CHART PATTERNS

Forex chart patterns are on-chart price action patterns that have a solid probability of follow-
through in a particular direction. These trading patterns offer significant clues to price action
traders that use technical chart analysis.
Price changes are usually represented using candlesticks, and after a series of time periods,
candlestick patterns form on a chart, telling the price action story.
Chart patterns are powerful tools for traders because they represent raw price action and help
traders to feel the mood and sentiment of the market.
Chart patterns are classified according to the signals or directional cues that they provide to
traders. Here are the 3 types of chart patterns:

1) Continuation Chart Patterns

Continuation chart patterns are those chart formations that signal that the ongoing trend will
resume. Usually, these are also known as consolidation patterns because they show how buyers
or sellers take a quick break before moving further in the same direction as the prior trend.
Trends don’t usually move in a straight line higher or lower. They pause and move sideways,
“correct” lower or higher, and then regain momentum to continue the overall trend.

2) Reversal Chart Patterns

Reversal patterns are those chart formations that signal that the ongoing trend is about to change
course. If a reversal chart pattern forms during an uptrend, it hints that the trend will reverse and
that the price will head down soon. Conversely, if a reversal chart pattern is seen during a
downtrend, it suggests that the price will move up later on.

3) Neutral Chart Patterns

Neutral chart patterns occur in both trending and ranging markets, and they do not give any
directional cue. Neutral chart patterns signal that a big move is about to happen in the market
and traders should expect a price breakout in either direction.

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Picture above shows some of the most popular chart patterns.

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Continuation Chart Patterns

Pennants
Pennants usually signal a small pause in a strong trend. They form in the shape of triangles.
Pennant looks like the shape of the small (mini) symmetrical triangle, as both triangle and
pennant are bound by trendline support and resistance lines. They are very brief with the
resulting move duplicating the movement that preceded the formation of the pennant. In an
uptrend, a bullish pennant will form when a small period of consolidation is followed by a strong
desire by bulls to drive prices higher. In an downtrend, a bearish pennant will form when a small
period of consolidation is followed by a strong desire by bears to drive prices lower.

On the picture above you can see pennant formation after the uptrend (left) and after the
downtrend (right).

Flags
Flag pattern is similar to pennant pattern. The only difference between flag and pennant is, flag
looks like a small channel (parallel lines) in a trend. In an uptrend, a flag pattern will form when
prices consolidate by forming lower highs and lower lows to signal a period of profit-taking. A
break outside the upper falling trendline will be a signal that bulls are ready to drive prices higher
for the next phase. Same explanation, but opposite direction applies to downtrend.

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On the picture above you can see flag formation after the uptrend (left) and after the downtrend
(right).

Reversal Chart Patterns

Head and Shoulders Patterns

Head and Shoulders Pattern is one of the top reliable chart patterns for technical analyst. A
straight head and shoulders pattern forms in an uptrend when the price makes three highs: the
first and the third highs are almost similar in height (shoulders), while the second high is higher
(head). A neckline is drawn to connect the lowest points of the troughs formed by the formation.
Traders usually enter the trade after price breaks the neckline. The distance between the neckline
and the ‘head’ serves as the target price when the price breaks below the neckline. A reverse
head and shoulders forms in a downtrend, with the second low being lower than the first and
third lows. The target price will be the distance between the neckline and the head when the
price breaks above the neckline.

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On the picture above you can see head and shoulders pattern (left) and inverse head and
shoulders pattern (right).

Double Top and Double Bottom

Double tops and double bottoms form after the price makes two peaks or valleys after a strong
trending move. They signal price exhaustion and a desire by the market to reverse the current
trend. Price targets, when trading double tops and bottoms, are equal to the same height as the
formation most of the time. After breakout confirms at the recent low level, you can enter into
the trade.

On the picture above you can see double bottom pattern (left) and double top pattern (right).

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Neutral Chart Patterns

Triangles
Symmetrical triangles are some of the most common neutral chart patterns. A symmetrical chart
pattern forms when the price forms lower highs and higher lows. The slopes of the highs, as well
as that of the lows, converge to form a triangle. The formation illustrates that neither bulls nor
bears are able to apply enough pressure to form a definitive trend. Wait for a breakout of the
triangle pattern to enter into the trade.

On the picture above you can see symmetrical triangle pattern – reversal (left), continuation
(right).
Let’s look out the Ascending Triangles and Descending Triangles.

On the picture above you can see ascending triangle pattern – contnuation (left), reversal (right).

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On the picture above you can see descending triangle pattern – contnuation (left), reversal
(right).
Keep on mind that nothing is 100% accurate on Forex market, so these patterns are not too.
Sometimes signals they give will not work. I advise you to create a certain plan that works for you
the best and trade without hesitation.

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