When I first entered the crypto world, I made about 4 million with a principal of 50,000. I graduated from college without ever working. I've just been playing in Kunming and Dali, not buying a house or a car. Monthly expenses are 1,500.
How I made money:
1. With a principal of 50,000, I did projects in college, affiliate marketing, order brushing, delivery, APP tasks, various small tasks, and saved up 50,000.
2. Entering the crypto world, I think BTC is too expensive, so I've been playing with ETH+, which has leverage, and then there's altcoin spot trading. Choose coins, manage positions well. Just execute this simple idea continuously; when the market is bad, I lose a little, and when the market comes, I earn a lot.
Why enter the crypto world? If you want to change your destiny, you must try the crypto world. If you can't get rich in this world, then ordinary people will never have a chance in their lives.
As someone who has weathered three bull and bear market cycles, let me tell you: Here are three things you absolutely must never do in the cryptocurrency world.
1. Don't touch contracts, don't hold losing positions, and don't chase after speculative stocks.
2: The worst thing you can do is to frequently buy and sell, chasing highs and selling lows*.
3. The worst thing you can do is put all your coins in one wallet address or exchange, which is more dangerous than playing futures with leverage.
Below, I'll share some pure, practical information on the most important things to do in the crypto world.
Yesterday, I had tea and chatted with a cryptocurrency trading guru. He said he started with 300,000 RMB in the crypto world, lost so much that he was left with only 70,000 RMB, and now he has assets worth tens of millions. What changed his life was his persistence in learning and improving his knowledge. He summarized six valuable insights, and I hope they will inspire those who read this.
1. Don't rush to cut losses if the market drops sharply in the morning. This usually indicates an overreaction to negative news from the previous night. Wait for the market to recover and reverse. Don't panic if the market rallies sharply at the end of the day.
Blindly chasing rising prices is a common tactic used by some major players to test the market and lure in more buyers, then sell at a lower opening price the next day to accumulate more shares.
2. Make good use of the trading volume indicator; volume can reveal future market trends. A sustained rise with decreasing volume indicates strong control by major players, while a fall with decreasing volume suggests that panic selling hasn't occurred and the bottom hasn't been reached, so further declines are likely.
3. Learn to identify the top structure of a sector. Typically, a sector's upward trend forms a five-wave pattern: the first wave attracts followers, the second wave consolidates and adjusts, the third wave is the main upward wave, the fourth wave is complex and shows divergence, and the fifth wave pushes up the price to distribute shares. In this process, the third wave has the largest increase, followed by the first wave, and the fifth wave has the smallest. However, market conditions are constantly changing, and there are many cases where the five-wave pattern doesn't even exist. Don't memorize it by rote. If you find that the leading stock in a sector has stagnated and the subsequent rebound doesn't continue the previous momentum, it's highly likely that the sector has topped out.
4. During each period of Bitcoin's peak acceleration, we will see a certain sector of similar stocks surge, thus triggering a reversal in Bitcoin's trend. Just check whether the performance of the major leading stocks has stopped falling and started to rise, and the index will follow suit and rebound.
5. Focus and specialization are key to getting started, especially for newcomers to the online market. Mastering one strategy and its techniques will yield far greater results than trying to learn everything at once. Trying to do too much at once will lead to failure, and a lack of focus will easily result in being taught a lesson by the market. Don't switch strategies arbitrarily; settle down and learn steadily. You'll gradually improve and achieve stable profits before learning more techniques to truly integrate them.
6. Price movements can be categorized into three structures: upward, downward, and sideways. During an upward trend, the success rate of all technical indicators increases, while during a consolidation phase, [the following is a continuation of the previous sentence, likely due to a formatting error].
Buying low and selling high is more efficient when using support and resistance levels. In a downtrend, most indicators become ineffective. Different tools should be used to deal with different stages to ensure a confident approach.
Three Iron Laws
First, never chase after a price surge; do the opposite. When others are too scared to act and are panicking to sell,...
When selling, we should be bold and greedy in entering the market; but when others are blinded by the profit-making effect and frantically chase the highs, we must remain calm. Developing the habit of buying when the price drops is crucial for profitability!
Second, never place an order too long. While it may seem like you can wait for a better price, placing an order too long often leads to missing out on fleeting opportunities and letting profits slip away. So never make this mistake.
Third, never trade with your entire capital. If you're fully invested and the market moves against you, you'll find yourself in an extremely passive position. The cryptocurrency market offers countless opportunities; being fully invested means giving up numerous other potential profit opportunities, resulting in an excessively high opportunity cost and extremely high risk.
Six tips for short-term cryptocurrency trading
Firstly, when the price of a coin is consolidating at a high level, don't rush to enter the market; it will usually reach new highs later. Conversely, when the price of a coin is consolidating at a low level, it is highly likely that...
It will continue to bottom out and reach new lows. Therefore, it is essential to patiently wait for the direction of the market to become clear before taking any action, to avoid losses due to blind trading.
Secondly, never trade during a sideways market. This seemingly simple point is the root cause of many people losing money in cryptocurrency trading. During a sideways market, the market direction is unclear.
It's clear that trading at this point is like trying to find your way in a fog—extremely risky.
Thirdly, when trading using candlestick charts, remember this little trick: buy when the daily candlestick closes as a bearish candle and sell when it closes as a bullish candle. This method of operation...
