Chart patterns provide great trading opportunities, as they offer objective and recurring events that can be studied in detail.
These 9 Forex chart patterns are trend-following patterns as well as trend-reversal ones. You can use them in different market conditions. Chart patterns can also be traded in different timeframes. Chart patterns can be found on different timeframes, including the Daily, 60-minute, Weekly, and 1-minute.
This article will help you understand what’s really happening behind the scenes. Understanding chart patterns will allow traders to use their knowledge in all chart scenarios and improve their understanding of the price action.
CUP AND HANDLE
The Cup and Handle pattern is a complex breakout pattern that can be used as a trend following chart pattern.
The screenshot below displays a classic Cup-and-Handle Forex chart pattern in an uptrend. During an uptrend, the price traded below the horizontal support level.
Understanding the Cup and Handle Pattern is all about the price behavior and the reaction to the resistance level.
- The price has shown a much stronger bullish reaction in the last two responses after it hit the resistance. The price didn’t drop much at all after the final touch of resistance. It returned quickly to the opposition.
- Second, the distances between the successive returns to the level of resistance also get shorter. The price returns to the same level faster, and the bullish participants in the market are pushing the price higher quickly. This is called absorption.
The bullish trend continues after the breakout. Traders wait for a flight that is confirmed when the price closes above the resistance.
Waiting for a breakout is crucial, as the price may remain within the Cup-and-Handle pattern for a long period.
WEDGE
The wedge pattern can be used to reverse and end a trend on a Forex chart.
The wedge is formed in the screenshot below after a price trend has been lower for some time. It is recommended to look for patterns of reversal during mature movements, as mature trends are more likely to reverse than new trends.
The fading of bearishness can be seen by connecting the lows in the wedge pattern. The lower trendline has a shallow angle. This confirms that the price cannot move lower as fast as it once could. This is a sign that the bearishness has faded.
Wait until the price clears the previous high. You want to see the price take out the previous high easily.
The more bullish the sequence before the breakout, and the stronger it is, the greater the chance of a successful trend reversal.
After the breakout, the trend shifted strongly in a bullish direction. Price signals can foreshadow a release of such strong bullish pressure.
- The more time the trend has been in place, the greater the chance of a strong reversal. The longer a bearish trend continues, the fewer new sellers there are on the market. A number of traders have a large amount of unrealized profit and are eager to close their positions.
- A wedge pattern that is persistent and in which price cannot be lowered can indicate a shift from a market dominated by sellers to one dominated by buyers.
- A strong pre-breakout can enhance the pattern quality as it signals a shift in momentum.
TRIANGLE
Triangles can be used for a variety of purposes on a Forex chart but are best traded using patterns that continue underlying trends.
In the example below, the market is currently in a positive trend. The current trend is pausing as it struggles with the horizontal resistance levels and has not continued.
How the lows form is key to creating a triangle chart pattern. In the example below, the arrows show that every low is higher than before. This confirms the fact that buyers buy the dips sooner each time, and sellers do not want to get involved.
This pattern shows a great deal of pressure building. The buyers are still in full control, even though the price is not moving in the direction of the trend.
After the successful breakout of the triangle, the final chart shows the market immediately formed a new chart pattern. The second triangle has a much smaller height, which is also a bullish sign since it appears that there are very few sellers but still many buyers buying dips.
This could have been due to the narrow triangle range or the strong buyer surplus.
FAKEOUT/TRAP
Fakeouts are a pattern of failed trend continuation that can lead to a complete trend reverse.
The screenshot below shows that the price initially moved in an upward trend but then moved to a sideways movement. Price did break out, which at first looked like a continuation of the trend. However, within two candles, the price moved back into the pattern below the resistance.
The volatility is also noteworthy. Around the fakeout, the volatility increased, and the candles grew. While it’s normal to see a rise in bullish candlesticks during a breakout of a trend, you don’t want to see larger bearish ones during a bullish continuation breakout.
Aggressive traders may decide to sell short immediately after the breakout fails. Waiting for the complete reversal of the trend and the flight to a new low is a more conservative approach.
In the screenshot, the price has broken out with a strong momentum candle. The situation is extremely bearish at this stage.
Fakeouts can be an interesting Forex chart pattern and provide a high reward-to-risk ratio. Due to the increased volatility during the trend peaks of the chart, these patterns are considered advanced trading concepts. They may not be suitable for beginners.
FLAG CONTINUATION
The most common Forex chart patterns are flags, which are trend-continuation patterns.
The flag indicates a weak correction phase within an existing trend. The trend in the screenshot below initially advanced with great force. The bullish correction phase does not have much strength in the direction of the bulls. This difference between bullish strength and bearish weakness confirms a general bearish trend.
The higher the difference between the two market phases, then the greater the chance of a successful continuation trend.
Moving averages and Pivot points are ideal indicators for this type of pullback trade.
During a phase of trending, the price is generally below the Moving Average but does not touch it. During a correction phase, the price may start to trade around a Moving average or return to a pivot point.
These tools can be used to find corrective phases and also for timing trade entry. Usually, the continuation signals are given when the price breaks below the Moving Average and the Trendline.
After the breakout, the trend is still bearish. The Moving Average allows us to monitor trend strength. The price will remain away from the Moving average during a strong and healthy downtrend. If the price reaches the Moving Average, it could signal the next correction.