Assume that you are searching for gold. You can’t dig every part of the earth, you need a tool to show you where the precious mine located. In other word, you need a detector! Well, chart patterns in Forex are your detectors in Forex trading.
Today I will explain chart patterns in Forex to you. The more you read carefully, the more you will equipped with great trading knowledge. So don’t even think of making technical analysis before understanding these concepts.
What are the main chart patterns in Forex? How to spot a uptrend or downtrend? Do these strategies work really? Is chart patterns in Forex complicated? Don’t worry, you will be able to answer all these questions after reading this chart patterns in Forex article.
I am going to cover basic concepts for beginning. But first we should understand our goal before achieving it. One of our aims is to identify price downtrends and avoid it. The other aim is to locate uptrends and earn a lot of money! So to sum up, our goal is earning money like everyone else.
Basically we can cover the topic in six different category.
This type of pattern indicates reversal from uptrend. You can identify top so easily. The part of graphic looks like a mountain and the top is the peak point of that mountain.
Another similarity between a top and a peak of mountain is that you can’t go up further. But how can you be sure whether it’s double top or an actual rising? It’s easy. In double top, the second peak is very close to first peak. However it doesn’t exceed.
So it means that market has reached the maximum value in the first peak and no matter how they tried to overcome it, they couldn’t achieve. So it’s a double top and it means the pressure of buyers is about to end. Thus, we should be ready for a downtrend.
We should draw a neckline and when the price downs below the neckline, we should be ready for the immediate drop in the price.
So when will the drop stop? Well, probably the price will drop as much as the price difference of neckline and double top.
Another reversal sign is double bottom in chart patterns in Forex. However this time the pattern will tell us to buy rather than sell.
Same as Double top, Double bottom will form after the market has reached a certain level of low.
After the pressure of sellers end, you can expect the price to rise as much as the difference between neckline and double bottom.
As you see double top and double bottom is same but exact reverse of each other.
Head and Shoulders
Another reversal indication is ‘head and shoulders’. There is reason we call it head and shoulders. There will be three different peaks in the graph next to each other. However, the middle peak will be higher than other two. Just like head and shoulders of human body…
Then we should draw a neckline between two lowest points of the peaks. If the neckline goes downward, it means that our conclusion is more reliable.
So after the price downs below the neckline, we can expect a significant drop in the price. It will probably drop as much as the difference between neckline and highest peaks.
Reverse of Head and Shoulders
Head and shoulders and its inverse is basically same logic. You just need to think everything as opposite of what I showed in head and Shoulders.
For example in this type of pattern, you need to buy instead of selling, because the price will rise after it surpass the neckline.
Wedges mean pausing. If you realize the wedge, it means that Forex traders are still not sure what to do.
Wedge of Rising
The price will be continued between resistance line and support line. However in this type of chart pattern in Forex, Support line is steeper than resistance line. The form of lines look a-like wedge so the name of the pattern was born.
So if you see this pattern after a rise of price, you should be ready for the fall of the prices immediately after the wedge.
However, if you see this pattern after a fall of price, it could continue falling of price.
Wedge of Falling
It’s like wedge of rising but there are differences. Both of the lines are falling, but this time resistance line is steeper than support line.
Rectangles is one of the most useful chart patterns in Forex. If you realize that the price is stuck between parallel support and resistance lines. The rectangle indicates that buyers and sellers are in draw so the price can’t surpass the lines for a while. So you need to wait until one of the boundary value is broken.
Rectangle of Bearish Trend
This type of chart pattern in Forex occurs when the price remains stable after a downtrend. The reason of this rectangle is to give a break from selling. Probably sellers will start their trading executions again after the rectangle.
Once you realize that the price is below the support line, you can expect this downtrend to continue at least as much as the price difference of support and resistance lines.
Rectangle of Bullish Trend
In contrast, if the price was rising before the rectangle, you can conclude it as rectangle of bullish trend. So if you buy before surpassing the resistance line, you can earn good money.
Moreover, once the price breaks the resistance level, how much will the price will increase? The answer is at least as much as the difference between two parallel lines which forms up the rectangle.
Pennants is one of the most used form of chart patterns in Forex. Pennants are similar to rectangles by many ways. One of them is to indicate continuation rather than reversal.
After the big moves of prices, whether a rise or drop of price, traders take a rest before continuing their trading operations. So the price sometimes forms up a tiny triangle also known as pennant.
During this pennant form of price, many traders will join to continue the big move of the price.
Pennants of Bearish Trend
Bearish trend occurs after the price dropped so fast. So after a while, some of the traders stop their trading operations while new traders will join the downtrend. Thus, pennant form of the price will be realized.
Pennant of Bullish Trend
Increase of the price will continue after this type of pennant form. Again this happens when the buyers want to take a rest from their trading executions. After they rest enough and store enough power, they will continue buying.
In fact, the pennants have a very small size, but they indicate a very fast and very big moves in price. So be aware and try to catch them.
There are three different form of triangles in chart patterns in Forex: symmetrical, ascending and descending.
This type of pattern occurs when the line of highs and line of lows merge in a point. And they are symmetrical to horizontal axis. It means that the slope of both lines are equal in magnitude but they have opposite signs.
So when the price comes to end of the triangle, you can expect price to break one of these lines. But how can we know whether the price will rise or fall? Well, unfortunately we won’t be able to tell this.
But don’t worry. We can still get over this problem with developing a smart way of trading. You need to give trading executions when the price just get out of the triangle.
On ascending triangle, there is a resistance level at the top and a line of higher lows. If we need to explain the situation, the buyer traders can’t surpass the resistance level. So they drain their energy by making higher lows instead.
So finally, we have reached to tip of the triangle, so what? What can we conclude from this ascending triangle? The answer is really controversial.
Many people who call themselves as ‘experts’ of charting will tell you that the buyers will win and they will make the price to rise. But in fact, it’s not true always. You must prepare yourself for each direction of price move.
If you read our article until this point, you would guess that the descending triangle is opposite of ascending triangle. And yes, you are right! Instead of resistance, there is a support line and instead of higher lows, there are lower highs.
Most of the cases, the price will break support line and the price will fall. But same as ascending triangle, you can’t be a hundred percent sure about fall of the price. So be aware!