The method can help you better grasp market fluctuations and increase your probability of making a profit.
Fourth, when the downward trend slows, the rebound is often relatively weak; however, if the decline accelerates, the subsequent rebound is usually stronger.
The impact is relatively large. Understanding this pattern will allow you to make more rational decisions under different market conditions.
Fifth, use a pyramid-style buying method to build a position. This is a proven strategy in value investing; specifically, it involves buying in line with the price of the coin.
When prices fall, gradually increase your purchases. This will both reduce costs and effectively control risk.
Sixth, after a currency has experienced a sustained rise or fall, it will inevitably enter a sideways trading range. During this sideways trading phase, avoid impulsive purchases at high levels.
Don't sell all your holdings at the bottom, and don't blindly buy all your holdings at low prices, because after consolidation, there will definitely be a trend reversal. If it's a downward reversal, you have to act quickly.
Close out positions and cut losses immediately; if the market reverses upwards, it's not too late to add to positions at the appropriate time. In short, you must respond flexibly according to market changes.
Choosing a timeframe is a crucial decision for day traders, but there's no single right answer. The appropriate timeframe varies from person to person.
The differences depend on their trading strategies and how they prefer to spend their trading hours (relaxed or intense). Below are the intraday trading patterns for each session.
Learn the advantages and disadvantages of the Easy Timeframe* so you can decide which cycle is right for you.
Day traders can choose to trade using a single timeframe or multiple timeframes. Here are some common timeframe examples: 1 minute.
Clock, 5 minutes, 15 minutes, 30 minutes, 60 minutes, and Tick chart+ (based on a fixed number of trades).
Smaller timeframes (e.g., 1 minute): provide more detail and are suitable for fast-paced trading, such as scalping.
Longer timeframes (e.g., 15 minutes): Fewer details, smoother charts.
5-minute cycle: somewhere in between, balancing detail and smoothness.
It is recommended to analyze using multiple timeframes: look for trading opportunities in longer timeframes, then switch to shorter timeframes to confirm.
Set precise entry points and smaller stop-loss levels.
1. On the 60-minute chart, a triangle pattern is approaching a breakout point.
2. Switch to a 1-minute chart and place your stop-loss order below the recent swing low on the 1-minute chart. This is generally more suitable than placing a stop-loss order on a 60-minute chart.
The low point is closer to the current price.
3. Smaller stop-loss orders mean larger position sizes and higher potential profits.
4. Use the target profit level on the 60-minute chart. This achieves a higher risk-reward ratio. Switch to [position/strategy] when the price approaches the target.
Use a 1-minute chart and exit when the price reverses to avoid giving back too much profit.
Find and observe patterns on longer timeframes; patterns on shorter timeframe charts appear and disappear quickly. If you need a larger...
From a different perspective, we simply need to zoom out of the chart (compress the chart).
Advantages and disadvantages of various intraday trading timeframes
The chart can be broken down into different time frames, including 1 minute, 5 minutes, 10 minutes, 15 minutes, and others beyond these ranges.
Timeframes. We will analyze these timeframes one by one, discussing their advantages and disadvantages, and the suitable trading styles for each.
Please read the analysis for each time frame carefully, as they are compared with each other.
Before we begin, here is a chart showing the differences between 1-minute, 5-minute, and 15-minute charts. They all show the same day.
The price data is from the 11-hour period, but there are significant differences in the details.
There's no inherent superiority of one over the other, but a particular timeframe might be more suitable for you because it may offer more trading opportunities, or a chart...
The table looks clearer, and combining multiple timeframes is also possible. We'll discuss how to use multiple timeframes later.
1-minute time frame
A 1-minute timeframe may be suitable for those who like to observe the details of price movements and want to enter and exit the market through short-term trades (lasting only a few minutes).
If you want to trade on a 1-minute chart, build and test your strategy on a 1-minute chart.
Trading on a 1-minute chart requires almost constant attention because a candlestick is generated every minute, and trading signals may appear frequently (depending on the strategy).
Because price candlesticks appear frequently, traders on 1-minute charts often have the opportunity to make more trades than traders on longer timeframes.
In a profitable system, more trades mean more profits and faster account compounding. However, without a profitable system...
Such strategies can lead to rapid losses for traders.
For trades based on smaller candlesticks (rather than higher timeframes), stop-loss and take-profit targets are often more important for traders using higher timeframes.
Use smaller stop-losses, but this isn't absolute; traders can use smaller stop-losses on a 1-minute chart and pursue a higher risk-reward ratio.
Waiting for larger profits might mean reducing the number of trades throughout the day.
Because the stop-loss may be small, the position size can be very large.
Foreign exchange trading positions may require leverage of 20, 50, or even 100 times, while still keeping trading risk within the account balance.
Below 1%. Many brokers currently offer leverage of 100x or even higher.
In the US stock market, intraday trading positions are typically (but not always) limited to 4x leverage. This means that even per trade...
By taking on only 1% or 0.5% of your account balance, most of the funds in your account (including maximum leverage) are readily available (you don't need to take on as much risk, and you can take on less). A single day trade might consume most of the available funds in your account, leaving very little for other trading activities, such as swing trading. You can choose to allocate a specific amount to day trading and use the remaining funds for other trades.
The trade uses a fixed 2:1 risk-reward ratio.
