Best Chart Patterns for Forex Trading






Top 10 Forex Chart Patterns You Should Know

  • What is a Graphic Pattern?

  • Pattern indicators

  • Pros and Cons

  • Classification of Shapes

  • Best Forex Chart Patterns

  • How to Trade

  • Related Articles

  • FAQs

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A pattern is a repeated decorative or other element that occurs regularly under certain circumstances. The term is used in many fields starting from psychology to biology, includes stock trading. In Forex, patterns are charts that are formed by price movements. It is a basic element of technical analysis that allows a trader to successfully forecast quotes.

What is a graphic pattern?

In Forex, currency pairs are sometimes called trading pairs, and that is fair since they are used to exchange one national currency for another. To be more precise – it’s buying one currency for the face value of the other. As you see from the word “pair”, we are talking about two assets that are recorded sequentially. The order of the currency in the record has conceptual value for currency pairs trading.

Trading patterns in the stock market began to develop actively with the advent of the ability to track price movements on the monitor screen and build charts in programs. By now, over 100 trading patterns have been developed, so that a whole section in the field of technical analysis has appeared. It is called graphical analysis. However, please be aware that the vast majority of formations on the network are nothing more than the fantasies of individual traders. On the other hand, patterns that are now recognized as classics were once also someone’s fantasy.

Pattern indicators

Forex pattern indicators are technical indicators that automatically identify nuanced patterns as they form. Speak Plainly is a program that shows the given patterns on the price movement chart, based on the mathematical algorithms embedded.

Please note that there are no better pattern indicators. Different indicators are suitable for different strategies and assets. For example, there are some pattern indicators for binary options, indicators for price action setups, and indicators for scalpers. There are also indicators designed to search for specific technical formations, for example, to identify the harmonic Gartley Butterfly pattern.

Please understand that the indicator doesn’t indicate a market entry point. It serves as a tool for in-depth price chart analysis, automatically and promptly prompts the trader about a situation that is as close as possible to the parameters he pre-specified. That is, the pattern indicator indicates the required pattern sequence on the chart and gives the trader a heads-up and sufficient information necessary for him to make a decision.

Novice traders often make mistakes following the belief that candlestick pattern indicators on Forex apply only to candlestick analysis patterns. Today, a huge number of indicators have been developed and they can track almost any technical analysis or other patterns. Therefore, the indicator is a universal and indispensable tool for any Forex market participant.

Technical figures: Pros and cons

You cannot name the “best Forex patterns”. As in the case of indicators, various technical figures are designed to solve specific problems and identify certain patterns, based on the characteristics of the assets traded and the strategies used. That is why there are so many patterns. Nevertheless, there are a few core patterns among them, and we will analyze each below.

Consistency. A trading pattern is formed following strict rules. If the rules are violated, this is no longer a pattern and the corresponding analysis methods cannot be applied to it.

Independence. Potentially graphical formations of technical analysis allow you to analyze the market without the use of extra tools. Everything you need to make a decision is provided on the monitor screen.

The pattern formation rules have been developed and tested long ago, so there is no need to do anything by yourself. Just identify these patterns using indicators and analyze them. Moreover, there is no need for indicators to detect a trading pattern, you can use only levels and trends on a rising or downtrend curve.

This really greatly facilitates Forex trading, allowing you to make informed decisions quickly. The only drawback of graphic patterns is the subjectivity of their perception. Expressed differently, an experienced trader can detect a non-standard Forex pattern on the same chart and make money on it, but a novice trader will see some typical formation and make a false solution.

Classification of shapes during graphical analysis

In fact, any classification shall be considered conditional because of the perception of subjectivity. Nevertheless, all trading patterns in the stock market are usually divided into two main types, based on their ratio to the current trend.

Reversal patterns. According to the name, the result of the analysis of such a formation indicates to the trader that the trend will reverse abruptly. For example, the EUR/USD quotes, which have been going up in the past few days, will confidently decrease tomorrow.

