Chart Trend Patterns

Chart Patterns? It's Easy If You Do It Smart

Chart Patterns Your Way To Success

The discussion is how to recognize forex chart trend patterns and chart patterns your way to success and trade reversals. In this forex blog from forex friend loan, Chart trend patterns can be very helpful when trading forex trader in the forex market. They can help you get into forex near the bottom or the top.

Chart patterns are one of the most effective trading tools for a forex trader. They are pure price-action and form on the basis of underlying buying and selling pressure. Chart patterns have a proven track-record, and traders use them to identify continuation or reversal signals, to open positions and identify price targets.

Why Forex Chart Patterns?

Chart patterns are naturally occurring patterns in the forex market that can indicate a big move either to the upside or the downside. They can be a good indicator for short-term movements.

So why are they so important? Why can they give you a great way to trade the forex market?

1. They offer you a target

Chart patterns normally have a target that you can shoot for. This means that when you enter the trade you know what you are planning to happen.

It can be hard to determine how much profit is enough. Where you are just being greedy, and where you still need to hang onto the trade.  Well, chart patterns have targets so you know exactly when to take your profits and when to run.

2. They Let You Cut Your Losses

In addition to letting you know exactly where you should be aiming for they also allow you to know when the trade is just not working out and it is better if you just cut your losses short.

If a pattern breaks out but fails to move higher and in fact, the price of the currency pairs goes back into the pattern it broke out of, that is a good sign that the pattern has failed and it is likely to start turning against you. So if it was me I would want to exit for a small loss before it became a big loss.

3. Lets you trade all Time Periods

If you want to be a day trader chart patterns can help you, if you want to hold your forex pairs for several days chart patterns can help and if you want to hold your forex pairs for many months chart patterns can help you.

The same principals apply so you only need to readjust your chart in order for you to trade your desired time frame.

LEARN TO TRADE BASICS FIRST BEFORE TRADE

Chart patterns are specific price formations on a chart that predict future price movements. As the technical analysis is based on the assumption that history repeats itself, popular chart patterns have shown that a specific price movement is following a particular formation of price (chart pattern) with high probability. Therefore, chart patterns are grouped into (1) Continuation Patterns – that signal a continuation of the underlying trend, and (2) Reversal Patterns – that signal reversal of the underlying trend.

So, what is a trend reversal pattern? They are simply patterns that are seen time and time again at the end of a trend. There are a number of different ones, Double Top/Bottom, Head and Shoulders, Rounding Top, Triple Top, Triple Bottom, Rounding Bottom and Cup & Handle, etc. But they tell you the same thing.

Part 1 Reversal Patterns

Double Top and Double Bottom
Double Top and Double Bottom are another reversal pattern, occurring during up- and downtrend, respectively. A double top, as the name suggests, has two swing highs at about the same, or slightly different price. It shows that buyers didn’t manage to push the price higher, and a trend reversal might be ahead. The trigger signal for opening a sell position is the break of the support line, with target price being the distance between the top and the support line of the formation. A double bottom pattern is the opposite, with two swing lows. Sellers didn’t have the power to move the price more downward. The trigger signal is the break of the resistance line, with the target price being the distance between the bottom and the resistance line.

Head and Shoulders
Head and Shoulders is a reversal chart pattern, that indicates the underlying trend is about to change. It consists of three swing highs, with the middle swing high being the highest (red lines on the chart). After the middle swing high, a lower high occurs which signals that buyers didn’t have enough strength to pull the price higher. The pattern looks like a head with a left and right shoulder (the three swing highs), and that’s how it got its name. The neckline is connecting the two shoulders, and a break-out below the neckline is considered a selling signal, with a price target being the distance from the top of the head to the neckline (green arrows). If the Head and Shoulders pattern occurs during a downtrend, the same inverse pattern (with three swing lows) is called an Inverse Head and Shoulders pattern.

Triple Top and Triple Bottom
Triple Top and Tripple Bottom formations are basically the same as Double Top and Double Bottom formations. Both are reversal patterns, with the difference that Triple Tops and Bottoms have three swing highs and swing lows, respectively. Trigger signals are again the break of support and resistance lines, with target prices being the distance between the top and support line (for Triple Tops), and bottom and resistance line (for Triple Bottoms).

Rounding Top
A Rounding Top pattern takes a little longer to form then the other mentioned chart patterns. It shows a gradual change of the sentiment from bullish to bearish. The price forms gradually a „rounded top“, as can be seen on the chart. The trigger for entering a short position is the break of the support line, with the price target equal the distance from the top to the support line.