The following intraday stock trading charts illustrate some trades and potential trading opportunities (missed) using a 2-minute chart.
It has slightly less detail than a 1-minute chart, but more detail than a 5-minute chart.
Key takeaway: 1-minute charts are suitable for those who want to maximize their trading time through more trades, typically using larger position sizes.
And smaller stop-loss and profit targets (but targets can be increased if needed).
5-minute time cycle
A 5-minute chart may be suitable for those who focus on the larger intraday trend and do not need to view the opening price, high price, and low price every minute.
They don't want the closing price, but rather people who want to get aggregated data every 5 minutes.
If you want to trade on a 5-minute chart, build and test your strategy on a 5-minute chart.
Trading on a 5-minute chart requires focus, but not as constant attention as on a 1-minute chart. A candlestick forms every 5 minutes, therefore the data...
The time intervals between points are longer. If traders wait for the candlestick to close before acting, this means there will be a move at least every 5 minutes.
The movement usually lasts longer.
Traders using 5-minute charts typically make fewer trades than those using 1-minute charts because there are fewer actionable data points (candlesticks).
In a two-hour trading window, there may be one or two trades, or even more, but fewer than the number of trades on a 1-minute chart.
Stop-loss and profit targets are usually larger than on a 1-minute chart, which is neither good nor bad in itself, but usually means fewer trades per day.
Because the candlesticks on a 5-minute chart are larger, position sizes are typically smaller than on a 1-minute chart, meaning the distance between chosen entry and exit points can be greater.
Because position sizes are slightly smaller than on a 1-minute chart, traders may be able to hold multiple positions simultaneously. Similarly, you can set different positions for each intraday trade.
It is easy to allocate a specific amount to ensure that there are enough funds for all positions that you wish to hold.
The trade uses a fixed 2:1 risk-reward ratio.
Each section of the EUR/USD chart represents the same day, only with a different timeframe, which affects the number of trades and entry points.
Here are some examples of intraday stock trading using 5-minute charts:
Key takeaway: 5-minute charts are suitable for traders who want to focus on larger intraday price movements, receive fewer data points, and use medium position sizes (smaller than 1-minute charts, but larger than longer timeframe charts).
10-minute or 15-minute chart time period
10-minute or 15-minute charts are suitable for those who want to see the main trends and price fluctuations throughout the trading day, rather than every small fluctuation (such as 1-minute or 5-minute charts).
If you want to trade on a 15-minute chart, build and test your strategies on a 15-minute chart.
Trading on 10-minute or 15-minute charts requires less attention because candlesticks take longer to form. If you wait for the candlestick to close (which is not mandatory), there should be at least a 10- to 15-minute interval between each possible action.
Traders using this timeframe might only make one or two trades per day, especially if they are trading within a two-hour or shorter time window.
There may be many days without trading signals, and trading in this time frame may require more time in front of the screen because the time to enter and exit a trade is longer.
Stop-loss and profit targets are usually set larger than on a 5-minute chart. This is neither good nor bad in itself, but it usually means fewer trades per day.
Because the candlesticks on 10-minute or 15-minute charts are larger, position sizes are typically smaller than on 5-minute charts, which means stop-loss distances can be larger.
Because there are fewer trades and smaller position sizes, it is easier to hold multiple positions at the same time.
Key takeaway: 10-minute or 15-minute charts are suitable for traders who want to focus on larger price movements throughout the day. They don't mind waiting longer to open and close positions, they prefer clearer price action, and they may only make one or two trades in several hours of trading.
Summary and comparison of the best intraday trading timeframes:
Because 1-minute candlesticks form the fastest, more trading opportunities are usually found on 1-minute charts. The 1-minute chart is also the fastest, as a new candlestick forms every minute, providing new information.
The 1-minute chart allows for the largest position size because the stop-loss is very small; we can use all our funds with leverage, risking only 1% of our account per trade, which means the capital expenditure is also very high. As mentioned before, if you risk a fixed percentage of your account per trade, you might end up putting all your funds into a single trade with a small stop-loss.
Interestingly, 1-minute charts require the least amount of capital because stop-loss orders are typically the smallest, meaning that even small accounts usually face minimal risk.
It can also be controlled at 1% or lower. As the stop loss size increases, the amount of capital required for trading in a risk control manner will also increase.
The constant creation of new candlesticks every minute means that our mental focus is highest on 1-minute charts, while on longer timeframes, focus decreases as new candlesticks/information appear less frequently.
Multi-timeframe analysis
Some traders use only a single time frame for trading, while others use multiple time frames to look for trading opportunities.
When trading on a single timeframe, if you see a trading opportunity on a particular timeframe, you can trade directly without checking other timeframes for confirmation.
Multi-timeframe trading means you can view charts with longer timeframes and use them as filters for trading with lower timeframes.
For example, a trader might look at a 5-minute or 10-minute chart to determine the overall trend direction, and then look for tops on a 1-minute chart.
Entry opportunities based on trends. Alternatively, they can use a 30-minute chart to determine the overall direction and then use a 5-minute or 10-minute chart for entry.
The chart below shows the 60-minute chart of Draftkings (DKNG) on the left and the 5-minute chart on the right. The 60-minute chart provides a potential trading opportunity, and the 5-minute chart is used to find entry and stop-loss levels. The 60-minute chart also provides some reference for the potential price movement, although we cannot determine the specific range within a single day (for intraday trading).