Continuations. This group of formations is also called trend formations because they reflect the continuation of the trend. That is, based on the analysis of such patterns, the trader understands that the actual movement on the price chart will continue.

Accordingly, there are indicators for reversal patterns and indicators for trend patterns. Sometimes dual patterns are designated in a separate group. In this case, the level of chart growth is always equal to the level of its fall. This group includes the Wedge and Triangle trading patterns. They are considered the most dangerous for novice traders since it is more difficult for them to predict when a breakout will occur (that is, when the chart will go beyond the pattern).

Shooting Star Candlestick Pattern – Guide for Beginners

Why trading patterns are formed

The complexity of detecting classical formations using technical analysis when examining the foreign exchange market

  • The first problem is using classic patterns, a trader enters a trade when the quotes have already received a significant impulse. Frequently, after the entry, the price is sharply going against the trader.

  • Another complication is that trading patterns can sometimes overlap each other and give diametrically opposed signals. In such a situation, it is extremely difficult to make a decision, and even more difficult to make the right decision.

  • The classic graphic pattern is by no means a rigidly jointed framework. Often the price doesn’t reach the classical completion, but it perfectly collects stops behind the local low.

  • Experienced traders still use chart patterns as an extra, but not the main tool. Because the chart can always rebuild into another formation or simply ignore it.

  • The main problem of any pattern formation is that its practical completion is on average only 50%. This confirms the above thesis that graphical analysis patterns cannot provide guarantees.

Top-10 best Forex chart patterns

“Head and Shoulders”

The Head and Shoulders Pattern: How to Spot and Apply It

This trading pattern is formed with an uptrend at the highest price. There are three top points – a conventional head in the middle and shoulders on the sides, plus two points of minimums and a conventional neck strip must be drawn through them. When the pattern is clearly formed, the price moves below the neckline after completing the right shoulder. After that, the price is predicted to fall by an amount equal to the number of points from the neck to the peak of the “head”. Selling is carried out immediately after the chart breaks below the neck level.

“Inverse Head and Shoulders”

This pattern is the opposite of the previous one and is formed at the lows of the price when the trend is downward. Accordingly, the peak of the “head” and the peaks of the “shoulders” are located below the level of the neck, and not above, as for the standard figure. After breaking the neckline, the price is forecast to rise by several points at least equal to the distance from the neckline to the peak of the “head”. The asset is purchased at the moment of the breakout.

Inverse Head and Shoulders

Inverse Head and Shoulders

“Double Top”

This is a local trading pattern that is possible in an uptrend at a price peak. The pattern is formed by two equal or approximately equal price peaks with one peak of a local minimum between them. After the completion of the pattern, a downtrend is predicted, and the sale is carried out at this moment.

Double Top Pattern

Double Top Pattern

Double Bottom and Double Top Reversal Patterns Review

“Double Bottom”

The same as with the Head and Shoulders pattern, the Double Bottom has a reflected option that forms on a downtrend in the local low zone. The two lower points of the mirror top are marked at the price floor and the point of the local maximum between them. When the formation is completed and the bottom line, passing through the local maximum point, is broken, the asset is bought to sell it at a higher price in the future, since an uptrend is predicted after the “Double Bottom”.

Double Bottom Pattern

Double Bottom Pattern

“Triple Top” and “Triple Bottom”

The “Triple Top” is drawn at the maximum with an upward trend in quotes and there are three price peaks, unlike the “Double Top”. That is, the chart locally goes up three times and falls three times. After the third fall, the bottom line is broken and the sale shall be carried out. The “triple bottom” duplicates the top—not at local highs, but at local lows. Accordingly, after the bottom is broken through, a purchase is made.

Triple Top and Triple Bottom Pattern

Triple Top and Triple Bottom Pattern

Wedge

Wedge pattern can form both at the highs and the lows of the chart. This pattern for Forex trading “squeezes” the chart between two lines – a support line and a resistance line. The price can rise and fall several times within the lines, the breakout is considered to be the exit of the chart below the support line or above the resistance line. In the first case, a sale is carried out, and a purchase in the second one. Graphically, the Wedge is similar—but not identical—to the Triangle. It refers to reversal patterns, and the indicators define this pattern quite well (like most classic patterns).

