I only use a handful of Forex chart patterns.
In fact, I would say that 80% of the trades I take are based on channels.
The thing is, I like to keep things simple; really simple.
I’ve often said that you only need one pattern to become successful as a Forex trader.
Maybe the one you’ve been looking for is in this post?
Read on to find out!
- 1. The Head and Shoulders (and Inverse)
- 2. The Wedge Chart Pattern
- 3. The Bull and Bear Flag Patterns
- Final Words
- Frequently Asked Questions
1) The Head and Shoulders (and Inverse)
This is not only my favorite reversal pattern, but it is also my favorite pattern, period.
That includes its inverse, which has similar characteristics.
For those who have followed me for a while now, you may recall that my favorite pattern to trade used to be the wedge.
However, the last year of trading has produced a new winner in my book.
The head and shoulders is the least common of the three formations we will discuss today. While there may be similar price structures that occur more frequently, a valid and therefore tradable head and shoulders reversal doesn’t come around very often.
Why I trade it
Put simply, it works. But more than that, it can be quite easy to spot and extremely profitable when you know what to look for and how to trade it.
The pattern can offer a precise entry given the fact that the neckline is generally based on several highs or lows. This fact alone takes a lot of the guesswork out of determining when the pattern has confirmed.
Another huge benefit, like the other two technical formations below, is that we have a measured objective from which to identify a possible target.
Staying out of trouble
This is something that you may not know (unless of course you’re one of my members). In order to be considered valid, the two shoulders of the pattern must overlap at some point.
Situations where the shoulders don’t overlap are most common when the pattern unfolds at a steep angle. While a break of the trend line (if one exists) may trigger a change in trend, it does not fit the criteria to be called, or traded as, a head and shoulders pattern.
Notice how no part of the first shoulder in the illustration above overlaps the second shoulder. This disqualifies the price structure from being traded as a head and shoulders pattern.
Another common mistake among Forex traders is to use a measured objective as a “one-stop shop”. In other words, they simply measure out the distance in pips and then set a pending order to book profits at that level.
While that may occasionally work out in your favor, a much better approach is to determine whether or not that objective lines up with a pre-existing key level. If it does, perfect, however a more common scenario is one where the market will come in contact with a key level prior to reaching the objective.
If this is the case, you’re far better off taking profit at the key level rather than hoping for an extended move to the objective. Remember that technical analysis is not a perfect science and there are no guarantees, so there’s no sense to risk losing an unrealized gain of 500 pips in order to make an extra 50 pips in profit.
Last but not least, the head and shoulders is best traded on the 4-hour chart or higher. However, I have found that the best price structures tend to form on the daily time frame. A formation on the 1-hour chart or lower should always be ignored, regardless of how well-defined the structure may be.
2) The Wedge Chart Pattern
As the name implies, the wedge is a technical pattern in which price moves into a narrowing formation, also called a triangle.
Unlike the head and shoulders we just discussed, the wedge is most often viewed as a continuation pattern. This means that once broken, price tends to move in the direction of the preceding trend.
That said, it’s important not to get caught up in trying to predict a future direction while the pattern is still intact. Only once support or resistance is broken should you begin to identify possible targets.
Why I trade it
The wedge was one of the first Forex chart patterns I began trading shortly after I entered the market in 2007. By 2010, I had not only become proficient in trading them, but I had also developed the intuition necessary to identify the most profitable formations – something that can only be had after years of practice.
The really great wedge patterns don’t come around all that often. By “really great”, I’m referring to the ones that form on the daily chart. While you can trade these on the 4-hour time frame, in my experience the most lucrative trade setups form on the daily time frame.
Wedges tend to play out relatively quickly compared to something like the head and shoulders pattern. However, they also allow for an advantageous risk to reward ratio, especially the larger structures that form on the daily chart.
This combination allows you to secure a nice profit in a relatively short period of time. So although they don’t come around all that often, wedges should certainly be something that you watch for during extended periods of consolidation.
Staying out of trouble
There are three common mistakes I see traders making when it comes to trading the wedge.
The first and perhaps most prevalent is trying to force support and resistance levels to fit. In fact, this is a common issue I see across all of trading, not just wedges.
As I always say, if a level is not extremely obvious, it should be ignored. The three points in the illustration above are clearly not inline with the upper and lower levels of consolidation, which invalidates the formation in terms of “tradability”.
