If you are an experienced trader, then you will undoubtedly be familiar with chart patterns. New traders though might find chart patterns a bit complex and overwhelming, hopefully this article will help you familiarize yourself with these systems and inform you about their function and utility when trading.
Also known as chart price patterns, these help traders recognize movements, trends and as the name indicates - patterns that emerge from the movement of the prices of currency pairs. This can help you metaphorically “ride the wave” of a currency pairs’ movements; enter a trade on a low and exit high. Here are some of the most popular forex chart patterns.
1. Candlestick Patterns
One of the most frequently referenced chart pattern is the so called Candlestick Chart Pattern or Japanese Candlestick Pattern because it is said to have originated in Japan in the 1700s. These are some of its variations:
Single Candlestick – this pattern is further separated into the hammer and the hanging man. The hammer is seen during a downward trend in a bullish reversal movement. Hammers usually a signal of the approaching bottom price and speculated rise in the price of the pair soon after. Inversely the hanging man shows the zenith or peak of a price gain, indicating that there is an increasing number of sellers of the pair against buyers potentially creating a downward movement. There are further types of single candlestick patterns such as the inverted hammer and shooting star. The inverted hammer happens on a downward trend, indicating that most of the sellers of the pair have exited the trade, thus buyers will start moving in on it. The shooting star occurs on an upward trend and indicates that although buyers have attempted to increase the price, sellers have exited the trade at a more rapid pace.
2. Triangle Patterns
The symmetrical triangle pattern emerges when a forex currency pairs price’s highs slope converges with the slope created by the price’s lows. The two slopes “draw” towards the point of a triangle. This indicates a sort of equilibrium between buyers and sellers, but the closer to the “apex” of the triangle pattern the slopes move, the greater the chance of a breakout. Of course the breakout can be in either direction, so tread with caution. The ascending triangle pattern emerges when buyers manage to push up the price creating a higher lows slope, but still remain few than sellers creating a flatline of price highs. Much like its pattern homonym as the slopes converge so does the possibility of a breakout. There is also the inverse of the ascending triangle pattern, the descending triangle in which the lows stay on more or less a straight line, whereas the highs create a downwards trendline.
3.Head and Shoulders
Not only the name of a popular dandruff shampoo, head and shoulders and its inverse – the predictably named inverse head and shoulders chart pattern is an extremely popular and oft used pattern. The regular head and shoulders pattern predicts a downwards movement of the price, the inverse pattern forecasts an upwards movement. Usually the pattern involves two “minor” price highs (on the normal head and shoulders) on opposite sides of a higher price high and the inverse of the pattern: two “higher” lows on the opposite sides of a “lower” low.
4. Double Top/Double Bottom Pattern
Similar to the head and shoulders but without the “head” or “higher” high/”lower” low price, the double top pattern has two peaks, which indicates that buyer interest has waned and that there is the possibility of a downwards trend. The double bottom pattern on the other hand has two low price valleys which forecast a potential upwards moving trendline as buyer interest is now piqued.
5. Rising/Falling Wedge
Similar to the triangle with resistance and support trendlines that flank the price movements of a currency pair. The primary difference between the triangle and wedge is that the wedge pattern has two sloping trendlines that are almost parallel (with the resistance trendline having a more downward slope though) opposed to the converging trendlines of the triangle pattern. Another difference is the fact that generally an uptrend break won’t be observed as the both trendlines slope down. A further differentiation between the patterns is the fact that it is a longer term pattern as indicated by its shallower slopes – compared to the triangle. A rising wedge pattern works similarly to the falling wedge chart pattern forecasting a potential downward trend.
With knowledge about chart patterns and an STO account
that gives you access to MT4, one of the industry’s leading forex trading platforms, you can trade today. Click on the link above for more information.This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.