If you intend to use technical analysis to trade forex, then this article provides an introduction to the most popular forex chart patterns. You’ll learn how to analyze and use them when trading, although you also may want to invest in a technical trading manual. Such guides provide detailed information about how to recognize these patterns and how to confirm their breakouts to help avoid potentially costly false signals.
One of the most interesting aspects of technical trading involves the display of mass psychological behaviors in the market movements of prices or exchange rates. These behaviors show up on forex charts as chart patterns that many traders will quickly recognize. Most of them have special utility because you can observe pattern breakouts and then determine likely objectives for the resulting market move.
Many forex platforms provide charting functions you can use to display charts so that you can look for patterns on them. An introduction to some of the most common chart patterns used by forex traders appears below.
Double or Triple Tops and Bottoms
When the market rises to an initial level, retraces to a lower point, then rises back to the same level 2 or even 3 times before retracing back to the same lower point, the market has formed a double or triple top that sends a bearish signal.
Once the market declines below the retracement level or neckline, it should then fall by an amount equal to the difference between the pattern’s high point and its neckline. A double or triple bottom is the same pattern in reverse and gives a bullish signal.
A schematic drawing of a double top pattern poised at its neckline to breakout to the downside.
Head and Shoulders Top or Bottom
When the market rises to an initial level, retraces to a lower point, then rises even higher, retraces to the same lower point, then rises to the same level as it did initially before retracing lower, the market has formed a head and shoulder top.
Once the market falls below the retracement level or neckline, it is then expected to fall by an amount equal to the difference between the highest high in the pattern and the neckline measured from the neckline. A head and shoulder bottom is the same pattern in reverse.
A schematic drawing of a head and shoulders top pattern poised at its neckline to breakout to the downside.
Rising and Falling Wedges
Wedges consist of price action that moves between converging trend lines that either both rise or both fall. Rising or ascending wedges are considered a bearish pattern, while falling or descending wedges are considered bullish.
A schematic drawing of a bearish rising wedge pattern poised at its lower trendline to breakout to the downside.
Rectangles are chart patterns where price action is constrained by upper and lower price boundaries. Once the market breaks out of a rectangle, the objective is measured by projecting the width of the rectangle from the breakout point in the direction of the breakout.
A schematic drawing of a rectangle pattern trading between its upper and lower trendlines.
Bearing and Bullish Pennants or Flags
Pennants are chart patterns where an initial sharp directional move is followed by a triangular consolidation that then breaks out to show another sharp move in the same direction of roughly the same magnitude as the initial one. If the market rose before the consolidation, then it is a bullish pennant, whereas if the market fell initially, then it forms a bearish pennant. A flag is similar to a pennant, except that its trend lines are parallel rather than converging.
A schematic drawing of a bullish pennant pattern poised to breakout to the upside.
Triangles are chart patterns where price action is constrained by converging upper and lower trendlines. Triangles can be symmetrical, ascending or descending. When the market breaks out of a triangle, the objective is measured by projecting the triangle’s initial width from the breakout point in the breakout’s direction.
A schematic drawing of a symmetrical triangle pattern forming as the market trades between converging trend lines as its breakout nears.
Prolonged market movements either higher or lower tend to be encased in two parallel trend lines. These lines form a directional chart pattern known as a channel.
A schematic drawing of an upward trending market forming a rising channel pattern.
An uptrend is established when you have a series of higher highs and higher lows. The upper rising trendline is drawn through the highs, while the lower rising trendline is drawn through the lows.
Look to buy on dips to the lower trendline and take profits when the market reaches the upper trendline as long as the upward trend persists. Once the lower trendline breaks convincingly, then the uptrend is complete and the market then enters into a correction or consolidation phase.
A downtrend is simply the opposite of an uptrend, characterized by a series of lower highs and lower lows. The upper falling trendline is drawn through the highs, while the lower falling trendline is drawn through the lows.
Look to sell on rallies to the upper trendline and take profits when the market falls to the lower trendline as long as the downtrend remains intact. The downtrend completes upon a confirmed break of the upper trendline, where the market then corrects higher or consolidates.
Types of Signals
Certain forex chart patterns provide trading signals that suggest the market will either continue moving in its prior direction or reverse and start moving in the opposite direction after a breakout. These are respectively known as continuation or reversal patterns.
A continuation pattern signals that the market will continue in the same direction that prevailed before it formed. Classic continuation patterns are pennants, flags and most triangles.
A reversal pattern signals that the market will change direction. Classic reversal patterns are double and triple tops and bottoms, head and shoulders tops and bottoms, wedges and some triangles that fail.
Forex traders need to predict future market movements as accurately as possible to stand the best chance of making a profit. Bullish chart patterns suggest that the next major move will be higher, while bearish chart patterns suggest lower levels lay ahead.
Bullish chart patterns that suggest the next move will probably be higher include double or triple bottoms, head and shoulder bottoms, bullish pennants and flags, falling wedges and rising channels.
Bearish chart patterns that suggest the next move will most likely be lower include double or triple tops, head and shoulder tops, bearish pennants and flags, rising wedges and falling channels.
Best Forex Brokers
Selecting among the best forex brokers to trade through requires some research to determine which is the most appropriate for your trading goals and level of experience. You’ll also want to check out their forex platforms by opening a demo account first before depositing funds. Benzinga has compiled a broker comparison table below to help you make that important decision. Also check out our review of FOREX.com to see what characteristics a reputable online forex broker should have.
Using Chart Patterns to Trade Forex
Most forex traders who use technical analysis look for chart patterns that can give them a sense of what the market is going to do next. Becoming a successful forex trader depends significantly on how well you can predict future exchange rate movements, so many chart patterns provide clear trading signals you can follow. Since many other technical traders also follow these classic signals, the results tend to be reliable enough to use in a trading plan.
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