3.6 Common Forex Chart Patterns
Very often we find certain patterns forming, time and again, on our trading charts. These common chart patterns are nothing but a reflection of mass psychology and the price action originating because of that. For example a rising price finding strong resistances near the same level, multiple times, indicate that market is fearful of that level. It also means that instead of going up, a downward breakout may take place.
Chart patterns provide us a snapshot of the buying and selling actions of the millions of market participants. Whatever may be their psychologies, the net result of their trading activity is represented on a chart through price and volume. The battle between buyers and sellers is finally represented pictorially for us to analyze and decide our trading strategies. Chart patterns are representations of repetitive market behavior that can be identified and which can provide us a clue to the likely future move of the market.
We will learn to identify bearish and bullish patterns that appear on our charts, and position ourselves so as to take advantage of the ensuing moves. Trading the markets is no easy task, and chart patterns help us to stack the odds a little in our favor.
Understanding and trading with these important chart patterns can add positively to the trading results. It is always good to keep an eye on the charts of different timeframes to lookout for any common formation taking place.
So be prepared to become conversant with exotic sounding patterns like Head and Shoulders, Double Tops, Double Bottoms, Pennants, Wedges, Rectangles and even Triangles.
And we don’t mind if you drop these names at the next beach party – and sound like a trading guru!
Types of chart patterns:
The chart patterns can be classified in two ways, either:
- Reversal patterns and Continuation patterns
- Bullish Patterns and Bearish Patterns
Reversal chart patterns indicate the possibility of reversal of the ongoing trend.
During strong trends there are occasions when the price action pauses and go into a sideways mode. At such times either the trend may continue or a reversal may take place. Continuation patterns indicate that the possibilities of trend continuation are higher.
Bullish and bearish chart patterns
As the name suggests, these patterns indicate either the bullish sentiments or the bearish sentiments, even when the price action is indicating indecisiveness at the first glance.
- Common chart patterns