Forex Trading Patterns

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In a forex market, forex trading patterns are the ultimate trails that lead the investors to perform excellent trading opportunities. When a trader trades financial assets in a forex market, losses or profits are generally made out of price movements.

The price change is represented by using candlesticks. And after a series of 9 periods, these candlestick patterns will form a general trading chart. This chart will show the story of the price action of a specific underlying asset.

What is the meaning of chart trading patterns?

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Forex chart patterns act as a powerful tool through which a trader can perform technical analysis for representing a raw price action. It even allows the trader to feel the sentiment and mood of the trade market.

Through forex chart patterns, traders can ride the entire market wave. And if the concept of chart patterns is understood clearly, it can often help choose lucrative trading opportunities based on minimal risk exposure.

Importance of forex chart trading patterns

Chart pattern trading signals should be traded with definitive price targets and stop-loss orders. This is done to limit risk exposure and to improve profit opportunities.

To get better results, chart patterns can also be combined with a few other analysis techniques, including candlestick patterns and technical indicators. This combination will support the generated trading signals.

As you look around, you will find a variety of chart patterns available in the market to start trading with. In addition, traders can look for patterns based on their trading skills and knowledge to identify and exploit upcoming trading opportunities.

In short, chart patterns have an enormous potential for generating lucrative trading opportunities at any given time.

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How does the forex chart trading pattern work?

Chart patterns are generally formed due to an interaction between sellers and buyers. And this interaction, later on, led to numerous chart patterns, which are displayed on the chart daily.

Generally speaking, almost all chart patterns are looking forward to the supply and demand interaction.

Thus, this constant battle between sellers and buyers gives birth to various chart patterns you are probably trading right now.

How can you read chart trading patterns?

It is straightforward to see where the chart patterns work, but it is not easy to determine which areas it does not work. This is the point where the real issue occurs.

To avoid some pain, you should ignore those areas where you feel that the forex chart pattern won’t work. To trade chart patterns like a pro, it is essential to have a comprehensive systematic approach to read chart patterns easily.

Now let’s discuss how you can identify chart patterns like a pro in a few steps. Three essential things which can be applied to any chart pattern are:

  1. First of all, you have to assess the quality and size of chart patterns relative to the surrounding price action.
  2. The next step is the location of the chart pattern. Figure out where the chart pattern is located in a new trend. You also need to identify the pivot points and support & resistance levels.
  3. The last step is to assess the potential profit margin. A profit margin is useless to follow because it offers a minimum risk ratio of 1:1.

List of best forex chart patterns in a trade market

Below is the list of famous forex chart patterns which a trader can use right now:

1.   Head and shoulders

Head and shoulders are known to be a famous chart trading pattern. In this pattern, the larger peak is positioned to be at the slightly smaller peak on either side of it. This chart pattern plays a significant role in predicting any bullish-to-bearish reversal for a trader.

The first and third peaks are smaller than the second ones in this chart pattern. But all three of them fall back to the same support level, forming a condition of the neckline.

Once the third peak has fallen back into a support level, it starts to break itself into a bearish downtrend!

2.   Double top

A double top is yet another most common forex pattern. Traders utilise this pattern used for simply highlighting trend reversals. An asset price will experience a high peak before it retracts back to the support level.  

3.   Double bottom

The double bottom chart pattern indicates the period of selling. This pattern causes the asset price to drop below the support level. But before it drops itself again, it will rise to the resistance level.

But as the market becomes more bullish, the trend will reverse and start an upward motion. In short, the double bottom is known to be a bullish reversal pattern because it displays the end of the downtrend and shifts itself towards the uptrend.

4.   Rounding bottom

Next, we have a rounding bottom, another most common chart pattern to signify a reversal or a continuation. While being in an uptrend, the price of assets may fall back a bit before it starts rising one more time. The term bullish continuation defines this situation.

The majority of the traders choose to capitalise on this chart pattern by purchasing halfway around the rounding bottom. They even capitalise on the continuation when it breaks itself above the resistance level.

5.   Cup and handle

The cup and handle pattern is nicknamed a bullish continuation pattern. This pattern is generally used for displaying a certain period related to bearish market sentiment.

This chart pattern is similar to the rounding bottom pattern and has a handle similar to the wedge pattern.

At the rounding bottom, the asset price is expected to enter a temporary retracement known as a handle. This is because this retracement is confined to two parallel lines resulting in a price graph.

In the end, the asset will reverse out of handle and thus continue itself with an overall bullish trend.

6.   Ascending triangle

Ascending triangle works in the form of a bullish continuation pattern because this trading pattern signifies the continuation of the trading uptrend!

