Common Bar Patterns Used in Crypto Trading

One of the critical aspects of successful crypto trading is recognizing and understanding the common bar patterns that frequently emerge in trading charts. These patterns offer valuable insights into market sentiment and can greatly influence your trading strategies.

Read below a comprehensive guide on some of the most common bar patterns, exploring their definition, characteristics, and implications in trading scenarios.

The Key Reversal Bar Pattern

This pattern can provide traders with valuable insights into market sentiment and potential shifts in price direction.

Key reversal bars can be classified into two main types: 

1. Bullish Key Reversal Bar: when there is a downtrend in the market, and the price reverses and closes higher than the previous bar's high; this suggests a potential shift from bearish to bullish sentiment, indicating a possible uptrend reversal.
2. Bearish Key Reversal Bar: occurs during an uptrend, when the price reverses and closes lower than the previous bar's low; this suggests a potential shift from bullish to bearish sentiment, indicating a possible downtrend reversal.

You should also carefully observe price action to correctly identify this pattern. Specifically, you should keep an eye out for significant changes in price momentum, indicated by a sharp increase or decrease in trading volume, or a sudden shift in the range of price fluctuations. 

Trading Strategy

• The Bullish Key Reversal Bar pattern: consider entering a long position, preferably with a stop-loss order to manage risk after the pattern is confirmed. 
• The Bearish Key Reversal Bar pattern: once the pattern is confirmed,  consider entering a short position, preferably with a stop-loss order to manage risk.

In both bullish and bearish reversal patterns, monitor the price action closely and consider setting profit targets or trailing stops to secure profits as the market moves in favor of the trade.

The Two-Bar Reversal Pattern

The Two-Bar Reversal pattern can be bullish or bearish, depending on the context. 

• A Bullish Two-Bar Reversal occurs when the first bar is bearish and closes near its low, and the second bar is bullish and closes near its high, above the midpoint of the first bar. This indicates that the sellers are losing control and that the buyers are stepping in with force. A Bullish Two-Bar Reversal can signal a possible uptrend or a continuation of an existing one.
• A Bearish Two-Bar Reversal occurs when the first bar is a bullish candle that closes near its high, and the second bar is a bearish candle that closes near its low, below the midpoint of the first bar. This indicates that the buyers are losing control and that the sellers are stepping in with force. A Bearish Two-Bar Reversal can signal a possible downtrend or a continuation of an existing one.

The rationale behind this approach is quite clear: when a strong momentum in one direction lures traders into positions, a rapid reversal can lead to a rush for the exits. This occurs because their initial expectations aren’t met.

Trading strategy

Consider implementing a sell-stop order just below the low of the reversal bar to confirm short-term momentum. This can serve as a validating step in your trading strategy.

For risk management purposes, it's prudent to place your stop loss just above the highs of the pattern. This location provides a reasonable buffer in case the pattern fails to perform as anticipated.

Additionally, it's important to recognize the inherent stop-loss level built into this pattern, located at the extremity of the bar. This feature can serve as a safety net to limit potential losses.

The Two-Bar Reversal pattern can be used in conjunction with other technical indicators, like trend lines, support and resistance levels, moving averages, and oscillators, to confirm the validity and strength of the reversal signal.

The Inside Bar Pattern

An Inside Bar is characterized by a contraction in the price range and volatility.  On a price chart, an InsideBar is fully encompassed within the price range of the preceding bar. In simpler terms, the second bar must exhibit a lower high and a higher low.

In a given time unit, the market stands entirely within the preceding bar's range. This denotes a momentary pause in price action, without showing any visible strength in either upward or downward movement.

Trading Strategy

Enter a trade when the price breaks out of the Inside Bar in the trend’s direction to make the most of this pattern's breakout in either direction. 

Look for an InsideBar that forms near a significant level of support or resistance, and in the direction of the dominant trend. For example, if the market is in an uptrend, look for an Inside Bar that forms near a rising trend line or a moving average, and has its high near or above the level. Conversely, if the market is in a downtrend, you want to look for an Inside Bar that forms near a falling trend line or a moving average and has its low near or below the level.

You can place your stop loss below or above the mother bar, depending on whether you’re going long or short. You can set your target based on a risk-reward ratio or a trailing stop.

