How to Trade Chart Patterns Forex Work for Your Better Trade?
Price movements of financial instruments often form certain patterns. By knowing these various patterns you will be able to anticipate the possibility of price changes. There are many patterns of price movements to facilitate you in analyzing the market, all patterns are divided into 3 categories
- Continuation Chart Pattern
Prices move according to a fairly clear trend in quite a long time. For example Channel and Wedge
- Consolidation Chart Pattern
Prices move in a narrow range and tend not to be too long before deciding to continue a previous trend or reversal. For example Rectangle, Flag, Pennant, Triangle (Symmetrical Triangle, Ascending Triangle, Descending Triangle), Cup and Handle, Rounding Bottom
- Reversal Chart Pattern
This pattern is usually a sign of a trend reversal. For example Double Top, Double Bottom, Triple Top, Triple Bottom, Head and Shoulder
Read about How to identify Trend that may you need
This pattern occurs when prices move inside the upper and lower trendline limits (You must read about How to draw Trendline correctly). These trends are parallel to each other. According to the direction, and there are 3 types of Price Channels:
- Uptrend Channel
- Downtrend Channel
- Sideways Channel
Price Channel is a continuation of the pattern of price movements and usually the trend that lasts long enough. The trend will change if the price breaks the trendline, it can be bullish (breakout) or bearish (breakdown).
You can trade along the limits of this pattern. When prices touch the upper line can be used as a sell signal and the bottom line as a buy signal. Get used to narrowing the distance of the trendline as a buy and sell limit. Do a cut loss if the price breaks the trendline (brekout or breakdown).
Rising / Falling Wedge
Wedge pattern is a continuation pattern similar to Price Chanel but the difference is the trendline is not parallel but it tapers in the direction of the trend. If it's bullish it's called Rising Wedge while if it's bearish it's called Falling Wedge.
|Rising Wedge||Falling Wedge|
Rectangle is a pattern of price movements in the sideways channel. This pattern shows a consolidation pattern that usually occurs after a sharp increase or decrease. Prices move up and down many times in a certain range before deciding to move up or down
|Bullish Rectangle||Bearish Rectangle|
Rectangles are neutral because after this pattern occurs, prices can move up or down. All you have to do when you see this pattern is to wait for a breakout or breakdown that indicates the potential for the next price movement
Flag is a pattern of price movements that moves in a narrow range, showing a consolidation pattern before the previous trend continues. This pattern is a unique consolidation pattern because usually the trend continues. This pattern rarely turns into a reversal.
The characteristics of the Flag pattern are:
- Prices move between Price Channels (2 parallel trendlines).
- Its movement against the trend that occurred before
- Transaction volume decreases
If the price breaks out on the trendline that forms the Flag pattern, the price will move quickly and continue the previous trend.
Pennant is a consolidation pattern similar to Flag. The difference lies in the form of the trendline, both of which are tapered. The nature and character of this Pennant pattern are the same as Flag
Symmetrical Triangle patterns occur when price movements are increasingly pursed because interest in buying and selling is reduced and price consolidation is formed. In this pattern we do not know where prices will move next, can go down or up. Usually, if the price breaks one of the trendline lines, the movement will continue.
This pattern occurs if the price is very difficult to penetrate the resistance level so that the price movement centers on the resistance level (Read about Support and Resistance). When the price breaks the resistance level, it will usually continue moving upwards. Thus this pattern is usually followed by an uptrend, but not always
Descending Triangle is the opposite of the Ascending Triangle pattern. The basic principle is the same, just the opposite.
Broadening Top / Bottom
Broadening is a consolidation pattern that is similar to a triangle pattern but is reversed. If the triangular pattern is pursed, the broadening is the opposite. This pattern is very rare. If it happens at the peak of the price it is called Broadening Top. Whereas if it occurs in a valley called Broadening Bottom.
Cup and Handle
As the name implies, the shape of this pattern is like a cup arch or also like the letter "U" and the handle is a decreasing price.
Usually the Cup and Handle pattern occurs when the price is trying to break the resistance. But this effort got a reaction from other traders who took action to sell. Therefore, prices began to consolidate and move relatively flat. When the price approaches the cup pattern resistance, the price is slightly corrected, only then does the price continue to accelerate
In the Cup and Handle pattern like the letter "U" which is getting longer and rounder is a positive signal for bullish. Besides this the transaction volume also decreases at the base of the cup shape.
However, the Cup and Handle pattern that is heading towards bullish may fail to form if:
- The cup base forms the letter "V"
- The bottom of the cup is too deep
- Cup handles form a correction that is too deep ie more than half of the cup
Rounding Top / Bottom
This pattern is similar to the Cup and Handle pattern, which is shaped like a cup. The difference is there is no grip. Just like Cup and Handle, this pattern also indicates consolidation. This pattern is also rarely found. The most commonly found is the shape of a plate, the basin is not too deep, but the consolidation phase is quite long.
Double Top / Bottom
The Double Top pattern occurs because the uptrend is not strong enough to break through the resistance level, then reverses direction then tries to go up again but still does not work, then drops again. When breaking through the Neckline there is a downtrend
Double Bottom Pattern is the same principle as Double Top, just the opposite
Triple Top / Bottom
Triple Top principle is similar to double top, the difference in the number of peaks has 3, while the double top has 2
Triple Bottom is the opposite of Triple Top, which has 3 valleys
Head and Shoulder
Head and shoulder pattern is a reversal chart pattern, that is, if this pattern is formed the tendency will be accompanied by a massive price reversal. The pattern generally looks like this:
Ok Can you see the picture "head and shoulders" in the pattern? The "head" is the highest point (higest-high), flanked by the "shoulder" which is the two highest points parallel to the head. In such a pattern, we can open positions under the "neck". We can also determine the target as far as the "neck" by measuring the distance between "head" and "shoulder". Price trends plummeted long after this pattern formed. Like the double top and double bottom patterns are the opposite, the head and shoulder pattern is also the opposite. More or less the picture as follows:
The inverse pattern of head and shoulder (inverse head and shoulder) is formed from a lowest point (lowest-low) flanked by two other lowest points (which are not as low as the head) as the "shoulder". The price of the trend will rise sharply after this pattern is formed. Well, armed with this chart pattern, you will be able to anticipate the movement of the chart and of course take advantage of it.
Usually the Head and Shoulder pattern has a distinctive volume pattern. On the first shoulder, the trader is so enthusiastic that the volume becomes very large. At the peak (head) the volume usually decreases because the risk is getting bigger, thereby reducing their trading activities. Then on the second shoulder the volume returns to large, especially if the price breaks the neckline.
You have already learned a little about chart patterns and may be useful for the progress of your trading.
Maybe you need to learn too 7 Tips Forex Trading from Professional Trader
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