The Most Common Forex Chart Patterns
A Forex price chart is the starting point for all trading analysis. Even those traders who are sceptical of technical analysis still use charts in their trading to some extent. There is a very good reason behind this, which is that Forex charts provide traders with a large amount of information.
Furthermore, there are certain Forex patterns which occur in the price charts and provide the basis of various trading strategies. In this article, we will explore some of the most common Forex chart patterns and show you how you can spot them and use them to your advantage!
With such a variety of ways to trade Forex currencies, understanding the most common trading 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 chart patterns that frequently occur and can be easily spotted with little practice.
Whilst some of these methods can be advanced and sophisticated, there are some simple methods that take advantage of the most regularly traded elements of those Forex patterns.
In the following sections, we will provide you with a cheat sheet for some of the most common Forex chart patterns and teach you how to spot them!
The Head and Shoulders Forex Pattern
You will probably have come across the head and shoulders Forex pattern, or at least have heard of it, as it is quite popular and is fairly easy to spot.
It can appear on all time frames of all currency pairs. Its entry levels, stop levels and price targets make the formation easy to construct a trading strategy around, because these Forex chart patterns supply the levels for you.
Let's have a look at how the head and shoulders Forex 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 than the left shoulder
- 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 is the same as shown above, but upside down. 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 Forex chart patterns should be watched. However, no trades should be performed until the pattern breaks through the neckline – indicated by the lower of the two grey lines in the image above.
The most common entry point is a breakout of the neckline, with a stop loss set above or below the right shoulder, depending on whether the pattern is regular (like above) or inversed.
As for the profit target, for a regular head and shoulders Forex pattern, you need to establish the difference between the high of the head and the lowest point of both shoulders, this figure is then subtracted from the entry price.
For an inverse head and shoulders pattern, the process is very similar, but in reverse. The low of the head is subtracted from the high of the shoulders and the resulting figure is then added to the breakout price. Whilst this system is not ideal, it provides an approach for trading the markets based on logical price moves.
The Triangle Forex Chart Patterns
The triangle Forex patterns consist of two of the following trendlines: flat, ascending or descending. The price of the security bounces between these two trendlines before, eventually, breaking out.
There are three types of triangle Forex patterns which differ in their significance and construction:
- The symmetrical triangle
- The ascending triangle
- The descending triangle
The Symmetrical Triangle
Let's start with the symmetrical triangle, which is often considered to be a continuation Forex chart pattern that signals a period of market consolidation, consequently followed by the resumption of the preceding trend. It is formed by a descending resistance line and an 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 these two trendlines, towards the apex, and will then typically breakout in the direction of the foregoing trend.
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 has been preceded by an upward trend, the next step is to look for a break above the descending line of resistance.
It is important to note that whilst this Forex chart pattern favours a continuation of the previous trend, this is far from always the case. A break in the opposite direction of the previous trend should signal the new trend's formation.
The Ascending Triangle
The ascending triangle is a bullish Forex pattern which provides an indication that the security price is heading higher. 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 these trendlines until it breaks out, usually upwards through the line of resistance. These Forex chart patterns will typically be preceded by an upward trend, therefore making it a continuation Forex pattern.
The Descending Triangle
The descending triangle pattern is the opposite of the ascending triangle pattern. It provides a bearish signal to Forex traders, informing them that the price is likely to trend downwards upon completion of the pattern. This Forex pattern consists of a flat line of support, and a downward-sloping line of resistance.
Like the ascending triangle, this Forex pattern is mainly considered to be a continuation chart pattern, due to the fact that it is typically preceded by a downward trend.
It is important to note that this is not an exact science and, as with all these triangle patterns, the price will not always breakout in the expected direction. That is why it is crucial to implement a stop loss into your trading - as part of your overall risk management plan – in order to protect yourself against any unexpected price movements.
The Engulfing Candle Forex Chart Patterns
Forex candlestick charts provide a lot more information than simple line graphs. For this reason, Forex chart patterns are a useful tool for measuring price moves on all time frames. Since there are a lot of Forex chart patterns, we suggest paying attention to a trading strategy which is based on a pattern which is easy to spot.
The engulfing candle Forex pattern presents an excellent trading opportunity, as it is simple to spot and the price action indicates a powerful and instant change in direction.
In a downtrend, an up candle real body (i.e. the space between the open and close price) will entirely engulf the preceding down candle real body. This is a bullish engulfing pattern. Conversely, in an uptrend, a down candle real body will wholly engulf the previous up candle real body. This is a bearish engulfing pattern.
These Forex chart patterns are highly tradable as the price action strongly indicates a reversal, since the previous candle has already been entirely reversed.
Traders can take part in the beginning of a potential trend, setting a stop loss above the previous swing high where the Forex pattern occurred, when the engulfing pattern is bearish. When trading a bullish engulfing pattern, the stop loss should be placed below the previous swing low.
Final Thoughts
There is a wide range of trading approaches which make use of Forex chart patterns to find market entries and stop levels.
Forex chart patterns that include the head and shoulders and triangle patterns provide ready-made entries and stop losses, as well as profit targets within a pattern which can be identified with little effort.
The use of the engulfing candlestick Forex pattern provides an indication of a trend reversal, providing the potential opportunity to participate in a new Forex trend with an identified entry and stop level.
A savvy trader may take the opportunity to combine all these well-known patterns and methods and perhaps create a distinctive and customisable trading strategy of their own.
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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.
