This is a brief look at five forex chart patterns every trader needs to know.
Chart patterns in forex are distinctive formations created by the movement of prices of currencies as depicted on a candlestick chart. A chart pattern is defined by connecting common lines or points, over a period of time. These lines of points may connect highs, lows, closing prices, etc. These are now used in technical analysis as a means of predicting the future price movements of the underlying currency pair.
In this article, we will talk about five forex chart patterns every trader should know. These are:
1) The Wedge
2) Head and Shoulders
4) Descending Triangle
5) Double top
There are several others, but this is our scope in the present article.
There are two variations of the wedge pattern. The wedge pattern itself is a reversal pattern, which shows that a reversal of the pattern within the boundaries of the wedge is about to occur. Thus a falling wedge is a bullish reversal pattern, and the rising wedge is a bearish reversal pattern. The wedge is formed by connecting the highs and lows of the candlesticks, which converge to produce a pattern where the upper trend line forms a sharper slope than the lower trend line (falling wedge) and the lower trend line forms a sharper slope than the upper one (rising wedge).
Head and Shoulders
As the name implies, this pattern looks like a head flanked on both sides by shoulders. The head and shoulders pattern is formed when a trend line connecting the highs of the candlesticks forms three peaks and two troughs. There is the first peak, followed by a trough, then a second peak which is higher than the first peak, followed by another trough at almost the same level as the first one, then a third peak which is not as high as the second peak and may or may not be at the same level as the first peak. A horizontal line drawn at the lows of the two troughs forms a neckline. This pattern is a bearish reversal signal, with the entry being done as a Sell Stop placed at the neckline after the 2nd shoulder, and the pip distance between the neckline and the head set as the first profit target.
This is a bearish pattern formed by the convergence of an upper trend formed by lower highs and a lower horizontal trend line formed by the lows of the candlesticks. Eventually, there will be a bearish breakout at the horizontal lower trend line.
Channels have several variations: horizontal channels, ascending channels and descending channels. Whichever variation you see on the chart, the definition of channels is the same. Channels are technical ranges in which prices have traded in for some time. So horizontal channels occur if the price range has been consolidating sideways, ascending channels occur when the range is trending upwards, and descending channels occur when the range is trending downwards. Since the upper and lower trend lines which connect the highs and lows border the price, they are excellent ways of profiting from forex by selling at the resistance levels and buying at the supports.
This is a bearish reversal pattern formed by two successive peaks and one trough in between them. The peaks are located at almost the same level at each other. The trough is a temporary support and a horizontal line drawn at this point forms the neckline. Trading is done by setting a Sell Stop at the neckline with the same pip distance between the neckline and the peaks being used as the first profit target.
These are 5 of the most important forex chart patterns every trader should know.
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