Most Frequently Used Forex Chart Patterns
Reading time: 9 minutes
You'll probably know that the chart of a security is the starting point for all future analysis. Even those who are sceptical of technical analysis still use charts in their trading to some extent. There is a very good reason behind this - Forex charts provide traders with a large amount of information within limited time periods.
For instance, if you have a look at a four year chart of a company, you can instantly see how well stockholders have been over that period of time. You would also be able to identify the volatility of the company's shares, just by observing movements on the chart.
What is the point we are trying to make? With such a huge variety of ways to trade currencies, selecting the most common methods can save a lot of time, money, and effort. By using popular and simple approaches, a trader can design a complete trading plan using Forex trading chart patterns that frequently occur, and can be easily spotted with a little practice.
Charts such as Ichimoku and candlestick patterns, can provide you with visual clues on when the best time to trade is. Whilst these methods can be complex and sophisticated, there are some simple methods that take advantage of the most regularly traded elements of those patterns. Two other frequently used chart patterns are head and shoulders, and the triangle.
Crucial Information About the Head and Shoulders Pattern
You will probably have come across this pattern as it is quite popular and can be easily spotted. In addition, this pattern appears on all time frames and can be applied by day. Furthermore, entry levels, stop levels, and price targets make the formation easy to implement, because the Forex chart pattern supplies significant and easily seen levels.
Let's look at how a head and shoulders pattern is formed:
- The left shoulder - the price rise followed by a left price peak, accordingly followed by a decline
- The head - the price rises once more forming a higher peak
- The right shoulder - a decline happens once more, followed by a rise forming a right peak that is relatively lower than the head
With an inverse head and shoulders, the Forex pattern formation is the same as mentioned above, but in reverse. It is important that traders wait for the pattern to be completed after they set a neckline or trendline that connects two highs in a bottoming pattern, or two lows in the topping pattern of the formation. Almost all or partially completed patterns should be watched. However, no trades should be performed until the the pattern breaks the neckline.
The most common entry point is a breakout of the neckline, with a stop above or below the right shoulder. As for the profit target, it is the distinction of the high and the low with the pattern Forex supplemented (market bottom) or deducted (market top) from the breakout price. Whilst this system is not ideal, it provides an approach for trading the markets based on logical price moves.
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The Triangles and Their Types
As the name suggests, these chart patterns have a triangular shape. The triangle pattern consists of two trendlines, flat, and either ascending or descending, with the price of the security heading between the two trendlines. There are three types of triangle Forex patterns which differ in their importance and construction, and they are: the ascending triangle, the symmetrical triangle, and the descending triangle.
The Symmetrical Triangle
Let's start with the symmetrical triangle, which is often considered to be a continuation chart pattern that signals a period of consolidation within a particular trend, consequently followed by the resumption of the preceding trend. It is formed by the convergence of two components: the descending resistance line and the ascending support line.
The two trendlines in the formation of this triangle should have a slope converging at a point, which is commonly known as the apex. The security price will bounce between those trendlines, towards the apex, and will then typically breakout in the direction of the foregoing trend. This is one of the peculiarities of this chart pattern in Forex.
In the case of being preceded by a downward trend, a trader's task is to concentrate on a break below the ascending line of support. However, if it it has been preceded by an upward trend, the next step is to look for a break above the descending line of resistance. This pattern does not always lead to a continuation of the prior trend. The break in the opposite direction of the previous trend should signal the new trend's formation.
The Peculiarities of the Ascending Triangle
One of the Forex trading patterns, the ascending triangle, is actually a bullish pattern that provides an indication that the security price is heading higher upon accomplishment. This chart pattern is formed by two trendlines - a flat trendline being the point of resistance and an ascending trendline in the role of price support.
The security price moves between those trendlines until it ultimately breaks out to the upside. This chart pattern will usually be preceded by an upward trend, therefore making it a continuation pattern. That being said, this pattern can also be found during a downtrend.
The Essence of the Descending Triangle
The descending triangle pattern in Forex is the opposite of the ascending triangle pattern, in that it provides a bearish signal to FX chartists, informing that the price will trend downward upon accomplishment of the pattern. This pattern consists of a flat line of support, and a downward-sloping line of resistance.
Almost identically to the ascending triangle, this chart pattern is mainly considered to be a continuation chart pattern. That is due to the fact that it is preceded by a downward trendline. It can also be found in an uptrend.
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The Engulfing Chart Pattern
Candlestick charts provide more information than line graphs, OHLC, or any other area charts. For this reason, candlestick chart patterns in Forex are a useful tool for measuring price moves on all time frames. Since there are a lot of candlestick patterns, we suggest paying attention to a particular one which is especially useful in FX trading.
The engulfing pattern is an outstanding trading opportunity, as it is easy to spot and the price action determines a powerful and instant change in direction. In a downtrend, an up candle real body will entirely engulf the preceding down candle real body. Conversely, in an uptrend, a down candle real body will wholly engulf the foregoing up candle real body.
This pattern is highly tradable as the price action identifies a strong reversal, since the previous candle has already been entirely reversed. Traders can take part in the beginning of a potential trend whilst executing a stop.
What is a Ichimoku Cloud Bounce?
Generally, Ichimoku is a technical Forex chart pattern indicator which overlays the price data on a certain chart. Since patterns are not as easy to pick out in the real Ichimoku drawing, when you combine the Ichimoku cloud with the price action, you are able to see a pattern of common occurrences.
In turn, the Ichimoku cloud consists of both former resistance and support levels in order to generate a dynamic resistance and support area. In other words, if the price action is above the cloud, it is actually bullish, and the cloud acts as a support. If the price action is underneath the cloud, it is bearish, and the cloud acts as a resistance.
The cloud bounce is an ordinary continuation pattern, yet the resistance and support of the cloud is considerably more dynamic than the typical horizontal resistance or support lines. This pattern can provide entries as well as stops that are not generally seen.
There is a wide range of trading approaches using patterns in prices to find entries and stop levels. Forex chart patterns that include the head and shoulders and triangle patterns provide stops and entries, as well as profit targets within a pattern, which can be seen without effort.
The use of the engulfing candlestick pattern provides an insight into trend reversal, as well as, potential participation in that FX trend with an identified entry and stop level. As for the Ichimoku cloud bounce, it's useful for participation in long trends, by exploiting multiple entries and as a progressive stop. A trader has the opportunity to combine all those patterns and methods, and perhaps create a distinctive and customisable trading system.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.