In its early days, Bitcoin experienced spectacular price spikes and dips, due to the cryptocurrency’s novelty. After all, it’s the only cryptocurrency that is “digital gold”, making it a target for investors who expect to outperform traditional commodities in a bull market.
Many classic chart patterns have been used to sell Bitcoin short over the years. But because of its extreme price volatility, Bitcoin has been favored as a trading vehicle for traders that profit from a sharp move in Bitcoin’s price. And so, Bitcoin has been the subject of a recent trend known as “Bitcoin whales”.
There are a lot of different ways to view Bitcoin price behavior. Some people take the traditional analysis of chart patterns and try to find the patterns in the market. Some people take the holistic approach and look at all the factors in the market, while others are chartists and even more chartists. Many people, however, take the view that the price of Bitcoin is determined by limited supply and demand, and that this supply and demand determines price.
Traders are often preoccupied with determining the best time to enter a trade, but few are concerned with establishing a plan for leaving positions. If one sells too soon, significant earnings are lost, and if one holds a position for too long, the markets rapidly reclaim the profits. As a result, it’s critical to recognize and exit a trade as soon as the trend begins to reverse.
One classical setup that is considered reliable in spotting a trend reversal is the head-and-shoulders (H&S) pattern. On the longer timeframes, the H&S pattern does not form often, but when it does, traders should take note and act accordingly.
Let’s look at a few ways to identify the H&S pattern and when to act on it.
The fundamentals of head-and-shoulders protection
The H&S pattern forms after a bull phase and indicates that a reversal may be around the corner. As the name indicates, the formation consists of a head, a left shoulder, a right shoulder, and a distinct neckline. When the pattern completes, the trend usually reverses direction.
Top with a head-and-shoulders design. TradingView is the source of this information.
The above image shows the structure of an H&S pattern. Before the formation of the setup, the asset is in an uptrend. At the peak where the left shoulder forms, traders book profits and this results in a decline. This forms the first trough but it is not yet a strong enough signal to provoke a trend change.
Because the trend is still positive, lower levels attract purchasing once again. Buyers manage to push the price above the left shoulder, but they are unable to maintain the uptrend.
Bulls’ profit-booking and counter-trend traders’ shorting drive the price down, which finds support around the previous low. The setup’s neckline is formed by joining these two troughs.
The bulls try to continue the uptrend when the price bounces off the neckline, but profit-booking kicks in as the price hits the height around the left shoulder, and the rally fizzles out.
The right shoulder is formed by this lower peak, which is typically aligned with the left shoulder. The upward trend reverses, as selling gains traction. The bears finally succeed in bringing the price below the neckline. The bearish pattern is now complete, and the trend has shifted from bullish to bearish.
Spotting trend reversals with the H&S pattern
Daily chart of BTC/USDT. TradingView is the source of this information.
After breaking out at $20,000 in December 2020, Bitcoin (BTC) began a sustained upward trend. On March 13, the BTC/USDT pair reached a local high of $61,844 before correcting and establishing a trough on March 25. The left shoulder was the local summit.
Because the trend was still up, the bulls saw the drop as a buying opportunity. Aggressive purchasing drove the price over $61,844, and on April 14, the pair reached a new all-time high of $64,854. This level drew selling, causing the price to fall to its second low on April 25. The head was created by the central peak, which was taller than the other summits.
On May 10, another effort by the bulls to continue the upswing failed. The right shoulder was created as a result, and the subsequent corrective broke below the pattern’s neckline. This bearish setup was accomplished on May 15 with the collapse and closure below the neckline.
The price may retest the breakdown level from the neckline following a breakdown, but if the momentum is strong, the retest may not materialize, as seen in the chart above.
Daily chart of BTC/USDT. TradingView is the source of this information.
Determine the distance between the neckline and the top of the head to calculate the pattern goal for this arrangement. The amount is $15,150 in this instance. To get at the minimal goal objective, deduct this distance from the breakdown point on the neckline.
In the case above, the breakdown occurred around $48,000. This resulted in a $32,850 pattern goal. This number should only be used as a guide since the fall may occasionally surpass the goal, and in other cases, the down motion can stop before reaching the target.
Head-and-shoulders aren’t always effective.
Sometimes traders jump the gun and take counter-trend positions before the price breaks below the neckline of the developing H&S formation. Other times, the break below the neckline does not see follow-up selling and the price climbs back above the neckline. These instances may lead to failed setup, trapping the aggressive bears who are forced to cover their positions and this results in a short squeeze.
Daily chart of the ADA/USDT currency pair. TradingView is the source of this information.
Cardano (ADA) started an uptrend from the $0.10 level on Nov. 20, 2020. The uptrend hit resistance in the $0.35 to $0.40 zone in January and a H&S pattern started developing. The price dipped to the neckline on Jan. 27, but the bears could not sink and close the ADA/USDT pair below the support.
On Jan. 28, when the price bounced off the neckline, it was an indication that the bullish mood was still alive and well. On the 30th and 31st of January, bears tried to halt the uptrend at the right shoulder, but continued bullish purchasing drove the price above the head on February 1. The setup was thrown out because of the break over the pattern’s head.
Daily chart of the ADA/USDT currency pair. TradingView is the source of this information.
When a bearish setup fails, many aggressive sellers are caught off guard. This causes a short squeeze, causing the price to rise. In the previous case, the same thing occurred, and the pair surged in February.
The most important takeaways
The H&S pattern is considered a reliable reversal pattern but there are some important points to bear in mind.
In contrast to an upsloping neckline, a downward sloping or flat neckline is seen to be a more dependable design. Before entering a trade, traders should wait for the price to break down and close below the neckline. Preempting the setup may cost you money since a botched bearish pattern can lead to a big rebound.
The pattern objectives should only be used as a guide, since the price may overshoot and continue down, or it may reverse direction before reaching the target objective.
The author’s thoughts and opinions are entirely his or her own and do not necessarily represent those of Cointelegraph.com. Every investing and trading choice has risk, so do your homework before making a decision.
On December 14th, 2017, Bitcoin went on a wild ride, as it spiked to $19,783. The price was in a parabolic channel that had held for the last few years, and was the most reliable indicator of a major top. However, the parabolic channel had been broken, and the next day saw the price fall by about $3,000. The parabolic channel remained broken for the next few days, and by the 22nd, it was confirmed that Bitcoin had reached its peak.. Read more about bitcoin price pattern and let us know what you think.
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