Weage Pattern

Weage Pattern

“Triangle”

It can be equal-sided, ascending, or descending. All three types either continue the trend or reverse it. Unlike the Wedge, the support line and the resistance line completely intersect on the right side of the pattern. Selling and purchase and carried out depending on the type of formation and trend:

  • In an equilateral triangle, the purchase is carried out if the chart breaks above the resistance line, and the sell shall be carried out if it is below the support line.

  • In an ascending triangle, a purchase is carried out when it breaks above the resistance line.

  • In a descending triangle, a sell is carried out when it breaks below the support line.

Triangle Pattern

Triangle Pattern

Diamond Pattern

The “Diamond pattern” is an alternative name for this trading pattern. It is quite a rare reversal formation that can be formed during any trend at local minimum/maximum. After the chart breaks through the formation, either an entry into a correction (a sideways trend) or a radical change in the trend is predicted. If a pattern appears during a downtrend at the lows, a purchase is made when it breaks above the resistance line.

Rectangle

The formation is formed by parallel support and resistance lines, which form a conventional passage for price movement on the chart. The price is consolidating and regularly changes direction within the passage. Trading is naturally conducted in the direction of the breakout of the formation and a purchase is made if it closes above the resistance line. Selling shall be made when the figure closes below the support line.

Rectangle Pattern

Rectangle Pattern

“Flag”

There are quite a few indicators of this type of Forex pattern because the “Flag” is among the most stable continuation formations. A strong upward price movement forms the so-called “flagpole”, then a corrective passage is formed when the price goes sideways. The flag passage can run strictly perpendicular to the flagpole or have a slight slope. Its general shape can correspond to various shapes such as a triangle, a rectangle, or a wedge. The correction ends when prices go beyond the resistance line. At this point, a purchase is made.

Bull Flag Pattern Review

Flag Pattern

Flag Pattern

How to Trade Bearish Pennant Pattern

How to trade Forex using patterns

You must practice developing your skills in finding and identifying patterns because blindly trusting them is a direct path to losing your deposit, especially if you are a novice trader. Even though formations give correct predictions only in half of the cases, drawing them is still recommended. Because a chart with a pattern always gives a better idea of the expected price movement than a chart without a pattern.

Thus, the combination of the method of graphical technical analysis with other approaches allows you to get a more accurate picture. We can use an example with the “Triangle” when during the pattern formation, an accumulation of orders is formed so that other traders also see the formation. If we had not seen the pattern, then the stop loss would have been placed below its support line (orange mark). But we put a stop in the pattern field (red mark), and take profit for the local high (blue mark). With an SL/TP ratio of one to two, we have an excellent trade (green mark). Otherwise (orange mark) the ratio would be three to two.

That is, it is not worth trading purely by patterns. But they can be used to assess the market situation and make the right decisions based on patterns.

FAQs

What are trading patterns?

These are conventional patterns displayed in the quote chart. They are formed by several lines, at least two of which are a support line and a resistance line. The template allows you to predict further price movement after it goes beyond its limits.

What are pattern indicators?

This is a separate type of technical indicator that signals that the price chart is lining up in a given pattern based on certain algorithms. The indicator doesn’t provide the perfect moment to enter a trade but makes it easier to track patterns.

What kind of graphic shapes are there?

At the moment, over a hundred different patterns are known, however, the patterns on the chart can potentially take any form. Several dozen forms are considered classics such as the Diamond, Triangle, Wedge, Flag, Double Top, Triple Bottom, etc., patterns.

How to trade based on patterns?

Pure pattern trading is a losing strategy. The figures act as an applied method of technical analysis and allow you to assess the market qualitatively. The decision on the forecast shall be made taking into account other factors as well. But if you find a clear pattern, it makes it easier for you.

Best Chart Patterns for Forex Trading

Source: https://tradersunion.com/interesting-articles/top-10-forex-chart-patterns-you-should-know/

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