A Brief Breakdown of Forex Chart Patterns

Whether you’ve been trading the Forex market for a long time or a quite new to it, chances are you’ve heard about chart patterns and the importance of technical analysis. Today, we’ll go through the most important chart patterns in Forex to give you a starting point in increasing your knowledge of trading technical chart patterns.

First, let’s explain a little bit about what chart patterns actually are. Forex chart patterns are based on the price action of a particular asset/currency pair/etc, that either provides a higher than average probability of price moving in a particular direction, and/or offers a great risk reward potential for a trade. These chart patterns are clues to helping determine the potential for price to push towards a predefined target area that traders can take advantage of.

Types of chart patterns

Forex trading patterns are generally split into three categories depending on the potential direction indicated by the pattern itself. The first category we’ll cover is continuation chart patterns.

A trend continuation pattern is exactly what the name suggest, a pattern that suggest price will continue in the direction in which it’s been trending. If you see a continuation pattern (which we’ll discuss further on in this article), it means that price is in a short term correction.

The next type of pattern we’ll cover is reversal chart patterns. A reversal pattern will reveal itself at the end of a trend. In many cases if you see a reversal pattern forming when price is trending, we can expect that price will reverse if the reversal pattern is confirmed.

Finally, we have neutral chart patterns. Now, these chart patterns are likely to push the price towards a new move, however the direction of price movement is unknown until price actually breaks out in either direction. Neutral chart patterns tend to appear during both trending and consolidation periods. This might sound confusing, but these neutral patterns can be quote valuable because they can still present some great trades, and all you have to do is open a position in the direction that price breaks out.

Below is a list a few of the most common technical Forex chart patterns and their potential direction.

 

Chart Pattern Occurs when? Type of signal Probable Direction What it looks like
Double top Uptrend Reversal Down  
Double bottom Downtrend Reversal Up  
Head and shoulders Uptrend Reversal Down  
Inverse Head and Shoulders Downtrend Reversal Up  
Rising Wedge Downtrend Continuation Down  
Rising Wedge Uptrend Reversal Down  
Falling Wedge Uptrend Continuation Up  
Falling Wedge Downtrend Reversal Up  
Bearish Rectangle Downtrend Continuation Down  
Bullish Rectangle Uptrend Continuation Up  
Bearish Pennant Downtrend Continuation Down  
Bullish Pennant Uptrend Continuation Up  
Ascending Triangle Both Neutral Both (Up Bias)  
Descending Triangle Both Neutral Both (Down Bias)  
Symmetrical Triangle Both Neutral Both  
Symmetrical Expanding Triangle Both Neutral Both  

 

As you can see, these patterns are a crucial part of trading price action in the forex market. They tend to represent the accumulation and distribution of price (which reveals itself as consolidation) that comes after or during a trend in any direction. Then, after this consolidation is completed (the buying and selling by the big banks), the price often breaks out resulting in a significant move.

It’s can be hard to recognise these patterns if you’re quite new to Forex trading, however with practice you’ll find it easier and easier to spot them live on a chart. Feel free to bookmark this ‘cheat sheet’ and use it for reference because technical chart patterns are a tried & tested system used by many professional traders, and a welcome addition to any new trader’s strategy.

I hope you enjoyed reading this brief introduction to popular Forex chart patterns. Have a great week, traders.

Source: Vantage FX Blog