The Forex market is just like a battle field where both buyers and sellers are always battling to take lead in the market. The strongest leads the market as the other follows. As a trader you need tools that will help you gauge the strength of the buyers and sellers so that you are able to identify the true winner for every session and go with that. Chart patterns do it all for you.
When used properly, you will be able to identify the trend movements of price and gauge who leads after the battle. There are various types of chart patterns but we will take you through the most popular patterns that are frequently traded in the market and easy to spot.
Chart patterns are in form of pictures or shapes or just formations made by candlesticks on a price chart that show movements of prices in the market.
Let’s have a brief introduction, later we will discuss the details of each pattern with examples
Chart patterns are classified into 3 major groups;
- The reversal chart pattern
- Continuous chart pattern and
- Bilateral chart patterns.
The reversal chart patterns
The reversal chart patterns indicate that the current price movement is about to change direction. For instance if a reversal chart pattern forms in an uptrend, it signals that the current trend is coming to an end and a down trend is about to begin.
The same goes for a downtrend. When a reversal chart patterns appears in a down trend it signals the upcoming of an uptrend.
The reversal normally occurs on completion of the pattern.
Some of the reversal patterns are:
- Head and shoulders chart pattern
- Inverse head and shoulders
- Double tops and Double bottoms
- Triple tops and Triple bottoms
Continuation patterns are small pauses made by price before it continues in its initial direction. This means that as price is moving, it reaches at a certain point pauses for sometime and then continues in the same direction.
These pauses in price movements are known as consolidations or congestion. It may not be easy to race the whole day so you need take a break, rest and gain your strength to complete your journey.
Under this situation there is a lot of indecision between the buyers and the sellers about the future direction of the market. This makes the traders to hold onto their currency or stocks until they get a clear picture of where the market is likely to head. This may be due to several reasons like future expected fundamental economic news or change in the country’s government.
The major continuation patterns include;
- Ascending triangles
- Descending triangles
- Symmetric triangles
- Bullish rectangles
- Bearish rectangles
- Falling and rising wedges
- Cup and handle
Bilateral patterns give two opposite signals. The pattern shows that prices can either move up or down in either direction. These are neutral patterns. This shows that any thing can happen at that point.
The best example for a bilateral pattern is rectangle pattern and triangle patterns. If price breaks the upper line of a rectangle it is likely to take the upper direction and when it breaks the lower line that’s a possible down trend. It works either way.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...