Basic charting patterns explained
Using established chart patterns can help a Forex trader spot more opportunities within the market. Our experts explain how you can utilise chart patterns optimally.
Using established trading patterns can help a trader to spot more opportunities in the Forex market. However, spotting a single chart pattern on the daily chart isn’t a winning formula. It is about how we use chart patterns in combination with other tools to create more confluences which will inevitably give our setups more probability.
Employing chart patterns will be similar to using a bomb detector in that you will be able to locate moments on the chart before the explosion of movement. If you can correctly detect a breakout explosion, you’ll often be able to win handsomely in that trading spot.
As well as showing areas of fast movements approaching, chart patterns can offer indications of great trades around entry points. Let’s cover some of the basic, classic charting patterns.
While some chart patterns, such as triangle formations, are not included in this article, most other classic chart patterns will provide more complex signals for finding trades. You will quickly obtain a lot of chart experience if you understand the fundamental concepts and keep your chart clean of overcrowding indicators.
Keep in mind that many other Forex traders will be attempting to use these tools as well, so be on the lookout for market manipulation. Make sure you note your entry and exit levels before allowing the action to unfold.
The wedge pattern in technical analysis is made up of two trendlines. We can break the wedge pattern into two forms – a falling wedge and a rising wedge. They tend to operate in different trends.
The main characteristic of these chart patterns is that they pull price action together like a spring, and the market prepares to release the spring, resulting in a decent breakout movement.
Within two trendlines, a rising wedge is formed during a period of consolidation in an uptrend. It is frequently associated with price action that is steep. The lows are frequently printed faster than the highs, resulting in a wedge shape pattern. They can appear at any point during the course of a trend.
Price will frequently break out to the upside at the start of a trend, and it may also break out to the downside at the end of a trend. To create a target using the rising wedge, measure the base height and add it to the breakout to get the target level, which we can then trade toward.
Because these patterns aren’t as straightforward to draw on the chart, you’ll need to be inventive when employing them. When you’re in a profitable trade, lock in profits as soon as possible to help this charting pattern become even more profitable.
The falling wedge, like the rising wedge, provides trading possibilities in the opposite direction. They can be discovered in a downtrend with price action that is dense. To create a target using a falling wedge, measure the base height and add it to the breakout height to get the target level, which we can then trade towards.
Rectangle break out patterns
Rectangle breakouts appear to be more common, and they’re the most popular method to view a breakout from a key level. On their charts, a competent trader will draw rectangles to represent support, resistance, or targets. We can search for momentum breakouts to carry our trades to the next target level when the price fluctuates between these levels and revisits them often.
These chart patterns are simple to draw and provide consistent movement as long as you trade with momentum and within a trend. To determine this, look to the left for a succession of higher highs or lower lows. You will come across manipulation that can lead to false breakouts from time to time, but understanding the overall sentiment and keeping to your original bias will help.
Head and shoulders pattern
Because it entails a trend change, the head and shoulders pattern is less prevalent. Because finding one at the end of a downturn would be deemed an upside-down head and shoulders pattern, it is most often during uptrends or at the end of uptrends.
As shown in the video above, the peaks will determine the formation. We need to see a left peak (left shoulder), followed by a higher peak or higher high (head), followed by a lower peak or lower high (right shoulder), and then a break and closure below the base neckline. Once we get this classic formation we can then look to short or sell that currency pair.
Depending on the preceding price action and what levels of support it lines up with, the target is then measured from the head or right shoulder. Some traders may wish to keep the trade open for a longer period of time because the trend on a higher timeframe has recently changed and there is much more potential. We recommend closing all, or at least a large portion, of the profit at the target as we don’t want to be too greedy or become overconfident when trading this chart pattern.
The head and shoulders pattern can appear on a variety of timeframes, from monthly to daily. While you might be able to locate one on a smaller timeframe, we’ve found that it’s not as reliable, therefore we recommend sticking to the daily or weekly timeframes to uncover these types of trend reversal patterns.