters 3 and 4," said Hash. "Instead of two or three candles, they play out over weeks or months. And yes, they come with targets, which you should treat as rough guides, not promises."
12.2 Two families
Chart patterns fall into two main groups.
Reversal patterns suggest the current trend may end. Continuation patterns suggest the trend is pausing before resuming.
| Reversal patterns | Continuation patterns |
|---|---|
| Head and shoulders | Flags |
| Inverse head and shoulders | Pennants |
| Double top and double bottom | Symmetrical triangles |
| Rising and falling wedges (often) | Ascending and descending triangles (often) |
12.3 Head and shoulders
A head and shoulders pattern forms at the end of an uptrend, with three peaks:
- Left shoulder: a peak, followed by a pullback.
- Head: a higher peak, followed by a pullback to around the same level.
- Right shoulder: a lower peak, roughly matching the left shoulder.
The line connecting the two pullback lows is the neckline. The pattern is confirmed when price closes below the neckline. In market structure terms (Chapter 6), the right shoulder is a lower high, and the neckline break is a lower low.
Measured move. The traditional target is the height of the head above the neckline, projected down from the neckline.
| Price | |
|---|---|
| Head (highest peak) | $105,000 |
| Neckline | $95,000 |
| Height | $10,000 |
| Target after neckline break | $95,000 − $10,000 = $85,000 |
Chapter 12 · Head and shoulders target
Price forms a left shoulder, a higher head at $105,000, and a lower right shoulder, with both pullbacks ending at a neckline at $95,000. The head stands $10,000 above the neckline. Price then closes below the neckline and falls along a dashed path, and the same $10,000 is projected down from the neckline to a target of $85,000.
An inverse head and shoulders is the mirror image at the end of a downtrend, with the target projected upward after a break above the neckline.
12.4 Double tops and double bottoms
A double top forms when price reaches the same high twice and fails both times, with a pullback in between. It's confirmed when price breaks below the pullback low.
A double bottom forms when price reaches the same low twice and holds, confirmed when price breaks above the middle peak.
The measured move works the same way: the distance from the tops (or bottoms) to the middle level, projected from the breakout.
| Double bottom example | Price |
|---|---|
| First low | $2,500 |
| Middle peak | $2,900 |
| Second low | $2,520 |
| Height | $400 |
| Target after breaking $2,900 | $3,300 |
12.5 Triangles
Triangles form as price ranges narrow, with highs and lows converging.
Ascending triangle: flat resistance on top, rising support below. Buyers are getting more aggressive with each dip. Often breaks upward.
Descending triangle: flat support below, falling resistance above. Sellers are getting more aggressive. Often breaks downward.
Symmetrical triangle: falling highs and rising lows. Indecision, often breaking in the direction of the previous trend.
Measured moves for triangles typically use the height of the triangle's widest part, projected from the breakout point.
As with the Bollinger squeeze (Chapter 11), triangles show volatility compressing before a potential expansion.
12.6 Flags and pennants
A flag forms after a sharp, strong move, called the flagpole. Price then drifts in a small channel against the direction of the move, like a flag hanging from a pole. When price breaks out of the flag in the direction of the original move, the trend often continues.
A pennant is similar, but the consolidation forms a small symmetrical triangle rather than a channel.
The traditional target is the length of the flagpole, projected from the breakout.
| Bull flag example | Price |
|---|---|
| Flagpole start | $80 |
| Flagpole top | $100 |
| Flagpole length | $20 |
| Flag breakout | $96 |
| Target | $96 + $20 = $116 |
Flags are common in crypto, where strong trending moves often pause briefly before continuing.
12.7 Wedges
A rising wedge has both support and resistance rising, but converging, with each push higher becoming smaller. It often appears near the end of an uptrend and typically breaks downward.
A falling wedge has both lines falling and converging, and typically breaks upward.
Wedges show a trend continuing but losing strength, a visual version of momentum divergence (Chapter 9).
12.8 How reliable are patterns?
Node raised the obvious concern. "How often do these targets get hit?"
"Less often than social media suggests," said Hash.
Chart patterns have real limitations:
They're subjective. Different traders draw different necklines, triangle boundaries, and flagpoles.
They're clearest in hindsight. Many patterns that look perfect afterward were ambiguous while forming.
Many fail. Patterns fail regularly, and a failed pattern can produce a sharp move the other way, as traders who acted on it rush to exit.
Targets are rough. Measured moves are a traditional guideline, not a law. Price may fall short, overshoot, or never reach the target.
To improve your odds:
| Practice | Why |
|---|---|
| Wait for confirmation, such as a candle close beyond the neckline or boundary | Reduces acting on patterns that never complete |
| Check volume on the breakout | Genuine breakouts usually have higher volume (Chapter 7) |
| Prefer higher timeframes | Patterns on daily and weekly charts are more meaningful |
| Consider the bigger trend | Continuation patterns in the direction of the main trend tend to work better |
| Plan for failure | Know where the pattern is invalidated and place your stop there |
12.9 Failed patterns as signals
When a well-known pattern fails, the result can be powerful. Imagine a head and shoulders that breaks below the neckline, triggers many short trades, and then quickly reverses back above the neckline. Those short sellers are now losing, and their stop-losses push price higher. Some traders specifically look for these failed patterns.
"So a pattern failing is information too," said Mint.
"Everything the market does is information," said Hash. "The skill is not getting married to your first interpretation."
12.10 Try it yourself
On a daily or weekly chart of Bitcoin or Ethereum, find one example each of a double top or bottom, a triangle, and a flag. For each, calculate the measured move target and check whether price reached it. Then find one pattern that failed and describe what happened next.
Key takeaways from this chapter
- Chart patterns are larger versions of candlestick stories, forming over weeks or months.
- Reversal patterns include head and shoulders, double tops and bottoms, and wedges.
- Continuation patterns include flags, pennants, and many triangles.
- Measured moves project the pattern's height from the breakout as a rough target.
- Patterns are subjective, clearest in hindsight, and fail regularly.
- Wait for confirmation, check volume, prefer higher timeframes, and know where the pattern is invalidated.
- Failed patterns can produce sharp moves in the opposite direction.