Pattern trading & price action: What you need to know
What are patterns and how can you identify them? Learn all about trading and price action!
Firstly, what are patterns and why are they important when it comes to trading? Patterns are the distinctive formations created by the movements of asset prices on a chart. A pattern is identified by a line that connects common price points, such as closing prices or highs or lows, during a specific period of time. Traders need to identify patterns as a way to anticipate the future direction of an asset’s price. Patterns are the foundation of technical analysis.
How patterns work
Patterns, perhaps better known as trading patterns, can occur at any point in time. While trading patterns may be simple to detect in hindsight, spotting them in real time is a much larger challenge. There are numerous types of patterns in technical analysis, including the cup and handle, ascending/descending channels, and the head-and-shoulders pattern.
There are two primary types of stock analysis: fundamental and technical. Fundamental analysis looks at the specifics of an asset. External factors such as news play a very big role. Technical analysis is mostly involved with pattern recognition, regardless of performance. These patterns are then used to uncover pricing trends. Fundamental analysis can help determine what to buy, while technical analysis can help determine when to buy. Well-rounded traders like you will apply both types of analysis, right?.
Support & Resistance
Part of analyzing chart patterns, these terms are used by traders to refer to price levels on charts that tend to act as barriers, preventing the price of an asset from getting pushed in a certain direction.
Support is a price level where a downtrend can be expected to pause or bounce due to a concentration of demand or buying interest. As the price of assets drop, demand for that asset increases, thus forming the support line. Meanwhile, resistance zones arise due to selling interest when prices have increased.
Once an area or zone of support or resistance has been identified, those price levels can serve as potential entry or exit points because, as a price reaches a point of support or resistance, it will do one of two things; bounce back away from the support or resistance level, or break past the price level and continue in its direction until it hits the next support or resistance level.
The timing of some trades is based on the belief that support and resistance zones will not be broken. Whether the price is halted by the support or resistance level, or it breaks through, traders can "bet" on the direction and can quickly determine if they are correct. If the price moves in the wrong direction, the position can be closed at a small loss. If the price moves in the right direction, however, the move may be substantial.
Types of traders & strategies
Traders who use the day trading strategy are called day traders in the market. On the other hand, people who use the scalping strategy to scalp the market are called scalpers. Swing traders are traders who hold trades for months. The main difference is the timeframe the traders use to trade in the market.
Scalping is a trading style that specializes in profiting off of small price changes and making a fast profit off reselling. Scalping is a term for a strategy to prioritize making high volumes off small profits.
Scalping requires a trader to have a strict exit strategy because one large loss could eliminate the many small gains the trader worked to obtain. Scalping is based on the assumption that most assets will complete the first stage of a movement. But where it goes from there is uncertain. After that initial stage, some assets cease to advance, while others continue advancing.
A day trader is broadly defined as someone who does not carry their trades overnight, thereby confining the endurance of any positions to a single day. Unlike scalpers who place dozens of trades per day, a day trader would sit on the sidelines, waiting for the best trade setups to manifest. Day traders usually wouldn’t place more than a few trades per day and if there are no suitable opportunities, sometimes, none at all.
Although it depends on how quickly the market reaches their target price, day traders don’t keep their positions open for longer than several hours and always flatten their account before the end of the day to avoid rollover fees and wild volatility.
The strategy of swing trading involves identifying the trend, then playing within it. For example, swing traders would usually pick a strongly-trending asset like Bitcoin. In the case where Bitcoin has dropped to support, bounces to the upside, swing traders will usually place a buy order at support and ride the trend, taking profits before sellers take control at resistance.
Such buying and selling methods are repeated to reap gains. In cases where assets break through resistance and form continuation trends, traders buy the breakout and secure profits before the trend reverses at the next resistance. Typically, swing traders are “trend followers,” if there is an uptrend, they buy. Swing traders would hold their cryptocurrency assets for a few days to a few weeks (near-term)—sometimes even to months (intermediate-term), but typically lasting only a few days.
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There is no such thing as a 100% safe investment, and each decision has its risks. In any case, it is up to you to decide. All content and topics covered are mere opinions and do not constitute investment advice. Trading and investing in Bitcoin or any cryptocurrency carries a high level of risk. We do not assume any responsibility for actions taken upon reading any of our articles. ChainEX is not a financial advisory firm, investment manager, or financial consultant.