Understanding the Most Common Forex Chart Patterns
Trading success in the Forex market often comes down to your ability to recognize and analyze chart patterns. By understanding different Forex chart patterns, you can gain insight into how a currency pair is likely to perform in future trading sessions – allowing you to make informed decisions when investing.
Head and Shoulders Pattern.
The Head and Shoulders chart pattern is a popular reversal chart pattern that appears frequently in the Forex market. It is characterized by three successive peaks – with the middle peak being the highest, and two lower peaks on either side – forming a distinct ‘head and shoulders’ shape. When identified early, this chart pattern can signal an impending trend reversal and offer opportunities for traders to take advantage of.
Triangle Patterns: Symmetrical, Ascending and Descending.
Triangle patterns are one of the most reliable chart patterns as they have a high degree of accuracy when it comes to predicting future market movements. There are three main types of triangle patterns. A symmetrical triangle is characterized by both the support and resistance lines converging toward one another, forming an upward-facing triangle. An ascending triangle has a flat resistance line and rising support line, while a descending triangle is the reverse with a flat support line and falling resistance line. In all cases, when the apex of the triangle is broken, it indicates a potential breakout in either direction.
Double Top/Bottom Pattern.
Double top/bottom patterns are among the most simple chart formations and can be found regularly in all types of markets. It is formed when a currency pair makes a series of two highs (or lows) at approximately the same price level, indicating that the buyers/sellers have used up all their support/resistance levels and the market will likely reverse its direction. When these patterns begin to form, traders should anticipate an impending price retracement or breakaway move in the opposite direction.
Price Channel Pattern.
The price channel pattern is also a very useful formation to identify potential entry or exit points. This pattern consists of two parallel lines on the chart, one line representing support and the other resistance. When a currency pair trades inside of this channel, it suggests that buyers and sellers are in equilibrium in their push for control of the market. Traders should wait for the price to break out of the channel before entering into a trade, as it often signals a strong move in either direction.
Flags and Pennants Pattern.
The flags and pennants pattern is composed of a series of higher highs and higher lows, or lower highs and lower lows, leading to an eventual breakout. This pattern is considered a continuation pattern that suggests the direction of the trend will remain intact following the eventual breakout. Here, traders should be careful to spot a false breakout, which could signal a reversal in trend despite expectations that it would continue in the same direction as before.
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