There is no perfect combination or answer. A profitable trading system can be built on any time frame or any combination of timeframes, but understanding the advantages and disadvantages of each time frame will hopefully help you decide which one is best for you.
Alternatives to intraday trading timeframes – Tick charts and Renke charts+
Time periods are often discussed as the only chart option, but this is not actually the case; there are other chart types based on other factors.
Ticks: Based on a fixed number of trades. Once a certain number of trades are reached, a candlestick is generated. This means that during busy trading periods, candlesticks may form quickly, but during quiet trading periods, it may take several minutes or even hours for a candlestick to form.
I like to use this chart when trading futures contracts.
Renke's Circles: A brick-and-mortar chart based on price movements. A brick forms once the price has moved a certain distance. As long as the price continues along this path...
If the price moves in the same direction and reaches the desired range, the brick will continue to form. If the price reverses and reaches a range equivalent to two bricks, the brick...
It will change color and start moving in the opposite direction. The bricks are based on price changes, not time.
These are just a few examples of existing alternative chart types.
The time frame I use in trading
Forex intraday trading: I use a 1-minute chart.
For intraday stock trading: I use a 1-minute chart, but if I'm trying to capture larger fluctuations, I might switch to a 2-minute or 3-minute chart.
Stock swing trading: I only use daily charts, and occasionally I will check other timeframes if I have time.
Forex swing trading: I look for patterns on daily, 4-hour, and hourly charts. I usually base my analysis on the single timeframe I'm observing.
I trade on longer timeframes. Sometimes, if I find a trading opportunity I like on these longer timeframes, I might switch to a 5-minute timeframe.
Use clock charts to find entry points and maximize my risk-reward ratio (stop loss based on 5-minute chart, target based on 4-hour or hourly chart, depending on the time frame used).
How to Identify Trend Reversal Patterns (The Ultimate Guide)
1. Introduction
Observing the market at a certain time, you noticed a beautiful cup and handle pattern, as shown in the picture below.
Therefore, you made a trade, anticipating a significant upward trend in the market based on your analysis. However, what followed...
However, the market's direction was unexpected. It seemed the market had anticipated your trading intentions, but the result was completely contrary to your expectations, as shown in the following diagram.
This kind of situation doesn't happen occasionally, but frequently. If you frequently encounter this problem and seek solutions, then you've already entered a stage where...
The right field.
This guide will teach you the necessary knowledge and strategies to effectively address these patterns and translate them into trading advantages.
Momentum. The following is an overview of the core content of this guide:
(1) Definition and operating mechanism of trend reversal pattern;
(2) Key techniques for identifying high-probability trend reversal patterns;
(3) Simple trading strategies for each trend reversal pattern;
(4) Step-by-step operation process of the trading trend reversal mode.
2. Revealing the Hidden Nature of Trend Reversal Patterns: Exploring Their Definition and Operating Principles
The specific nature of the trend reversal pattern can be understood as follows: Imagine you are attending a social party, and suddenly the music changes from a melodious jazz tune...
The music transformed into the rhythmic salsa. Trend reversal patterns operate on a similar mechanism, playing a similar role in the market.
Similar to the role of a DJ, these patterns fundamentally indicate an impending shift in market trends, as shown in the diagram below.
Therefore, when you observe these patterns exhibiting their unique "rhythm" on a chart, as shown in the image below.
You realize that, based on how these patterns perform on the charts, it's time to take action and adjust your trading strategy accordingly.
Furthermore, although I have shown you diagrams of trend reversal patterns, one cannot help but ask, what are the common trend reversal patterns? Here, when I say "common," I mean that these basic trend reversal patterns are ubiquitous regardless of which market or timeframe you are observing, and they appear in various forms across a wide range of market environments: head and shoulders, cup and handle, double bottom.
Next, I will demonstrate the specific manifestations of these patterns in actual market trading. First, let's discuss the "Head and Shoulders" pattern, as shown in the image below.
However, this situation occurs when the market experiences a sharp downtrend, as shown in the following figure.
Subsequently, the market experienced a sudden and dramatic change, as shown in the figure below.
Clearly, a false breakout has occurred. Measures must be taken in this situation, as shown in the diagram below.
The head and shoulders pattern gradually forms by reversing the current market trend by hitting those insignificant stop-loss points. Next, we will explore the "cup and handle" pattern, as shown in the diagram below.
The "cup and handle" pattern is a technical analysis pattern that foreshadows an upward market trend. Its structure resembles a teacup with a delicate handle. While its appearance may seem familiar, it is one of the most straightforward and predictable trading patterns. This is because the trading process associated with this pattern is like a thrilling rollercoaster ride. Before the final ascent, investors will experience a precipitous drop, followed by a rise, and then a period of stable plateau, as shown in the diagram below.
Finally, we will discuss the "double bottom" pattern, as shown in the figure below.
This pattern can be seen as a representation of the market that I have hit a low point, but now I am poised to launch a stronger rebound. This is similar to the principle of a trampoline, where the buying power has not been defeated, as shown in the figure below.
Their importance is self-evident; these patterns are the primary knowledge points you must master in order to stay ahead in the trading field.