These triangles can quickly be drawn on charts by placing horizontal lines alongside the swing highs, which is the resistance level. Likewise, ascending trend lines are also drawn alongside swing lows, the support level.

Thus, ascending triangles have two or more two identical peak highs due to which horizontal lines are drawn. These trend lines will signify the uptrend of ascending pattern in future market movement.

7.   Symmetrical triangle

The symmetrical triangle pattern acts as a bearish and bullish trend based on market conditions. This triangle pattern is formed as soon as price converges with higher troughs and lower peaks.

Even if the overall trend is bearish, the symmetrical triangle will still display upward reversals.

Chart pattern trading strategy – Major rules to follow

Now let’s highlight a few essential strategies or rules you should follow while using chart patterns in a trade market.

Rule no 1: See if the market is consolidating or is in trend mode

This rule plays a significant role because some chart patterns are in consolidation mode, and some stay in trend mode according to market movements.

The continuation pattern signals the trader that the trend will stay constant. And a reversal pattern will signify the end of one trade and the start of the latest trend in the market. One best example of a reversal pattern is a double top pattern.

If the market is consolidating or in trend mode, with this information, a trader can quickly figure out which chart pattern is best for them based on the trading environment.

Most of the price action traders fail to achieve the desired targets because they are not following this golden rule. Instead, they trade each chart pattern without seeing the whole picture.

Rule no 2: Figure out which chart pattern you want to use

Ask yourself whether you are comfortable trading with continuation chart patterns or trade reversal patterns.

Once you have decided on your favourite choice, you can step forward and design a particular trade set-up.

It is always best to trade with good chart patterns to acquire them in real-time.

Rule no 3: Follow chart pattern strategy to reach good price location

Typically, the chart patterns work with the excellent price location to add confluence to the forex trade.

Price location is an area on a forex chart to expect a specific price reaction. This price location can be either a resistance or support level. Technical indicators can also be displayed by combining the two chart patterns.

What are the disadvantages of trading with chart patterns?

1.   Chart patterns can most often deliver false signals

It is not guaranteed that chart patterns will deliver 100% accurate results all the time. In short, a good chart pattern is not possible all the time.

It is suggested that the traders should always take advantage of those opportunities in which reward/risk ratios are pretty compelling enough.

2.   Chart patterns are time-consuming to form

For an investor or trader, patience is the key. And extra patience is required when they are forming chart patterns.

To generate high probability signals on a chart pattern, a lot of time is consumed to show actual and valid results. This might be psychologically burdening for the traders to watch out for a price action that works in their favour.

3.   Chart patterns are just adequate for the short term

Most of the chart patterns provide valid signals for a limited time duration. This means that traders are left with a small opportunity to benefit from generating profitable chart patterns.

A minor delay can cause the trading signals to no longer show effective results with a maximum risk/reward proposition.

4.   Chart patterns can inspire subjectivity

With the help of chart patterns, traders can get a natural feeling to be part of the forex market. However, when trading some chart patterns, traders have high chances to become more subjective than objective.

Subjective trading can be dangerous for the traders because they are more guided by the general guidelines and never follow strict rule-based systems. A chart pattern can continue one trader and a reversal formation for other traders.

FAQs

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1.   Which chart is best for forex trading?

The best chart for forex trading is the TradingView. This chart is highly recommended by multiple traders having access to the free version and various advanced features.

2.   Is it hard to identify forex patterns?

Based on two low points, you can identify the forex patterns in a “W” shape. Thus, you will find this bullish chart pattern following a downtrend in which the price drops itself to a new low. It increases itself slightly and then dips back down to the lowest point. Once it reaches the second low point, it is expected that the price will increase once again.

3.   Are chart patterns repetitive?

You can access helpful data once you learn about the stock market chart patterns. Of course, the patterns repeat themselves again and again. But the most significant turning point is that the exact pattern repetition will rarely occur.

4.     Can forex chart patterns predict the forex chart price?

Forex chart patterns cannot work perfectly for predicting the forex price chart. One biggest misconception with technical analysis and chart patterns is that it’s a reliable approach for predicting market moves.

5.   Why do chart forex patterns fail?

A forex chart pattern will display failure results if a specific chart pattern is not materialised as it was anticipated. And thus, it fails to achieve the desired potential in the market. This will cause the price action to start moving in an opposite direction.

Bottom line

To sum up the whole discussion, it is evident that chart patterns play a reliable role in tracking the price movement or seeing when it changes in the forex market.

Traders can identify prevailing marketing conditions through chart patterns and determine existing support and resistance levels. Plus, it is equally helpful in anticipating the possible changes in a forex market to catch rising trade opportunities.

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