Traders have used a wide variety of tools in the foreign exchange market to assist them in making more reliable trading trades. One of these important sources that the majority of forex traders employ is forex chart patterns. There are several advantages and benefits to be gained by utilizing these charts. All traders should be able to read forex charts. There are numerous patterns visible in them. The following article will illustrate the most well-known patterns used by traders worldwide.
What Are Forex Chart Patterns?
Forex charts are charts that display the currency’s performance and behavior over a specific period. The information that is acquired from these charts can be very useful to understand the past performance of a currency. This can also help you decide when to buy or sell.
All this movement in price can cause patterns to appear on the chart. Forex traders have recognized important patterns that can be useful while trading. This means while trading you must keep an eye out for these patterns forming. Some of the most known patterns that will be discussed below are the Head and shoulders pattern, Triangle pattern, and Engulfing pattern.
Although many traders have accustomed themselves to using technical indicators while trading, forex charts can still be very beneficial for them. So whether you are using technical indicators or not forex chart patterns should always be used to achieve a better insight into the market movement.
Head and shoulders Forex chart patterns
The Head and shoulders pattern is commonly used and easy to identify. As the name implies the formation consists of two shoulders right and left and one head in the middle. When the price rises and goes back down this forms a shoulder, after that the price rises again higher than the first time and then comes back down from where it rose, which forms the head, lastly the final shoulder is formed by a price movement similar to the first shoulder. The image below can help you grasp the formation much better.
Another version of the head and shoulder pattern can form, which is the same but just upside down. A trader should wait for the formation to complete before drawing the trendline or neckline. The neckline is drawn to connect the two lows in a topping pattern (like the image above) or connect the two highs in a bottoming pattern ( an inverted or upside-down pattern). Only when the pattern breaks through the neckline should a trade be made whether to buy or sell.
The Triangle chart pattern
The Triangle forex chart patterns are very useful and are divided into three types:
- Symmetrical triangle
- Ascending triangle
- descending triangle
Let’s take a look at each one and how to identify the formation on a forex chart.
Symmetrical triangle
This triangle usually indicates market consolidation. The Symmetrical triangle is formed with a descending resistance line and an ascending support line. The price movement will be towards the end of the triangle as shown in the picture below, this end is called the apex. The price then will typically break out in the direction of the foregoing trend.
Ascending triangle
The Ascending triangle indicates that the security price is heading higher. The security price moves between the lines that have been formed until it breaks out, usually upwards through the line of resistance. The image below can clarify how this shape is formed.
Descending triangle
This formation is the opposite of the ascending triangle and indicates the price is likely to trend downward upon completion of the pattern. It is also important to note that the price won’t move exactly as the shape indicates as there are always exceptions. This is also to be considered to the other triangle shapes.
Engulfing pattern
Candlestick charts in Forex can provide you with a lot of information. The price action indicates a powerful and instant change in direction and can be easily identified. The Engulfing candle forex chart patterns can be divided into Bullish engulfing and Bearish engulfing. These patterns are highly tradable as the price action strongly signifies a reversal since the previous candle has already been entirely reversed. The picture below furthermore explains how each pattern is formed.
A conclusion about Forex chart patterns
Forex chart patterns provide traders with valuable insights into the overall market trend and potential reversal opportunities. The most common patterns discussed here – head and shoulders, triangles, and engulfing candles – all give clues as to when support and resistance levels may break, signaling a change in direction. Traders can incorporate pattern identification into their overall technical analysis to gain confidence in entry and exit points. While no single indicator is foolproof, successfully spotting emerging patterns at key levels often precedes meaningful currency moves.
Overall though, taking the time to understand these fundamental formations can give traders insightful information about what large institutions and pros may be anticipating. With experience, pattern recognition becomes more intuitive and helps traders make quality trading decisions. Forex chart patterns continue to be a staple for many in developing a consistent approach.
