Patterns in Forex Charts
Patterns in forex charts are created by the price movements of a currency when depicted on a candlestick chart. The candlestick chart is the most commonly used forex chart for technical analysis. There are 5 different patterns that every trader should be able to identify.
The Wedge in Forex Charts
The wedge is a pattern that actually has two variations of falling and rising. The wedge pattern is known as a reversal pattern meaning it shows a reversal in pattern is about to occur. The falling wedge pattern is considered bullish while the rising pattern is considered bearish. To form this pattern the highs and lows on the candlestick graph should be connected. The pattern should have the upper trend dipping lower than the lower trend, a falling wedge. The pattern may also have the lower trend rising above the upper trend, a rising wedge.
Head and Shoulders Pattern
As the name would imply this pattern takes the image of a head and shoulders. The pattern forms when the highs of the forex chart forms two troughs and three peaks. The first peak will be followed by a trough and lead onto a second higher peak. A trough will follow the second peak before the third peak forms around the same level as the first peak. The neckline for this pattern is formed by drawing a line between the trough low points. This pattern is a bearish signal with this pip distance between the head and neckline as the profit target.
Descending Triangle Pattern
The descending triangle pattern is a bearish pattern. This pattern forms through the convergence of lower highs in the upper trend and a horizontal lower trend line. When this pattern forms a bearish breakout is likely to soon follow.
There are three different channel variations of horizontal, ascending and descending. Regardless of the variation the definition is the same. Channels are the technical ranges that currency prices have traded in for a prolonged amount of time. Horizontal channels occur when prices are sideways, ascending channels are prices trending up and descending channels are prices trending down. Channels help traders identify resistance and support levels to make purchasing positions easier.
‘Double tops’ is a bearish reversal pattern that, as the name suggests, is formed by successive peaks with a single trough between them. The peaks will be located at a similar level to each other. The neckline for this pattern is formed through the trough. The sell stop of the trade is set at the neckline and the first profit target is the pip distance between the peaks and neckline.
There are many other forex chart trading patterns that traders use but these are the 5 most common that all new traders should be aware of. Being able to identify these patterns increases the technical analysis of the market and the basis of trades. It is recommended that new traders focus on these 5 patterns before they move onto new analysis to ensure they have a solid base.