The Most Common Forex Chart Patterns
Trading analysis blooms from the seed called ‘charts’. Be it Forex or any other market, charts are always there. Although forex charts in particular may seem daunting at first, they do share some aspects that can allow you to comprehend them better. Over time, those have turned into patterns that speak of a currency pair’s price movement tendencies. Based on them, you can even see how some trading strategies have come into being. Not all charts have to be sophisticated to be meaningful, but if you analyze them long enough, you could begin understanding them much better.
Head and Shoulders
As perhaps the most common forex chart patterns of all, the Head and Shoulders pattern is rather easy to spot. It applies to all currency pairs and its price targets, entry and stop levels supply the needed information to form a strategy.
Trends guide the formation of the H&S pattern and three elements should be noted here – the two shoulders and the head. Subsequently, the trendline (or neckline) is the pattern where two lows or highs (shoulders) are separated by a regular upwards or an inversed downwards retracement (head).
Until the neckline is broken, traders tend to not take additional positions.
An opportunity for an entry point is created when a breakout – the price moves above the resistance area or below the support area – of the neckline takes place. Stop loss should be above or below the right shoulder in accordance with the pattern.
Short-term time frames commonly utilize the Triangles chart patterns, which are made of two components. Those can be any of the following – flat, ascending, descending, but for traders, the difference is not that great, though they still act as trendlines. Prices continue to move until they converge with the highs and lows, becoming tighter and tighter with each bounce. A triangle is formed when we follow through the trendline.
Triangles use resistance and support lines to form patterns. Symmetrical triangles take an ascending support line and a descending resistance line. The two trendlines converge at a point called the apex. The price bounces from the two necklines to the apex before breaking out.
Ascending triangles tend to be most useful for going long on a forex pair when there is an indication it is headed upwards. Here the point of resistance creates a flat neckline and we can see an ascending trendline indicating price support. Moving between these, the currency pair’s price eventually breaks out.
Descending triangles are simply the opposite of ascending triangles. In other words, when traders would usually go short on a forex pair that seems like it’s facing a downtrend at the end of the pattern. Here, the line of resistance is facing downwards, and the line of support is flat.
So far, we have only viewed line charts. However, the Engulfing pattern is one utilizing candlestick charts and it is usually more informative than other types. Close gauging of price movements, regardless of the time frame, is best done through candlesticks patterns. Perhaps the most common amongst those is the Engulfing Candle.
It is called engulfing because in a trend, a certain direction is being followed, but when the change comes, it turns the price the other way around. The candle real body, or the space between open and close price, is the compass guiding the pattern.
Bullish engulfing takes place during downtrends when the down candle real body is engulfed by the next candle real body which is going upwards.
Trends can form when a complete reversal of prices takes place and traders can participate while implementing a stop loss. Profit target can differ when utilizing the Engulfing Candle pattern. All things considered, though, in order to avoid serious losses while trending on margin, it is important to have a risk management strategy. Learning how to read charts can make the market a tad more predictable.