【Tips】— Identifying Major Washout Techniques in the Crypto Market

What is washout in the crypto market?

In the cryptocurrency market, “washout” refers to a series of operations by the main funds (often called “whales” or “market makers”) to clear out floating chips in the market and raise the overall holding cost. Similar to the stock market, the main players hope to shake out short-term investors who bought at low levels and lack conviction before pushing the price higher, thereby reducing selling pressure during the rally. Additionally, washouts can help the remaining holders’ average cost rise, creating more favorable conditions for the main players to distribute chips later.

Furthermore, during washouts, the main players can also profit from high sell and low buy maneuvers to offset potential capital costs during the upward phase. Although mainstream coins like BTC and ETH have large market caps, there are still obvious behaviors of capital control, especially in environments with high derivatives market participation. Washouts often accompany sharp price fluctuations and liquidation events. The following will detail three common washout techniques in the crypto space.

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1. “U” Shape Washout — Creating Fake Panic and Bearish Lines

Purpose: To create a “high open—low decline—close high” U-shaped pattern on intraday charts, inducing short-term profit takers to panic and sell.

Common scenarios: When the coin price is in an upward channel on the daily chart, or just after breaking through a key resistance level.

Features:

· The intraday chart shows a U-shaped pattern with an initial decline followed by a rise; the closing price often returns near or above the opening price, but during the session, a “deep pit” may be formed.
· Trading volume decreases during the decline, indicating that the main players have not truly escaped, and chips are well locked.
· Order book features: Main players use large sell orders to quickly break through key support levels (such as round numbers or previous lows), then gradually push back with small orders; buy orders are sparse, while sell orders are dense but inactive, creating a false appearance of “hanging without crossing.”

Practical reminder: In derivatives markets, U-shaped washouts often come with “spike” movements—rapid price drops to trigger stop-losses or liquidations below support, then quick rebounds. This method cleans leverage and frightens out hesitant spot holders.

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2. Arch-Shaped Washout — Creating a Fake Breakout for Distribution

Purpose: To produce a “low open—high rise—low close” arch-shaped intraday pattern, misleading investors into thinking the main players are pushing up to distribute, thus surrendering chips.

Common scenarios: When the price reaches previous significant resistance levels (such as historical volume clusters or neckline positions), or faces heavy pressure from trapped positions.

Features:

· The intraday chart shows an inverted V or arch shape with a rise followed by a decline; the close is significantly below the intraday high, forming a long upper shadow bearish candle.
· The upward phase is usually driven by small orders to attract follow-up buying; the decline is driven by large orders to quickly suppress, creating panic.
· Both buy and sell sides are dominated by small orders; main players hide behind passive pending orders, not actively absorbing large chips.

Practical reminder: In crypto, arch-shaped washouts often occur around major news releases. For example, before Ethereum upgrades or Bitcoin halving expectations, main players first push prices higher to attract longs, then suddenly dump to scare retail investors into selling, making them think the rally is over. In fact, they reaccumulate at lows for the next wave.

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3. Composite Washout — “U” + Arch Double Cleansing

Purpose: To simultaneously clear profit-taking and trapped positions, often seen when the price has already risen significantly and faces strong resistance.

Common scenarios: When the coin is in a mid-accumulation phase of a main rally, needing to break previous highs or weekly resistance levels.

Features:

· The intraday pattern shows a “U” + arch or arch + “U” composite shape. For example: morning drop then rise (U), afternoon surge then fall back (arch); or initial surge, fall back, then deep V rebound.
· Daily volatility is intense, but the final close is close to the open, forming a doji or small-bodied candle.
· Typical order book features: main players place large orders at buy 3 to buy 10 and sell 3 to sell 10 levels, creating the illusion of heavy defenses; actual transactions often involve large orders “air matching” (executed off the order book) or frequent cancellations and modifications, making it hard for retail traders to keep up.

Practical reminder: In crypto, composite washouts are very common, especially when funding rates are high and long-short ratios are unbalanced. Main players use both upward and downward spikes to clear leveraged positions on both sides, then shake out retail spot holders. Recognize by checking if the daily trend remains upward and volume during washouts does not keep increasing (indicating no distribution). After the washout, a volume-driven bullish breakout often follows.

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Summary: How to respond to washouts in the crypto market?

1. Avoid chasing highs or selling lows: Washouts exploit emotional swings. Panicking and selling during rapid intraday declines or chasing after quick rises can lead to repeated cleansing.
2. Focus on larger timeframes: As long as the daily and weekly trends remain intact (e.g., key support lines or previous lows are not broken), washouts can be opportunities to add or average in.
3. Control leverage wisely: Crypto volatility is much higher than stocks. Frequent spike maneuvers can lead to targeted liquidations. For mainstream coins, prefer spot trading or low leverage with wide stop-loss settings.
4. Observe volume and order book changes: Genuine washouts often involve decreasing volume during declines and increasing volume during rebounds; distribution involves volume stagnation or decline during rises. Learning to read order book signals (such as large orders frequently canceled or withdrawn) can help identify main players’ intentions.

Mastering these three washout techniques and combining them with crypto-specific data (like open interest, funding rates, and long-short ratios) will help you better dance with the main players rather than be easily shaken out.

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Disclaimer: This article is for technical exchange and learning only and does not constitute any investment advice. Cryptocurrency markets are highly risky; please make cautious decisions.