Understanding Chart Patterns

Chart patterns form on all timeframes and help traders predict the probable direction the currency pair is going to move. They are divided into two categories: reversal patterns and continuation patterns. Below are a few of the most popular chart patterns, which you can start using and implementing in your trading right away.

Head and Shoulders

This pattern forms after an uptrend, and if confirmed, marks a trend reversal. The opposite of it is the Inverse Head and Shoulders, and it is just as powerful for reversals in downtrends.

As you might have guessed, a Head and Shoulders consists of three peaks, where the center peak is the highest. The opposite is true for the Inverse Head and Shoulders. 

By connecting the lowest points on either side of the head you get a “neckline”. A breakthrough the neckline provides a sell opportunity and a buy opportunity for Inverse Head and Shoulder.

Double Top and Double Bottom Formations

Double tops and bottoms are one of the most popular, profitable and easily applied patterns known by Forex traders.

The Double Top is a bearish reversal formation that usually forms after prices have been in an uptrend. Price attempts to break above a recent swing high but fails. The two tops are approximately equal in height. The way it is generally traded is to wait for the confirmation when the retracement low beneath the two peaks is broken to the downside after the second peak. 

The Double Bottom is reversal pattern, bullish in nature. It generally forms after prices have been in a downtrend and it is a mirror image of the double top. 

The probability of this pattern working out increases if the double tops or bottoms are a long way apart, but they do not have to be exactly at the same level as the pip.

Triangles

This pattern is characterized by a series of upward sloping lows and equal highs, which if connected will form a right angle triangle. 

In an uptrend, a descending triangle will most likely lead to a trend continuation and can be a great sell signal when the price breaks out and down. 

The exact opposite is true with descending triangles. These are among the most reliable of all patterns because both supply and demand are easily defined.

Pennants

A pennant is a formation in which the slope of price highs and lows are converging to a point. Rallies and sell-offs form symmetrically sloping support and resistance. 

This congestion generally communicates that an explosive move is imminent. As this is a trend continuation pattern, place a buy order on a break out of the triangle, in the direction of the trend.