Trading Guides: Identifying Chart Patterns in Forex Trading -

Trading Guides: Identifying Chart Patterns in Forex Trading

When closely examining a Forex currency pair chart, traders can identify various patterns that can help them figure out market momentum and market psychology for that specific currency pair.

Pattern identification alone is not enough to trade successfully, but when combined with technical indicators and other trading tools patterns can provide useful insight that can allow traders to make better informed and more calculated decisions.

Chart Patterns are classified into:

Reversal Patterns

Head & Shoulders
Double Tops & Double Bottoms
Triple Tops & Triple Bottoms
Saucer Bottom

Continuation Patterns

Triangles (Ascending, Descending, Symmetrical)
Flags & Pennants
Wedges
Rectangles

There are 3 main rules when it comes to Reversal Pattern identification

There can be no reversal without a trend.
Violation of a trend line signals reversal
Long-term reversal is more significant than short-term reversal

Head & Shoulders Pattern

In an uptrend, the Head & Shoulders pattern consists of 3 consecutive high peaks. The first and last peaks are almost equal in height and the middle peak is much higher than the other two. When taken together they roughly resemble a head resting on shoulders, hence the name. The relative lows between the head and each shoulder form the neckline. The neckline is seen as a key support level. The market movement can either reverse off it or break through it.

A Head & Shoulders on the downtrend with 3 consecutive low peaks is called a Reverse Head & Shoulders. When the price crosses the neckline, it can signal a reversal upwards or break through.

Trading Guides: Identifying Chart Patterns in Forex Trading

Double Tops & Double Bottoms

One of the easiest patterns to recognize, a double top is an uptrend formation of a series of taller high peaks and shorter high peaks. It is a horizontal line that connects two high peaks at the same price. If price fails to break above the first peak and the second peak remains at the same price, then it can be an indication that the trend may reverse.

Trading Guides: Identifying Chart Patterns in Forex Trading

Double Top patterns can signal opportunities to sell. The relative low between the two peaks is also called the neckline and can be a potential entry point to sell if there is confirmation that the price will break. An example of such an indication is when a candle closes below the relative low/neckline.

The inversion of the Double Top is called Double Bottom which is formed when in a downtrend the price failed twice to break through. Double Bottom Patterns can signal opportunities to buy above the neckline after indication and confirmation of an imminent reversal.

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Triple Tops & Triple Bottoms

Similar to a Double Tops pattern, the Triple Tops pattern has an extra high peak that’s on the same resistance level. A third Top creates a strong resistance level with a neckline that connects the middle two relative lows. Traders can enter a selling position when the daily candle closes below the third peak neckline. Entry points can be set a few points under the low of the candle that closed below the line first.

An inverted Triple Top is a Triple Bottom. The third bottom is seen as a strong support level and can provide an opportunity to enter a buying position if there are indications and confirmation that there’s going to be a triple bottom reversal. Usually, traders wait until the price closes above the neckline and buy when the next candle exceeds the high of the first candle.

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Saucer Bottom

A very slow long-term developing pattern, the Saucer Bottom usually doesn’t have a clear entry point and gives no direct positioning signals. This pattern represents a progressive loss of downtrend momentum that is followed by consolidation in a sideways market with a potential higher trend return. Saucers are visible only on weekly, monthly and yearly charts because it takes long from them to develop. Because of this, entry points need to be determined with Technical Analysis.

Continuation Patterns

Continuation Patterns exist within trends where prices consolidate before continuing in the direction of the original trend.

Like Reversal Patterns, there 3 rules to follow when identifying Continuation Patterns

Price will move largely in one direction before hitting support/resistance levels
Price will consolidate for some time and create a continuation pattern
When price breaks through support/resistance levels it signals a continuation of the trend

Triangles

Trend lines that converge form Triangles. As trade lines converge volatility contracts which signals a possible upcoming breakout. When it comes to Triangles, it is not their shape that Is important but the direction of the breakout; the signal to trade is provided by the breakout direction.

Trading the Trend Lines Guide

When one of the triangle’s trend lines breaks a market breakout towards the direction of the break is expected. Before the breakout, traders are unsure in which direction the price will move. This psychological uncertainty is what ends up forming the narrow angle, or tip of the triangle. Bitcoin touches record high

Triangles are categorized into: Symmetrical, Ascending and Descending

Ascending Triangles

Ascending Triangles are formed in upward trends and signal continuation of the upward trend. Above the ascending triangle’s longest line (hypotenuse) is a straight trend line, which traders view as a key resistance level. When that resistance is confirmed that it is about to be broken it can signal that market control is at the hands of buyers, suggesting an opportunity to buy.

Descending Triangles

A Descending Triangle has a downward sloping hypotenuse at the top. Beneath it is a straight trend line. When the market breaks through this line then it signals that sellers are dominating, and it could suggest an opportunity for opening selling positions. Descending Triangles mostly appear in downward trending markets and usually signal the continuation of the downward trend.

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Symmetrical Triangles

Has two equal sides which slope at the same angle towards one another. It usually signals a continuation of market movement in the same direction as the overall trend. A Symmetrical Triangle is a rising support line and a descending resistance line converging on the right side of the chart. One of these lines will eventually be broken and when it does traders take the line as a simple trend line. With symmetrical triangles is sometimes difficult to predict which direction the price will breakout. Therefore, attention to the original trend is vitally important.

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