At the same time, a crucial question arises: why invest time and effort in studying these trend reversal patterns? This is because these patterns hold the key to unlocking a treasure trove of high-certainty or low-risk trading opportunities. They act like a treasure map, guiding you through turbulent market waters, helping you avoid potential risks and discover profitable trading opportunities. Furthermore, by mastering these patterns, you can quickly and easily analyze market dynamics and make informed decisions. It is hoped that you will recognize that these patterns are not merely temporary tools, but the lifeline to your success in price action trading.
3. Cracking the Code: How to Discover High-Probability Trend Reversal Patterns
Revealing the proportional relationship between trends and patterns is key to identifying high-probability trend reversals and is a crucial clue. This clue will be further elaborated upon below.
(1) Determine the ratio of trend to pattern
The trend-to-pattern ratio is determined by comparing the number of price bars during a trend progression with the number of price bars in a trend reversal pattern, as shown in the diagram below.
As you can see, this ratio is like a hidden code, and most traders fail to realize its importance. However, at the same time, it is a numerical race that distinguishes those traders who stick to the trend from those who are experts at spotting trend reversals.
Some trends are short-lived, lasting only a few price bars in length, as shown in the figure below.
Although some trends continue, as shown in the figure below.
Similarly, trend reversal patterns also exist, although some patterns are subtle, as shown in the figure below.
Meanwhile, some other patterns are so striking that they are large enough to overturn current mainstream trends, as shown in the figure below.
At this moment, you might be wondering: "Can we achieve our trading goals simply by using trend reversal patterns?" "What is the significance of studying this concept?" The following sections will further answer these questions.
(2) Trend to Pattern Ratio: Trend continuation (at least 2:1)
If the trend has more bars compared to the trend reversal pattern, as shown in the figure below.
Do you think this double bottom pattern has enough power to reverse a trend? Not at all. It's like an ant trying to stop a moving train; the trend-to-pattern ratio is a staggering 2.85:1. Therefore, if the trend-to-pattern ratio exceeds 2:1 (meaning the number of price bars in the trend is at least three times the number of bars forming the pattern), then the dominant trend is very likely to suppress this relatively small pattern.
(3) Trend pattern ratio: Reversal (at least 1:2)
Compared to the trend reversal pattern, the trend has fewer bars, as shown in the figure below.
For example, when the trend-to-pattern ratio is 1:3, if you observe such a ratio, then the pattern is highly likely to trigger a new upward trend, i.e., a trend reversal. You might ask, why are these trend-to-pattern ratios so important? By mastering this ratio, you will gain the ability to predict potential market movements.
You no longer rely solely on trend reversal patterns themselves, but are able to comprehensively consider the overall price behavior of the market.
By now, you have realized that you should not blindly rely on common trend reversal patterns without analyzing the strength of the trend.
But what if I told you there exists a pattern that transcends all other trend reversal patterns? A "universal" pattern that works against any trend reversal pattern? Does that pique your interest? If so, please read on.
4. Unlock the Key: Master Trend Reversal Patterns with Simple Techniques
The simple technique mentioned here refers to structural breakage. This technique will enable you to confidently and accurately navigate dynamic markets and master trend reversal patterns, as shown in the diagram below.
What is structural fracture?
Imagine you've built a house with a solid foundation, only to suddenly observe that the walls have shifted, forming a new structural shape. This is a classic example of a structural breakout. In trading, this occurs when the price breaks through an established trend line and subsequently forms a flag pattern breakout, as shown in the diagram below.
This is tantamount to a clear signal that the market direction is undergoing a significant shift. However, it's more than that; structural breakouts are a core element of all common trend reversal patterns, providing a credible entry point for your trades. If you have any skepticism, I will provide empirical evidence below.
Furthermore, regarding double bottom patterns, patiently waiting for the recent high to be "tested" or "confirmed" is a valuable strategy. Now, you can fully leverage the power of structural breakouts by precisely planning your entry timing, similar to catching a wave as it begins to rise, ensuring you can ride the wave and maximize your profits. Therefore, when the price breaks out of a flag pattern, as shown in the chart below...
This is like the starting gun firing in a race, giving you a clear starting signal. This moment of confirmation is the opportunity for you to confidently execute your trading instructions, as shown in the diagram below.
By mastering this simple technique, you will become a savvy trader, able to identify trend reversals and seize profit opportunities. At this stage, you might be thinking about questions like, "If a structural breakout is enough, what's the point of delving into other trend reversal patterns?" and "How do we apply this knowledge in practice?" However, the knowledge you've accumulated so far is to lay a solid foundation for your next stage of learning. Next, I will explain in detail how to enter, exit, and manage trades based on trend reversal patterns.
5. A foolproof strategy for trend reversal patterns in trading.
(1) Step #1: Identify trends
It all begins with trend identification. You must carefully analyze charts to determine whether the market is steadily rising in an uptrend or fluctuating in a downtrend. In this example, we will focus on the existing uptrend, as shown in the chart below.
Once you've successfully cracked the code of the trend, you can move on to the next stage and apply your pattern recognition skills.
(2) Step #2: Determine the trend reversal pattern
Now is the time to start searching for patterns that foreshadow trend reversals. Review familiar trend reversal patterns such as the reversal head and shoulders pattern, the cup and handle pattern, and the double bottom pattern. In this example, we will focus on the head and shoulders pattern, as shown in the image below.
