There are literally hundreds of different Forex chart patterns available to traders. With so many patterns to choose from, it’s little wonder why so many traders become confused as to which chart patterns are best to trade.
Among the hundreds of patterns available, there are a few that you need to know in order to increase your odds of success as a trader.
In this lesson, we’re going to look at three common chart patterns. Some of these are reversal patterns and others are continuation patterns, but they all serve a defined purpose and can be extremely profitable if traded properly.
The first thing you need to know is that chart patterns fall into two basic categories: reversal patterns and continuation patterns. Let’s take a look at each one in detail.
Let’s take a look at each one in detail.
Reversal patterns typically occur after an extended move up or down. Just as the name implies, they signal a possible reversal in the market.
Here is an illustration of a Forex reversal pattern.
Notice how the market made an extended move up but found a key resistance level, which ultimately led to a trend reversal. The pattern above is called a double top. We will discuss this pattern in greater detail later in this lesson.
Below is an illustration of a Forex continuation pattern.
Notice how after making an extended move up, the market consolidated with sideways price action before breaking higher. This break led to a continuation of the former uptrend.
Below are four of the most reliable and profitable chart patterns found in the Forex market. So while there is no such thing as a sure thing when it comes to trading, these patterns will certainly help you in your efforts to become consistently profitable.
Wedges are my favorite Forex chart pattern. They are reliable and can be extremely profitable if you know what to look for.
Not only that, but these chart patterns occur quite often once you begin looking for them. Below is an example of a bearish wedge pattern that formed on the GBPNZD 4 hour chart.
Notice how the market formed a wedge shape on the 4 hour chart. This wedge represented a consolidation period, which eventually led to a break of support.
One thing to note here is that although the bullish and bearish wedge pattern is technically a continuation pattern, it should only be traded based on the direction of the breakout.
See the lesson on the Forex breakout strategy to learn more about trading wedges.
The head and shoulders pattern is one of the more recognizable reversal patterns in the Forex market. As the name suggests, it’s represented by a head and two shoulders.
Below is an example of a head and shoulders pattern that formed on the EURUSD daily chart.
Notice how after making an extended move up, the market found resistance at the first shoulder. The market then made a new high but quickly returned to neckline support. The pair then made one last effort at a new high, but fell short as it formed the second shoulder.
As soon as the market closed below the neckline, the head and shoulders pattern was confirmed. This Forex chart pattern can be extremely profitable if traded correctly.
See the lesson on the head and shoulders pattern to learn more.
The double top and double bottom Forex chart patterns represent another profitable way to trade reversals in the Forex market. Just like the head and shoulders pattern, these chart patterns form after an extended move in the market that leads to a trend reversal.
Let’s take a look at the two patterns in action.
Double Top Chart Pattern
The double top forms after an extended move up. As the name implies, it’s represented by two tops that form at the same resistance level.
Below is an example of a double top that formed on the EURUSD daily chart.
In the Forex chart pattern above, the market made a new high (first top) after an extended move up. After finding support at the neckline, the market attempted to form a new high, but found resistance at the previous high. This formed the second top of the pattern.
This Forex chart pattern is easily recognizable due to the two tops which coincide with the same resistance level.
See the double top pattern lesson to learn more.
Double Bottom Chart Pattern
The double bottom is similar to the double top, only this time the pattern occurs after an extended move down. The double bottom forms the base of a trend reversal, where the market moves from a downtrend to an uptrend.
Here is a great example of a double bottom pattern on on the NZDUSD 4 hour chart.
In the NZDUSD chart above, the market made an extended move down where it found support at the first bottom. The market rallied but quickly found resistance at the neckline. This resistance resulted in another move down, where the market found support once more, forming the second bottom. The next rally broke neckline resistance and opened the door to a much larger reversal.
See the lesson on the double bottom pattern to learn more.
Bull and bear flags, also called bullish and bearish flags are a continuation chart pattern. This means that they typically break in the direction of the former trend. They offer a great way to identify periods of consolidation as well as opportunities to trade a breakout as the trend continues.
Below is an example of a bullish flag pattern that formed on the AUDCHF daily chart.
Notice how after making an extended move up, the market began to move sideways and consolidate. This formed a bullish flag that eventually broke to the upside as a continuation of the former trend.
See the lesson on bullish and bearish flag patterns to learn more.
Although there are hundreds of Forex chart patterns available to traders, the patterns discussed in this lesson are some of the most reliable and profitable.
Let’s recap the lesson by covering some of the more important points.