Crypto Trading Strategy - Market Psychology and Chart Patterns

How do you react if a sudden surge or a sharp crash occurred while you are trading? When that occurs, many traders end up making erratic trades and widening their losses amidst the high volatility. It is essential to build and understand a strategy for such situations in advance. In this article, I would analyze post-crash and post-surge market dynamics to help you prepare your strategy.

For example, what would be your next move on the chart above? The market made an abrupt crash and seems to have settled down. With the price action currently searching for the next direction, do you predict the market will turn bullish or bearish from here? Let's see the next price move and analyze it.

The result is the price made a trend reversal after forming a double bottom formation and fully retraced the long bearish candle. The double bottom might seem a bit distorted as it took some time to form, but it eventually created a long wick and started pushing higher. Notably, during the first leg of the double bottom, the attempt to break lower was rejected by a long bullish candle and right before the breakout, there is a strong bullish candle alongside the long wick, signaling intense buying pressure around the zone.

After the breakout from the double bottom formation, the price entered a consolidation phase. The support level of the consolidation zone has not broken below the resistance level of the double bottom, and based on Dow theory, you can determine that the breakout is valid. Besides, the price broke out of the consolidation zone with consecutive bullish candles, then formed an another consolidation at a higher level again. If you had simply followed the clear bullish trend signals we have seen so far, you should have been able to capture the profit on a sharp rally immediately after that price move.

The clean uptrend following the crash, as explained so far, occurred because of the price imbalance such as shown in the chart. Price imbalances like this are formed during sudden crashes or surges, as shown in the chart, and the price action typically follows up by fully retracing the entire move. Understanding the concept of price imbalance enables you to remain composed during market crashes or surges, helping you capture consistent profits. Let's look at an another example chart.

In this chart example, there is a sudden surge and the price successfully filled up the imbalance zone. Immediately after the surge, the price pulled back a level and settled into a consolidation phase. In this price move as well, during each consolidation phase in the downtrend, the resistance has consistently held below the prior support level. Everytime it breaches the support, the price continued to drop within a firm downtrend with consecutive bearish candles. Despite the second consolidation was extensive, the price failed to breach the previous support. It continues to mark lower resistances and is now successfully filling the imbalance zone as the downtrend accelerates. During a solid uptrend or downtrend, the price often moves according to Dow Theory and various chart patterns, making them highly reliable. In other words, by avoiding trades during ambiguous price action and only trading when the movement is as clear as this, you can steadily build up your profits.

By staying mindful of market psychology, chart patterns and Dow Theory behind the price action, you can not only stay calm during sudden surges and crashes but also turn those moves into profits. The more strategies you have in your arsenal, the more opportunities you will have to enter the market.