(3) Step #3: Determine the ratio of trend to pattern
The trend-to-pattern ratio is the next key clue in your challenging exploration of trading. You need to calculate the number of price bars in the trend progression and its corresponding trend reversal pattern, as you can see in the chart below.
The trend reversal pattern ratio is 3:1, therefore, if the trend is stronger than the pattern, the existing trend should be maintained. Conversely, if the pattern dominates, a bullish stance should be maintained.
(4) Step #4: Confirm your settings (flag mode breakthrough)
At this point, you need to establish your trading setup and pay attention to breakout signals in the structure. This requires you to patiently wait and closely observe the price breaking through the trend line, which then forms a flag pattern, as shown in the image below.
Indeed, we will temporarily set aside the head and shoulders pattern during this process. Next, you need to wait until the valid candle in the flag pattern completes its breakout. At this point, your trading setup is complete, as shown in the figure below.
(5) Step #5: Manage your transactions
You must set stop-loss and take-profit levels. For your initial stop-loss, you can set it at a certain distance below the support level, as shown in the figure below.
As for taking profits, you should use a medium-term trailing stop loss, such as a 50-period moving average, as shown in the figure below.
As you can see, these measures form a safety net for protecting your capital and safeguarding your profits, and you can employ a variety of methods to manage your trades. In fact, you can consult these guides for more information on these strategies: how to use trailing stops (five effective techniques) and how to set take-profit orders (basic guidelines).
6. Conclusion
Here is an overview of the core points of this guide:
(1) Trend reversal patterns (including reversal head and shoulders, cup and handle, double bottom) provide profound insights into potential trend shifts.
(2) The ratio of trend to pattern helps to assess the likelihood of a trend continuing or reversing.
(3) A structural breakout (a breakout of the trend line in the form of a flag pattern) provides a strong entry point for a reversal of the trading trend.
(4) The step-by-step process of trading includes identifying trends, patterns, ratios and settings, as well as effectively managing trades.
Technology is essential for survival; teaching someone how to fish is worse than giving them a fish; the true allure of investing lies in leveraging small investments for potentially large returns; and securing profits you're confident in is the foundation of financial management! We'll continue sharing valuable insights into the cryptocurrency world, allowing you to explore its mysteries together!
You may already be aware of the importance of chart patterns in financial analysis. Chart patterns reveal potential paths of market movements, can warn of impending market reversals, and can even help predict whether market trends will continue to rise or turn downward.
In this guide, you will learn the following:
(1) Understand the components of chart patterns and learn how to accurately identify these patterns;
(2) Distinguish between reversal patterns, signal patterns indicating trend changes, and continuation patterns, the latter of which helps to identify the continuation of a trend;
(3) By analyzing real-world cases, observe the formation and evolution of these patterns in the actual market;
(4) Master and apply effective skills and strategies, and use chart patterns to improve your trading success rate;
(5) Recognize the limitations and risks that may be encountered when conducting pattern trading.
2. Chart Mode Cheat Table: What is it and how does it work?
Chart patterns offer traders a unique way to interpret price dynamics on charts. These patterns have been observed across various markets for years, often demonstrating remarkable potential for predicting underlying price movements. You might wonder: do large financial institutions and corporations really rely on these patterns to make trading decisions?
Chart patterns are not formed by traders' subjective decisions; rather, they are more closely related to the collective psychology of market participants. These patterns often appear at key price points or other market elements because they are meaningful to many traders. Therefore, these patterns naturally form during shifts in market mechanisms, which may include brief price consolidations after a strong breakout and transitions from an uptrend to a new trend—manifested as a series of rising lows.
Examples of strong breakouts, reversals, and new trends
Fundamentally, chart patterns are a visual aid that makes observing changes in market conditions more intuitive. In fact, chart patterns provide traders with guidance on a crucial aspect that they often overlook in trading: entry and exit points.
Chart patterns clearly indicate take-profit and stop-loss zones, meaning you can plan your trades before actually entering the market. This eliminates the need to blindly enter the market and the anxiety of struggling to find the best exit point. The precise definition of chart patterns enables you to make more informed decisions, manage risk more effectively, and thus improve your overall trading success rate.
3. Types of cheating behaviors in chart mode
We will mainly explore two basic pattern categories: continuation patterns and reversal patterns.
(1) Continuation mode
Continuation patterns typically appear after a market has established a trend. Therefore, identifying these patterns after a significant rise or fall in the market allows investors to profit from the continuation of the trend. These patterns reveal whether the current trend is likely to continue. Usually, investors can find these patterns during brief market pauses, that is, some time before the market restarts.
(2) Reversal pattern
Reversal patterns are common across various timeframes and are relatively easy to identify. These patterns indicate a potential trend reversal, symbolizing changes in market dynamics and the potential start of a new trend. They are commonly seen when the market experiences its first lower high or low after a series of rising highs and lows, or when the market touches a key support or resistance level.
4. Types of Reversal Patterns
We will mainly discuss three reversal patterns commonly used by traders.
(1) Head and Shoulders Reversal Pattern
1) Head and shoulders example
The head and shoulders pattern is a typical bearish reversal pattern that occasionally appears at the end of an uptrend.
2) What constitutes the head and shoulders shape?