The Outside Bar Pattern

The Outside Bar pattern is in complete contrast with the inside bar. It’s characterized by a range that surpasses that of the preceding bar, with a higher high and a lower low. The pattern shows an expanded price range and increased volatility, signaling strength in both upward and downward directions.

In most cases, it doesn’t indicate clear signs of whether the bulls or bears have secured victory. The only certainty is the high level of market volatility.

Trading Strategy

Exercise caution and await the breakout of the Outside bBar, then consider fading it. This approach is particularly helpful when dealing with Outside Bars that resemble Dojis or those that defy the prevailing trend. 

Alternatively, trading the breakout can also be a viable strategy, especially when the closing price of the outside bar aligns closely with its upper or lower boundary.

The Horn Pattern

The Horn Bar pattern is a reliable and easy-to-spot reversal pattern that can help you catch the beginning of a new uptrend. In other words, it hints at a bullish reversal and resembles the horns of a bull, hence the name.

This pattern has two bars: a long red bar followed by a short green bar that gaps up and closes above the midpoint of the previous bar. 

The Horn Bar pattern signals a shift in market dynamics, suggesting that sellers are relinquishing their grip, and buyers are asserting their dominance. This transformation becomes visible with a gap up, which signifies a sudden and robust surge in demand. Additionally, when the closing price goes beyond the midpoint of the preceding red bar, it’s a sign of the bullish momentum's strength. Traders often employ the Horn Bar pattern as a strategic cue to initiate a long position or to exit a short one.

Trading Strategy

To trade the Horn Bar pattern, you should look for the following criteria:

• the market is in a downtrend or a pullback;
• the first bar is a long red bar that closes near its low;
• the second bar is a short green bar that gaps up and closes above the midpoint of the first bar;
• the second bar should have a small or no lower shadow, indicating minimal selling pressure.

Additionally, the stop-loss should be placed below the low of the first bar or the second bar, depending on the risk tolerance.

The Pin Bar Pattern

The Pin Bar pattern is a popular candlestick formation traders use to identify potential reversals in price trends. A Pin Bar pattern, also known as a pinocchio bar or a hammer, is a single candlestick pattern with a distinct price formation. 

This pattern is characterized by a long wick, also known as a shadow, and a small body. The wick represents the price rejection and shows the battle between buyers and sellers during the trading period. The longer the wick, the stronger the rejection and potential reversal signal.

There are two main types of Pin Bar patterns: the Bullish Pin Bar and the Bearish Pin Bar.

• The Bullish Pin Bar pattern: indicates a potential reversal from a bearish trend to a bullish trend; it forms when the price initially moves lower during the session but is then rejected and ends up closing higher, creating a long tail on the bottom end of the candlestick.
• The Bearish Pin Bar pattern: the opposite of its bullish counterpart, it suggests a potential reversal from a bullish trend to a bearish trend; the bearish pin bar forms when the price starts off higher but is rejected and ends up closing lower, resulting in a long tail on the top end of the candlestick.

Traders often use additional technical indicators, support and resistance levels, or trend lines to confirm the validity of the pattern before making trading decisions.

Trading Strategy

The Pin Bar pattern is most times used as a reversal signal, where support and resistance levels play a crucial role. These levels are areas on a price chart where buying or selling pressure has historically been strong enough to halt or reverse price movement. When a Pin Bar forms at a significant support or resistance level, it increases the probability of a reversal occurring.

Traders can enter trades based on the anticipated price rejection at these levels.

Set a stop loss order below the low of a bearish Pin Bar or above the high of a bullish Pin Bar to manage risk. This technique helps protect against potential false breakouts and minimizes losses if the reversal signal fails.

Traders often use additional technical indicators, support and resistance levels, or trend lines to confirm the validity of the pattern before making trading decisions.

Conclusion

These commonly used bar patterns are powerful and reliable tools in technical analysis for traders. They provide valuable insights and can help you identify profitable trading opportunities once you recognize their key characteristics.

When trading, always consider additional factors, like support and resistance levels, trend direction, and confluence with other technical indicators. This will help increase the probability of successful trades and minimize the risk of false signals.

So, keep analyzing charts, studying price action, and refining your skills to make the most of these bar patterns.