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38. Understanding Chart Patterns

Chart patterns form on all time frames and help traders predict the probable direction in which the currency pair will move. They are divided into two categories: reversal patterns and continuation patterns. Below are a few of the most popular chart patterns, which you can use and implement in your trading right away.

Head and Shoulders

This pattern forms after an uptrend, if confirmed, it marks a trend reversal. The opposite of it is the Inverse Head and Shoulders, and it is just as powerful for reversals in downtrends.

As you may have noticed, a Head and Shoulders consists of three peaks, where the center peak is the highest. The opposite is true for the Inverse Head and Shoulders.

AtoZ Forex training – Head and Shoulders Pattern

AtoZ Forex training – Head and Shoulders Pattern

By connecting the lowest points on either side of the head you get a “neckline”. In this break through, the neckline provides a selling opportunity. In an inverse Head and Shoulder, it provides a buying opportunity.

Double Top and Double Bottom Formations

Double tops and bottoms are one of the most popular, profitable and easily applied patterns known by Forex traders.

AtoZ Forex training – Head and Shoulders Pattern

AtoZ Forex training – Head and Shoulders Pattern

The Double Top is a bearish reversal formation that usually forms after prices have been in an uptrend. Price attempts to break above a recent swing high but fails. The two tops are approximately equal height. The way it is generally traded is to wait for the confirmation when the retracement low beneath the two peaks is broken to the downside after the second peak.

The Double Bottom is a reversal pattern, bullish in nature. It generally forms after prices have been in a downtrend and it is a mirror image of the double top.

The probability of this pattern working out increases if the double tops or bottoms are a long way apart, but they do not have to be exactly at the same level to the pip.

Triangles

This pattern is characterized by a series of upward sloping lows and equal highs, which if connected will form a right angle triangle.

AtoZ Forex training – Triangles Pattern

AtoZ Forex training – Triangles Pattern

In an uptrend, a descending triangle will most likely lead to a trend continuation and can be a great sell signal when price breaks out and down.

The exact opposite is true with descending triangles. These are among the most reliable of all patterns because both supply and demand are easily defined.

Pennants

A pennant is a formation in which the slope of price highs and lows are converging to a point. Rallies and sell-offs form a symmetrically sloping support and resistance.

AtoZ Forex training – Pennants Patterns

AtoZ Forex training – Pennants Patterns

This congestion generally communicates that an explosive move is imminent. As this is a trend continuation pattern, place a buy order on a break out of the triangle in the direction of the trend.

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