The head and shoulders shape consists of the following parts:
a. Left Shoulder: Formed during an uptrend when prices reach new highs.
b. Head: After a price reaches a new high, the subsequent low must surpass the high of the left shoulder.
c. Right Shoulder: This occurs when the price falls back and forms a new low, which may be higher or lower than the low of the left shoulder. The key point is that the movement to form a new high is lower than the head, and ideally lower than the left shoulder, although this is not always a necessary condition.
d. Neckline: A line connecting the two low points of the shoulders. Some traders set it at a level that provides support, while others prefer to pinpoint the neckline precisely between these two points.
It's important to recognize that the counterpart to the head and shoulders pattern, the inverted head and shoulders pattern, typically appears at the bottom of a downtrend as a bullish reversal pattern. Now that you understand the basic structure of this pattern, let's analyze it further through real-world trading examples.
EUR/AUD daily chart shows an upward trend.
A significant upward trend is clearly visible on the current EUR/AUD daily chart. Establishing an upward trend is the first step in identifying a head and shoulders pattern.
EUR/AUD daily chart head and shoulders pattern
By carefully analyzing the charts, can you identify the head and shoulders pattern forming within an uptrend? It's worth noting that traders typically tend to establish short positions when the price breaks above the head and shoulders pattern's leader. Some traders might choose to short after the leader is retested, while others might enter the market immediately when the candlestick closes below the leader. Furthermore, some chart patterns incorporate a concept called "Measured Move," as shown in the image below.
EUR/AUD Daily Chart Head and Shoulders Challenge Measurement Trend
Measuring the price action reveals the potential price target after a pattern forms. In this specific context, the measured price action is the vertical distance from the head to the tail. As a trader, you might predict that the price will fall from the head to the same distance as the head. Therefore, measuring the price action provides a useful reference for calculating potential profit targets. Let's analyze the results of this prediction, as shown in the following figure.
EUR/AUD Daily Chart Head and Shoulders Challenge Result
As shown in the chart, the price successfully reached the predetermined target level.
Regarding stop-loss settings, the head and shoulders pattern offers several possible options: First, consider the trading timeframe and your personal strategy. You can place the stop-loss above the leader line, a more aggressive approach; or, you can choose to place it above the right shoulder for a lower-risk strategy. These choices all relate to a flexible understanding of support and resistance levels. If the price quickly rebounds above the leader line, the head and shoulders pattern will be considered invalid.
(2) Double bottom reversal pattern
1) Double bottom example
The double bottom pattern is quite common in various markets, typically appearing at the bottom of a downtrend. Despite its seemingly simple structure, it is one of the most frequently used patterns in trading. You might wonder why this pattern is so popular? The reason is that the double bottom pattern effectively identifies new support areas.
2) What constitutes a double bottom pattern?
a. First test: The initial test represents the price level at which the price first rebounds.
b. Second test: A second test occurs when the price returns to the same level and bounces back again, indicating that the area has undergone a second test.
During these two tests, there must be a certain time interval and price movement between the rebounds. Note that the opposite of a double bottom pattern is a double top, which typically appears at the end of an uptrend. Let's now explore this with a trading example of a double bottom pattern, as shown in the diagram below.
AUD/USD hourly chart double bottom
The hourly chart for AUD/USD shows a sharp drop followed by a price rebound and upward trend.
AUD/USD hourly chart shows a double bottom rebound.
There is a considerable time interval between the two rebounds. Furthermore, observing how the price leaves this area and rebounds again suggests that this area on the price chart may be a rejection zone, indicating a potential price reversal—that is, the price refuses to touch the same area again. Next, let's explore what potential entry points might look like.
AUD/USD hourly chart entry
As shown in the diagram, a stop-loss order can be placed below this area. If the price falls below this area, the double bottom pattern will be considered invalid because the price has begun to form lower lows. However, unlike the head and shoulders pattern, the double bottom does not provide a clear moving target. Therefore, for this example, we set a reasonable 2:1 risk-reward ratio as our target. Let's explore this strategy in more detail, as shown in the diagram below.
AUD/USD Hourly Chart Exit
You successfully entered the trade with a 2:1 risk-reward ratio and made a significant profit from the simple support level bounce of the double bottom pattern. Note that the triple bottom pattern is essentially similar to the double bottom pattern, but it involves three bounces instead of just two. Both patterns can serve as visual representations of support levels, making the trading process much simpler.
(3) Chart mode cheat table: Cup and handle reverse mode
The cup and handle pattern is a rounded bottom shape. Although its shape and size may vary, the main feature of this pattern is its smooth bottom outline, which resembles a cup. The image below is a schematic diagram of this pattern.
Cup and handle examples
The main characteristics of the Cup and Handle pattern include a rounded bottom that extends upwards to the neckline. Near the neckline, the price may retrace, forming a handle-like shape. Sometimes, this handle shape is also rounded, but this is not mandatory. Entry signals can be found during the formation of the handle pattern or when the price breaks through the neckline. Next, we will examine an example of the Cup and Handle pattern, as shown in the figure below.
EUR/USD daily chart shows a downtrend.
In the current chart, it is clear that the price is in a continuous daily downtrend, which is the first step to take when identifying the cup and handle pattern.
EUR/USD daily chart shows a cup pattern.
