If you are a frequent visitor of crypto Twitter or any other crypto-trading community, the odds are high that you've seen the Dalai-Lama pattern mentioned once or twice before. When I first heard about the pattern, I scoffed and thought "What the f*ck is a Dalai lama pattern?" Or at least, I did, until I did some digging and quickly found out this pattern is more reliable than the humorous name might suggest.
In today's article, we dive into the Dalai lama pattern, what it is, and how it works.
Before we dive into the Dalai lama, here's a quick refresher on trading patterns: they are easily recognizable price structures that can be found across many different timeframes. Most chart patterns have been studied for decades, some of which we've covered in a recent article.
Even though most articles thusly have built a track record – new patterns are still being discovered to this day – especially in a younger market such as crypto. The Dalai lama pattern is one of those patterns, which rose to popularity in the bull market of 2020.
The Dalai Lama pattern
Bull markets are also when this pattern tends to show up most, as it requires strong buying interest to play out successfully. The pattern consists of four distinct stages:
- The Sell-off: I can hear you think, "You just told me the pattern needs buying interest to play out, this does not make any sense!" I understand your concern, but bear with me here; the Dalai lama pattern starts with a steep pullback in price over a very short period of time.
- The bounce: After the initial sell-off, the market quickly rebounds higher as a result of passive and aggressive buying orders flooding the books – similar to a V-shaped recovery where the price goes back up just as fast as it came down.
- The Consolidation: After the initial bounce-back, a brief period of consolidation is typical of the Dalai lama pattern. There is no set-in-stone structure that the consolidation must follow, but it cannot make a lower low.
- The full retrace: After the period of consolidation, the price continues to push higher, eventually leading to a complete retrace of the crash that kicked off the Dalai-Lama pattern.
The result is a structure that resembles the Greek letter Mu (µ): a sharp correction downwards, followed by a swift recovery - showing strength & resilience in the market. One of the first Mu-shaped charts that popped into my mind when writing this article is perhaps one of the most memorable periods in crypto: the pandemic-induced crash in March 2020.
The exact reason for naming this pattern after the famous spiritual leader of Tibet is unknown, but I can't say I do not enjoy the memes.
The Dalai-Lama pattern in trading practice
Knowing the stages of a typical Dalai-lama structure helps traders position themselves for the next move in the market. Most traders try to spot the pattern as early as possible – seeing as the earlier they recognize it, the more profitable trading the pattern can be. After all, the pattern completes once it reaches the price level prior to the crash.
However, there is more value in the pattern than just trading the pattern itself. As we discussed earlier, the Dalai Lama pattern shows strength and resilience in the market. Thus, when the Dalai Lama pattern prints, it suggests the asset has strong buying interest behind it, which may suggest further upside is on the cards.
This becomes especially insightful when comparing different altcoins. For example, when trader Benny decides to compare the AVAX and SOL charts right after a sharp pullback in the market, he notices that Solana is much quicker to retrace the correction than Avalanche. This tells Benny that Solana is the stronger coin at the moment, and he decides to buy SOL instead of AVAX. As such, the speed at which an altcoin completes the Dalai-lama pattern can be very telling of which coin is the fastest horse in the race.
The Dalai Lama pattern is a relatively new pattern in crypto, but it yields valuable insights for traders. Not only can traders take advantage of the retrace, but the pattern can also give away information on potential outperforming altcoins.
As with any trading pattern, the Dalai Lama is not without false signals, making it unwise to make trading decisions based on the Dalai Lama pattern alone. Nevertheless, adding the pattern to your pre-existing knowledge of markets, risk management, and trading may just take your trading to the next level.
Author's Disclaimer: This article is based on my limited knowledge and experience. It has been written for informational purposes only. It should not be construed as trading or investment advice in any shape or form.
Editor's note: CryptoJelleNL provides insights into the cryptocurrency industry. He has been actively participating in financial markets for over 5 years, primarily focusing on long-term investments in both the stock market and crypto. While he watches the returns of those investments roll in, he writes articles for multiple platforms. From now on, he will be contributing his insights for WOO as well.
Check out his twitter: twitter.com/cryptojellenl
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