The second mistake I see among traders is attempting to trade a wedge on a lower time frame. While these formations may occur more often, they won’t be nearly as reliable or effective as the price structures that form on the daily time frame.
Last but not least is the issue of timing. As you may well know, timing is a key factor if you wish to succeed in the world of Forex. And when it comes to wedge patterns, timing is everything.
More often than not, when this pattern breaks, the market will retest the broken level as new support or resistance. This retest offers the perfect opportunity for an entry, however it does take patience to achieve.
Be careful of entering on the first closed candle outside of the pattern as you will likely get a retrace of some sort. This will not only give you a more favorable entry, but it will also help you avoid making an emotional decision about exiting the position in the event you entered prematurely.
3) The Bull and Bear Flag Patterns
The bull or bear flag is another name for a channel. However, by adding “bull” or “bear” to the designation, we’re giving it a directional bias. So as you might expect, it is most often traded as a continuation pattern.
Like the head and shoulders, flags often form after an extended move up or down and represent a period of consolidation. It’s essentially an indecision point in the market, where the bulls and bears are battling to see who will win control.
Why I trade it
I feel confident in saying that you could literally trade nothing but bull and bear flags and make very good money in the Forex market. This, of course, assumes that you have become a proficient price action trader.
Why do I think so?
There are a few reasons, but mostly due to the fact that these formations occur quite often. This is true even if you are trading the higher time frames.
Of course when I say “quite often”, I’m referring to a few times per month, at most. That said, you only need one profitable trade each month to make good money as a Forex trader.
If that one good trade comes in the form of a bullish or bearish flag pattern, it is likely to have an extremely favorable risk to reward ratio attached to it. This is another reason why I love having this price structure included in my trading plan.
The measured objective in this case often allows for several hundred pips on most currency pairs. Combine that with a precise entry and a well-placed stop loss that is 50 to 100 pips away, and you have a recipe for a profit potential of 3R or better just about every time.
Staying out of trouble
Like the other patterns above, there are a few things you should watch out for when trading this formation.
The first is perhaps the most obvious – never cut off the highs or lows in order to make the channel fit. If it isn’t obvious before you even draw the channel tool on your chart, it isn’t likely something you’ll want to trade.
The illustration below shows price action that you would want to ignore completely.
Notice how the two points above don’t match up with support and resistance.
Calculating the measured objective also tends to give traders fits. Just remember that the measurement should include the consolidating price action.
The correct measurement in the illustration above covers the entire “flag pole”, not just the price action leading up to the consolidation.
Using chart patterns to trade the Forex market isn’t for everyone. However, if you enjoy using raw price action to identify opportunities, the three formations above would make a great addition to your trading plan.
You don’t have to know and trade every price structure available in order to make consistent gains as a Forex trader. Doing so will only slow the learning process and also send you chasing trades in every which direction.
Becoming a successful trader is about finding an approach to the markets that fits your style, defining your trading plan and then refining those rules as you gain experience.
So if you enjoy trading technical patterns, as I do, be sure to give some consideration to the three we just covered; they truly are all you need to become consistently profitable.
Frequently Asked Questions
What are Forex chart patterns?
As the name implies, Forex chart patterns are formations that occur on a price chart. They develop due to psychological triggers as other traders tend to focus on similar patterns in the market.
What are the most profitable Forex patterns to trade?
The head and shoulders, channels (bull and bear flags), and wedges (rising and falling) are three of my favorite patterns.
What time frame is best to identify these patterns?
In my experience, the higher time frames such as the daily and weekly are the best to identify and trade chart patterns. The 4-hour can be advantageous as well, but the daily and weekly should come first, in my opinion.
I’m a fan of these patterns too, thanks to your teaching. These three patterns are easy to spot, simple to trade and highly effective.
Kiwi, absolutely! They really are the only three patterns you need to become profitable.
Hi Justin, thank you for your great and consistent work.
Can this flag be valid? Doesn’t look to be, just confirming. Having read a previous post re: this pair and the h&s pattern that now seems to be realized, this q aims to define the invalidation point of the certain -appears to be- bullish flag.
I wouldn’t call that a flag. The touches off of support and resistance aren’t very well defined.