As prices retraced, a slightly rounded bottom began to form. Although the cup's shape wasn't necessarily a perfect circle, it reassuringly demonstrated the inherent stability of the price.
EUR/USD daily chart shows a cup and handle pattern.
Now, the price has formed a handle, with the neckline aligned with the previous support level, suggesting a potentially positive development. Once the cup and handle pattern is fully formed, you can start considering trading. This could involve a breakout of the neckline and subsequent retests, or simply a breakout of the neckline itself. Let's explore the possible scenarios for this trading setup.
EUR/USD daily chart: cup and handle entry point
Now, if you prefer a more aggressive stop-loss strategy, you can place your stop-loss order below the bullish candle that initially broke through the neckline. If the price falls back below the neckline, you should exit the trade. On the other hand, if you are seeking profits from a long-term trend, you can consider the second stop-loss strategy, which depends entirely on your personal preference and risk tolerance. Now that you have mastered the identification methods for the three main reversal patterns, let's further explore the two main continuation patterns.
5. Types of Continuation Patterns
Continuation patterns typically take the form of a flag or a triangle. While I have shown examples of two variations here, they are not the only forms; you will also learn about wedges and symmetrical triangles, whose rules are similar to those I will introduce today.
(1) Bull Flag
First is the famous bull market flag, the opposite of the bear market flag. The bull market flag usually appears in an uptrend and is best described as a brief pause in price before the next round of gains; you can think of it as bullish forces gathering energy for the next upward push.
Bull Flag Example
The measured move of a bull market flag is the length of its flagpole, indicating that you can expect the price to move at least the same distance from the bottom of the flag to the original rise (i.e., the distance of the flagpole). I often see these continuation patterns on Bitcoin charts, so let's explore them with an example, as shown in the image below.
BTC/USD 4-hour chart bullish flag
On the 4-hour chart, you can see that the price has experienced a brief consolidation after a strong uptrend. The formation of a bull flag pattern may manifest as a downtrend or sideways consolidation in the price. As long as the price remains within a relatively narrow range, it can be identified as a bull flag pattern.
BTC/USD 4-hour chart bullish flag entry
You can consider entering at any point within a bullish flag pattern. However, it's advisable to wait for the price to touch the support level or the bottom of the flag's range and observe price resistance to that area before a rebound from the lows. Bullish flag patterns can last for days or even weeks, so entering at the lows allows for a wider stop-loss range. In this example, we assume you've set a stop-loss very close to the lows, and for your target, you've used a measured move from the initial upward impulse. Note that bullish flags don't always reach their measurable move, so continuously analyze price action and make decisions based on your trading strategy and objectives.
BTC/USD 4-hour chart bullish flag exit
This pattern typically performs well in highly volatile markets, such as the cryptocurrency market. Next, let's explore another pattern similar to a bullish flag: the ascending triangle.
(2) Ascending triangle
The ascending triangle is another continuation pattern that shows a robust uptrend followed by a short-term price pause as prices form a series of higher lows and equal highs. Prices then hold steady until they reach the equal highs of the triangle before continuing their breakout.
Ascending Triangle Example
Similar to bullish flags, the measuring movement of an ascending triangle matches the initial price rise until consolidation. Let's explore this with another example, this time using Bitcoin after a significant bullish surge.
Example of an upward trend in BTC/USD
For the ascending triangle pattern to form, a strong upward trend is essential.
Example of an ascending triangle in BTC/USD
As shown in the chart, the price formed a higher low while encountering the same high. This pattern demonstrates how, instead of forming a lower low, the price gradually contracts towards a resistance level. Ultimately, as the price continues to tighten, the resistance level is eventually broken. Next, let's explore potential entry points.
BTC/USD Ascending Triangle Entry Options
The chart shows several potential entry points:
1) Entry Option 1: Enter when a breakout occurs above the top of the triangle.
2) Entry Option 2: Wait for the resistance line to turn into a support line and be retested.
7. Limitations of using chart-based cheat tables
(1) Patterns are not always effective
Like other aspects of trading, patterns are not absolutely reliable and may not always work as expected. The market is influenced by numerous factors, so there is no guarantee of success for any trade. When a pattern fails to perform as anticipated, it is crucial to remain calm and analyze the situation. Instead of getting frustrated, consider why the pattern failed and be willing to adjust your perspective based on what the market is showing you. For example, if a head and shoulders pattern fails, it may indicate that the market is using the neckline as support, meaning that in this case, it's time to change your trading strategy.
(2) The patterns are not the same
One challenge traders face when dealing with patterns is the variability in their shape and size. It's quite common for patterns to differ slightly from textbook examples, often leading to stagnation in analysis. Traders may hesitate due to minor differences in appearance, thus postponing trades. Therefore, it's important to recognize that no single pattern will look exactly the same in every situation. Overcoming this obstacle requires focusing on the core principles of patterns rather than getting overly concerned with minor details.
8. Conclusion
Here is an overview of the key points of this guide:
(1) You have gained important knowledge about the value of chart patterns and their role in market analysis.
(2) You have explored various types of patterns, including reversal and continuation patterns.
(3) Through real-world examples, you learn about five specific patterns, which will help you master their application in trading.
(4) You have discovered valuable techniques to enhance your pattern trading strategy and gain a competitive edge in the market.
(5) You have recognized the limitations and risks associated with the trading model and emphasized the importance of risk management.
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