Rounding Bottom
A Rounding Bottom is a Rounding Top flipped vertically. The price made a gradual change from the previous downtrend, indicated by a „rounded bottom“. The trigger signals are the same as by the Rounding Top, i.e. the break of the resistance line. Price target is the distance between the bottom and the resistance line.

Part 2 Continuation Chart Patterns
In this part, I will reveal the most popular continuation chart patterns. Continuation patterns are as important as reversal patterns. They are more suitable for a different style of trading- trend following. While reversal patterns are good for contrarian traders and swing traders, continuation patterns are considered to be great for finding a good entry point to follow the trend. The next few patterns will reveal a new angle to trading to you. I will start with the first one, which is the rectangle:

Rectangles
A rectangle is a continuation pattern, which means it confirms that the underlying trend should continue. It is divided into bullish and bearish rectangles, depending on the underlying trend. A bullish rectangle appears during an uptrend, when the price enters a congestion phase, during a sideways trading. The price will likely break out in the direction of the preceding trend. The trigger signal is the break of the upper line of the rectangle, with the price target being the height of the rectangle. For the bearish rectangle, the opposite rules apply. It forms during a prevailing downtrend when the price enters a congestion phase and trades sideways. This means the trend will most likely continue downwards, with the break of the lower rectangle line. The price target is again the height of the rectangle.

Wedges
A wedge is another continuation pattern. A bullish wedge forms during an uptrend, as the price trades inside converging trendlines. These converging trendlines imply that sellers are trying to push the price lower, but don’t have enough strength to win against the buyers. Ultimately, the buyers win and the price breaks through the upper trendline, indicating that the uptrend will resume. Target prices are calculated as the maximal height of the wedge, which is then projected to the point of break-out. A bearish wedge is similar to a bullish one, with the difference that it is appearing during downtrends, and the slope of the wedge is up. Converging trendlines are again showing that buyers interrupted the downtrend, trying to push prices higher. A break-out through the lower trendline indicates that sellers won the battle, and the downtrend is resuming. The target price is, like by bullish wedges, the maximal height of the wedge which is then projected to the point of break-out.

Flags
A flag is very similar to a wedge, with the difference that the trendlines which form the flag are parallel, and not converging. A flagpole is also a part of the flag pattern because the target price is measured in a different way than by other chart patterns. Flags can be bullish and bearish, with a bullish flag shown on the chart above. A bullish flag forms during an uptrend, with parallel trendlines above and below the price-action, which form a downslope. A break-out above confirms that the uptrend is resuming. A bearish flag is pretty much the same as a bullish flag, with the difference that it forms during downtrends and has an upslope. The price target is measured as the height of the flagpole (green arrow) to the top of the flag, which is then projected to the lowest point of a bullish flag (or highest point of a bearish flag).

TRADING FOREX WITH CANDLESTICK CHARTS

Triangles
Triangles can be ascending, descending and symmetrical. All three types of triangles look pretty much the same, with the difference that ascending triangles have a flat upper trendline, and descending triangles a flat lower trendline. The asymmetrical trendline is the most common, and forms during both up- and downtrend. It has converging trendlines, just like a wedge pattern, but the slope is neither pointing up or down. The breakout point of the lower trendline during downtrends confirms that the downtrend is resuming, while a breakout of the upper trendline during uptrends confirm the underlying uptrend. The target price is the height of the triangle, projected to the point of the breakout.

Cup and Handle
A Cup and Handle pattern is a Rounding Top pattern with an additional pullback (the handle). It is a continuation pattern which shows that in middle of an uptrend, the sellers tried to push the price lower, but the sentiment is again gradually changing from the sellers to the buyers. Additionally, a pullback occurs as the last attempt of the sellers to dominate. After a break-out of the resistance line (green dotted line), the target price is calculated as the height of the Cup & Handle pattern. An Inverse Cup & Handle pattern appears during downtrends, and the inverse rules of a regular Cup & Handle apply for it.

Every reversal pattern is said to have a target for which to shoot for. Most of these patterns will hit their target, but not all of the time. In fact, there are three different things that can happen when one of these patterns form.

Another thing that can happen is the forex market heads up once it breaks out. Then it goes and hits its target. Once it hits its target however the stock may actually crash. People see the forex as overvalued and a selloff occurs.

The third thing that can happen is the pattern can just fail. The forex doesn’t go up and actually breaks down lower.

All this uncertainty is why trend reversal trades need to cut their losses short and let their winners ride.

Chart patterns your way to success every trader should know.

This chart patterns your way to success might help you determine trend direction, but you should not rely solely on them. I have covered the major 10 chart patterns every trader should know. I believe that these are the most important ones, but if you feel like I have omitted an important one, please share.

Chart Trend Patterns