If you've been paying attention to the Forex market for any duration of time, you've likely heard about chart patterns and their importance in technical analysis.If you want to understand more about chart patterns and the signals they provide in trading, this article will serve as a good starting place for you to expand your …
If you’ve been paying attention to the Forex market for any duration of time, you’ve likely heard about chart patterns and their importance in technical analysis.
If you want to understand more about chart patterns and the signals they provide in trading, this article will serve as a good starting place for you to expand your knowledge of traditional chart pattern trading.
What Are Forex Chart Patterns?
Forex chart patterns are price action patterns that have a greater than average likelihood of confirming in a specific direction. These trading patterns provide important indications to price action traders who employ technical chart analysis to make Forex trading decisions. Each chart pattern can shift the price in a new direction. As a result, Forex traders look for chart patterns to capitalise on anticipated price fluctuations.
Different Types Of Chart Patterns
Forex trading patterns are classified depending on their likely price direction. In Forex fundamental charting, there are three basic types of chart patterns.
Continuation Chart Patterns
When the market is rising, the trend continuation chart pattern occurs. Seeing a continuation chart pattern during a trend indicates that the price is correcting. In this way, continuation patterns suggest the likelihood of a fresh move in the same direction. Pennants, rectangles, and corrective wedges are amongst the most common continuation chart forms.
Reversal Chart Patterns
At the end of a trend, the trend reversal chart patterns occur. When you see a reversal chart structure when the price is trending, the price move will usually reverse with the validation of the formation.
In other words, reversal chart patterns signal that the present trend is going to finish and that a new opposite move is on the way! Double (or triple) top/bottom, head and shoulders, reverse wedges, and ascending/descending triangles are the most common reversal chart patterns.
Neutral Chart Patterns
These are the chart patterns that will most likely drive the price in a new direction, but the direction is uncertain. Neutral chart patterns can emerge during both moving and non-trending times. You may be wondering what value-neutral chart patterns have because we can’t predict the future direction.
However, recognising a neutral chart pattern is still extremely important since it allows you to trade a future move. You can open a trade in the direction of the breakout after the price confirms a neutral chart pattern!
Continuation Chart Patterns
Pennant Chart Pattern
The pennant is a price move that is corrective/consolidating and appears throughout trends. Its form is similar to that of a symmetrical triangle since both are constrained by trendline support and resistance lines. Pennants generally form throughout a trend phase, although triangles can form throughout both trends and general consolidation phases.
Pennants can be bullish or bearish based on the trend. When a pennant forms throughout a trend, the price can move in the direction of the broader trend. The projected move is generally a measured move, which means that the objective from the breakout position equals the size of the pennant.
Rectangle Chart Pattern
The rectangle chart pattern is a trend continuation pattern that seems to be a price stabilization formation between horizontal support & resistance lines. When the price begins to move sideways during a trend, producing a rectangle, another trending movement is likely to occur until the price ultimately breaks out of the rectangle shape. This motion will most likely be at least as large as the rectangle. Rectangles can be bullish or bearish based on the trend.
Corrective Wedge Pattern
Corrective wedges emerge as a retracement in the opposite direction of the trend. As a result, if you have an upswing and a falling wedge, you get a corrective falling wedge with trend continuation characteristics. You have a correcting rising wedge with a trend continuation nature if you have a downtrend and a rising wedge. If a corrective wedge forms during a trend, it can drive the price in the direction of some other trending movement equal to the size of the wedge.
Reversal Chart Patterns
Reversal Wedge Pattern
Reversal rising/falling wedges have the same appearance as corrective rising/falling wedges. The distinction lies in the relationship between the wedge and the trend direction.
Every rising wedge has a bearish bent to it. As a result, a rising wedge reverses bullish tendencies while maintaining negative trends. At the same time, every collapsing wedge has a bullish personality. As a result, falling wedges reverse negative tendencies while maintaining bullish trends.
Double Top & Double Bottom Patterns / Triple Top & Triple Bottom Patterns
These are some more reversal chart patterns. A double top pattern occurs when, following an upswing, the price forms two tops that are roughly on the same level. On the other hand, we have a double bottom pattern when, following a decline, the price forms two bottoms that are roughly on the same level. The triple top and triple bottom formations are the same. The variation here is that the tops and bottoms are three instead of two.
Head & Shoulders Pattern
This is one of the most dependable chart patterns in the inventory of a technical analyst. Head and shoulders is a reversal formation that indicates a topping reversal following a bullish run.
Simultaneously, this chart pattern has an inverse version – inverted (or inverse) head and shoulders. The inverted head and shoulders pattern usually appears after a negative trend and indicates a price bottom.
Ascending Triangle Pattern / Descending Triangle Pattern
The ascending triangle has tops that are all on the same horizontal line as the bottoms of the swings. The falling triangle has bottoms that are parallel to the horizontal line and lower swing tops.
Even though many people see these chart patterns as neutral, their likelihood of reversing the trend is slightly greater.
Neutral Chart Pattern – Symmetrical Triangle
Symmetrical triangles have two sides that are almost the same length. Because the two sides of the triangle are generally the same, there is a technical force equivalence, which gives the structure its neutral nature.
The Bottom Line
Forex chart patterns are analytical on-chart patterns that predict future price movements.
There are three types of chart patterns:
- Continuation Chart Patterns
- Reversal Chart Patterns
- Neutral Chart Patterns
The following are some of the most significant trend continuation chart patterns:
- Pennants
- Rectangles
- Corrective Wedges
The following are some of the most significant trend reversal chart patterns:
- Double/Triple Top/Bottom
- Head and Shoulders
- Reversal Wedges
- Ascending/Descending Triangles
The Symmetrical Triangle is a common neutral chart pattern.
All of these chart patterns have a price movement that is proportional to the magnitude of the formation itself. This is known as a calculated move price potential.