Awesome post Justin. What I like about these patterns is that once they form on the charts they are for the most part consistent and predictable. You’re not going to win 100% of the time with them, but as I said they are consistent and do perform well. My favorite one is the pennant. I love the way it bounces or rockets in its intended direction. It is a pattern that I myself is comfortable with and even teach it to my clients. Stick with what works for you and you’ll get consistent results. I hope you all have a magnificent day on PURPOSE!
Tareeq, you got it! There is no approach to trading that will work 100% of the time. It’s about finding something that fits your style, developing an edge that stacks the odds in your favor and always maintaining a favorable risk to reward ratio.
It doesn’t happen overnight but it does work given the right amount of time, effort and patience.
In regard to you comment, I would please like you to teach me the pennant pattern you mentioned if possible.
Real world trading looks very different to nicely drawn illustrations. Maybe if you offered trade examples from actual trading within a third-party verified account you could be taken seriously. The thing is this: my five year old niece does drawings similar to those in this article. But she’s no trader. I would’ve expected something different from a guy who calls himself a professional trader and who has ads in Forbes and Washington Post (that’s how I landed here).
Hi JLTrader, perhaps you should have a look around the site before making such a drastic judgement call. The reason I used these drawings in this lesson is simply because it’s easier to explain the patterns.
If you want “real-world trading” examples, have a look at the following links:
These are but a few of the real-world examples I publish every week.
Have a good one.
They work. Over 80% success on trades taken on these patterns. When people are buying signals they are buying tips on these patterns. It’s a shame considering that a five year old can trade these patterns and make money especially on longer (4H and greater-especially 1D time frames).
Justin, I am regular reader of your blog, I want to know that the patterns you explained is only for forex or can be applied in any instrument like commodities or stocks.
Anil, these patterns can be effective in any market so long as there is sufficient liquidity.
Good job ! Thanks for the lesson. I’ll surely try them out
You’re welcome, Hendrix. Let me know if you have any questions.
I’m interested of this pattern of trading and I’m trying it, thank you for this nice and clear explanation
Thank you for this nice and clear explanation
Thank You for all done. It’s realy help me learn price action.
Thank you very much….you make it easier for us
If the price action doesn’t retest the broken level, at how many pips would one consider the break not a fake?
Great price pattern .
Thanks for the lesson
Great price pattern.
Thanks for the lesson
wow! good explanation.
In your article, you said both Wedge and Flag are most viewed as “Continuation” pattern. For what I have known, continuation or not should take the combination of 1)The trend type before the Wedge or Flag and 2) The formation type of Wedge or Flag into consideration.
Say for example, if the previous trend is “up” and the flag is “ascending”, this flag pattern is most viewed as a “Reversal” pattern. Same applied to Wedge.
If you agree with that , I will be very happy to see you updated this great article to make it more complete.
Anyway, this is a great pattern article for beginners. Keep you good work!
Thanks very much…I can’t waiting to get fantastic skills please help me to know forex trick..From East Africa (Tanzania)
Hi Justin. Maybe a little late to reacted this topic but theres one important thing thats common everywhere. Thats the famous retest. Why on earth should banks, marketmakers whatever return to the place of “crime”. Imean they have filled their pockets in the consolidation, selled everthing here they got for highest price or buyed all they could get for the lowest price. Why this return!!
The same reasons a market retraces and retests support/resistance in any trend. It’s an exchange of hands. Profits are taken, new orders are established and filled.
no such thing as patterns in forex
As someone who has traded patterns for 17 years, I can tell you that isn’t true. Patterns exist in every market as long as there is enough liquidity.
send me an ebook
This is the best and thanks for explaining in an easy way where by even a 9 years old child would understand.
I love your teaching and pattern. Thanks ; believe i can trade well now
great lecture. thanks.
Thanks your really help me God bless you
Just went into your website. Its real good. Will always want to receive your mails.
This article is very benificial. A forex chart is a chart that lets you know the rate of exchange between two currencies or pairs. It graphically displays the historical and current trends and behaviour of the market and various currencies. It also depicts the changes in price over time. For identifying various movements, trends and patterns of the market, trade analysts and day traders use these charts in their favour.
Appreciate it! 🙂
Please cover the USDJPY next week
Thank You so much Chart Patterns Explain very well. Appricate
Thank you very much for providing such valuable material for free.
what is great about it is simplicity and clarity and catching the core of the thing.
I am newbie, just start to learning the basics,not even start demo acc. may I be one day join dailypriceaction.com.