Price fluctuations in the forex market help to create chart patterns. A price trend that continues in a specific direction tends to pause before changing its course or resuming in the same direction. Patterns are usually formed at these pauses making them a significant part of technical analysis.
Traders work to spot these patterns in the hope of making a profit from an expected price movement. With this in mind, let’s take a closer look at some of the popular and useful patterns used by forex traders.
1. Head and Shoulders/Inverse Head and Shoulders
True to its name, this pattern looks like a head with two shoulders and predicts and bullish-to-bearish trend reversal. Conversely, the inverse pattern appears after a bearish trend, forecasting an upward movement. This type of chart pattern is called a ‘reversal pattern’ – no surprises there. While the HS signals the end of an uptrend, a HS bottom indicates that a downtrend is over and prices could be about to rise.
2. Double Top/ Double Bottom
The double top pattern has two peaks, indicating waning interest among buyers and the possibility of a downtrend. A double bottom pattern, on the other hand, occurs after a downtrend, when the price movement creates two bottoms at the same level, forecasting a potential uptrend due to rising buyer interest.
The signal line for the double top pattern is the horizontal line that goes through the bottom, between two tops. Similarly, for the double bottom, it is the horizontal line going through the top, located between two bottoms.
When the price closes a candle beyond the signal line, a pattern is confirmed.
3. Rising/Falling Wedge
Rising wedges denote a reversal of a bullish trend, to form a bearish market scenario. Conversely, falling wedges have a bullish character. Reversal wedges occur at the end of a trend, indicating price moves in the opposite direction of the trend.
4. Triangle Patterns
These are a type of continuation pattern, indicating that an ongoing trend will likely resume its course in the same direction. Triangles patterns come in three types: ascending, descending and symmetric. They occur in shorter timeframes, when prices, with their highs and lows, tend to converge into a narrower and tighter price area.
An ascending triangle forms when the price follows a rising trend line, and then consolidates. In the descending triangle, the lows stay on a straight line, and the highs create a downward trend line. Symmetric triangles are examples of neutral chart patterns, a breakout in either direction indicates a new trend.
5. Candlestick Patterns
These are perhaps the most popular patterns, frequently used by traders across all timeframes. The single candlestick pattern comes in two well-known formations: the hammer and the hanging man.
Hammers indicate a downtrend, in a bullish reversal movement, while the hanging man shows the peak of a price gain, indicating an increase in the number of sellers of a currency pair, against a potential number of buyers. Candlesticks also make engulfing patterns, which are useful to track sudden and strong changes in price movements.
Technical analysis helps traders to make sensible decisions during live trading sessions and therefore knowing the different chart patterns you might come across is of great importance.