Forex trading Chart Patterns
There are different types of Forex trading chart Patterns. To accurately predict the future direction of price many Forex traders use chart patterns and formations. The most popular patterns occur across all timeframes and form a central part of technical analysis. These chart formations are reliable, not only because they have historically performed as anticipated when they have occurred, but also because of the huge number of traders who are watching for these patterns. Chart formations may take couple of hours, days or weeks to form but their outcome can be verified by looking at previous examples which have provided good trading opportunities. This two types of chart formation, reversal and continuation, are helpful to all traders learning how to read the Forex markets.
We should remember that our goal is to spot big movements before they happen so that we can ride them out and rake in the cash. After all, who doesn’t want to have a pool of cash to swim in like a rich?
Chart formations help us spot conditions where the market is ready to break out. They can also indicate whether the price will continue in its current direction or reverse so we’ll also be devising some nifty trade strategies for these patterns. But you don’t need to worry about it; we’ll give you a neat little cheat sheet to help you remember all these cool patterns and strategies!
Types of Forex trading Chart Patterns
Below is the list of chart patterns that we’re going to cover:
- Double Top and Double Bottom
- Head and Shoulders and Inverse Head and Shoulders
- Bullish and Bearish Rectangles
- Triangles (Symmetrical, Ascending, and Descending)
The double top and bottom
One of the most highly recognizable and popular reversal chart formations is The double top and bottom. This chart form when price attempts, twice, to push higher or lower. The result is that an M or W pattern forms and this represents the end of a trend. Normally Traders wait for this pattern to be confirmed when price pushes up or down beyond the first pullback, showing that it is not simply a short-term correction but a complete reversal of the trend. Double bottom and double top chart formations can be seen on all timeframes and they are made even more reliable if the second top or bottom fails to reach the price level of the previous top or bottom.
Head and shoulder
Another very recognizable and frequently-traded reversal chart formation is Head and shoulder. The pattern is formed when price rises before pulling back, creating the left “shoulder”, and then pushes higher to create the “head”. In the most obvious head and shoulders patterns the price will then fall to the level of the first neckline before trying once again to rise in order to create the right hand shoulder. Forex traders will wait for the right shoulder to complete before price is expected to fall aggressively beyond this. This is one of the favored patterns for technical traders due to the high probability of success but also the speed at which price often falls off the right shoulder.
Flags and pennants
This pattern form a good indication that price is going to continue in the direction of the trend after a consolidation period. These are particularly important for traders who use the trend to hold long and short positions as they provide reassurance that price will continue to move in their favor once the consolidation is complete. In order to be considered reliable, these chart formations should be found during a trend when a previously sharp rise or fall in price has occurred. These patterns are usually followed by a breakout beyond the resistance line formed by the pattern.
Most technical traders use channels to define the inner and outer boundaries of the current price trend. They can be found on price charts using both an upper and a lower trend line and these become support and resistance levels from which trades can be places. As a continuation pattern, channels can be either bullish or bearish, depending on their slops. Once the trend begins to falter, traders typically wait for the price to confirm a breakout of the channel before looking for reversal or corrective trades.
The Breakout traders enjoy identifying rectangular chart patterns that shows price trapped within a range to form a rectangle. These patterns are particularly powerful on the 1 hour and higher timeframes as price tests the upper and lower support and resistance of the rectangle and eventually breaks out. Traders will normally wait for confirmation of the breakout and enter the trade with a high probability that the trend will continue in the direction of the breakout.
Please note that: Successful Technical Analysis largely depends on the functionalities of the MT4 Platform provided by your broker. If you are new in forex trading, you might consider reading the article on what is the best trading platform, Introduction to MT4 Platform and MT4 Platform functions. We have used a fully functional MT4 platform provided by HYCM Broker. Read why their MT4 platform has better trading conditions from the HYCM Broker review.
Technical Analysis in Forex Trading
|Lesson 1||Types of Technical Analysis Indicators|
|Lesson 2||Forex Trading Trendline Analysis|
|Lesson 3||Forex trading Chart Patterns|
|Lesson 3.2||Double Tops and Double Bottoms|
|Lesson 3.3||Head and Shoulders Pattern|
|Lesson 3.4||Rectangle Chart Patterns|
|Lesson 3.5||Triangle Chart Patterns|
|Lesson 4||Japanese candlestick Trading Strategy|
|Lesson 4.2||Japanese candlestick Trading Strategy Part 2|
|Lesson 5||Support and Resistance Levels|
|Lesson 6||Types of Technical Analysis Indicators|
|Lesson 6.2||moving averages Technical Analysis|
|Lesson 6.3||MACD Indicator Technical Analysis|
|Lesson 6.4||RSI Indicator Technical Analysis|
|Lesson 6.5||Stochastics Indicator Technical Analysis|
|Lesson 6.6||Technical Analysis with Bollinger bands Indicator|
|Lesson 7||Fibonacci Retracement Forex Strategy|
|Lesson 8||Forex Trading Pivot Strategies|