If you watch closely you will find certain chart patterns forming time and again on your Forex charts. Chart formations are nothing but a reflection of mass psychology. Coupled with that when many traders try to take decisions thinking that trading particular chart pattern would result in a particular way, it adds strength to it and the probability of getting expected results becomes even higher.
Understanding and trading some important chart patterns/formation can bring surprising results to your Forex trading results. Always keep an eye on these common chart formation on charts of different time frames. What we mean is that there could be a pattern forming on daily chart and you may be trading on hourly trading chart and may take a wrong decision.
Here we will be discussing some very common chart patterns and how to trade those.
One of our most favorite chart patterns.
Double Top formations are reversal patterns and are among the most common (together with double bottom formations) patterns. Double Top formations are two consecutive peaks of same or almost same height with a pull back in between which can be called a pivot point or neckline.
Double top patterns works on charts of any time-frame (short time frame or longer time frames like daily charts) but can be a major reversal pattern on longer time frame charts like daily charts, especially after an extended uptrend. This pattern is confirmed when the price goes down from the second peak and goes below the neckline or pivot point. If it happens then the most likely further downwards movement may take place.
A double top formation is a distinct chart pattern characterized by a rally to a new high (peak1 or resistance1) followed by a moderate pull back to the pivot point or neckline (support level) and then again a second rally to (peak 2 or resistance 2). The second peak is almost equal to the first peak and may prove to be the real resistance level.
Now if the market pulls back below the pivot point or neck line, it makes our double top formation.
Go short below the Neck Line (support level) when the price breaks from its second peak and goes below the neck line (pivot point). Place your stop loss order a little above the second peak. Please note that many times there will be some pull back after the price breaks the neck line and hence you may wait to short-sell at little higher price, when it pulls back upwards a little.
Your target must be a downward movement at least equal to the distance from the neck line (pivot point) to the level of the two peaks (double top). The figure above explains it clearly.
Example: If the first and second peaks (double tops) are 135.20 and the neckline (pivot point) is at 134.00 then your target level must be at least 120 pips below the neck line or pivot point i.e. 132.80.
Let's have a look on the following 3 charts to see how a double top chart formation looks like and how to trade it.
The chart above shows Double Top pattern on EUR/JPY 30 Min chart.
The chart above shows Double Top pattern on USD/JPY hourly chart.
The chart above shows Double Top pattern on EUR/JPY 30 Min chart.
Another of our most favorite chart patterns.
Double Bottom formations, like double top, are reversal patterns and are among the most common patterns. Double Bottom formations are two consecutive lows of same or almost same height with a pullback upwards in between which can be called a pivot point or neckline.
Double bottom patterns works on charts of any time frame (short time frame or longer time frames like daily charts) but can be a major reversal pattern on longer time frame charts like daily charts, especially after an extended downtrend. This pattern is confirmed when the market goes up from the second low and goes over the neckline or pivot point. If it happens then the most likely price direction is further upwards movement. What does a Double Bottom Formation look like?
A double bottom formation is a distinct chart pattern characterized by a rally to a new low (Bottom 1 or Support 1) followed by a moderate pull back upwards to the pivot point or neckline (resistance level) and then again a second rally to ( Bottom 2 or Support 2). The second bottom is almost equal to the first bottom and may prove to be the real support level.
Now if the market pulls back above the pivot point or neck line, it makes our double bottom formation.
Buy above the Neck Line (support level) when there is a break from the second low and above the neckline (pivot point). Place your stop loss order a little below the two bottoms level. Please note that many times there will be some pull back after the breaks above the neck line and hence you may wait to buy at little lower price.
Your target must be an upward movement at least equal to the distance from two bottoms to the neck line (pivot point). The figure above explains it clearly.
Example: If the first and second lows are approximately 135.20 and the neckline (pivot point) is at 136.00 then your target level must be at least 80 pips above the neck line or pivot point i.e. 136.80.
The chart above shows double bottom formation on daily chart of GBP/CHF.
Triple Top formations (together with triple bottom) are not as common as double top but work in exactly the same way as double top. Triple Top formations are reversal patterns with bearish sentiments. Triple Tops are identified by three consecutive highs of same or similar) height with 2 moderate pull backs in between (neckline or pivot points).
Triple top patterns works on charts of any time frame (short time frame or longer time frames like daily charts) but can be a major reversal pattern on longer time frame charts like daily charts, especially after an extended uptrend. This pattern is confirmed when the price goes down from the third peak and goes below the neckline or pivot point. If it happens then the most likely market direction is further downwards movement.
A triple top formation/pattern is a distinct chart pattern characterized by a rally to a new high (peak 1 or resistance 1) followed by a moderate pull back to the pivot point or neckline (support level) and then again a second rally to ( peak 2 or resistance 2), followed by a moderate pull back to the neckline (support level). And finally a third rally to test a new high (peak 3 or resistance 3). The second peak and third peaks are almost equal to the first peak and may prove to be the real resistance level.
Now if the price pulls back below the pivot point or neck line, it makes our triple top formation.
Go short below the Neck Line (support level) when there is a break from the third peak and goes below the neck line (pivot point). Place your stop loss order a little above the three peaks level. Please note that many times there will be some pull back after the price breaks below the neck line and hence you may wait to short-sell the pair at little higher level.
Your target must be a downward movement at least equal to the distance from the neck line (pivot point) to the three peaks. The figure above explains it clearly.
Example: If the three peaks are approximately at 135.20 and the neckline (pivot point) is at 134.00 then your target level must be at least 120 pips below the neck line or pivot point i.e. 132.80.
The above chart shows Triple Top formation on EUR/JPY 1 Hour.
Triple Bottom formations (together with triple top) are not as common as double bottom but work in exactly the same way as double bottom. Triple Bottom formations are reversal patterns with bullish sentiments. Triple Bottoms are identified by three consecutive lows of same or similar) height with 2 moderate pull backs in between (neckline or pivot points).
Triple bottom patterns works on charts of any time frame (short time frame or longer time frames like daily charts) but can be a major reversal pattern on longer time frame charts like daily charts, especially after an extended downtrend. This pattern is confirmed when the price goes up from the third bottom and goes above the neckline or pivot point.
If it happens then the most likely market direction is further upward movement.
A triple bottom formation is a distinct chart pattern characterized by a rally to a new low (bottom 1 or support 1) followed by a moderate pull back up to the neckline or pivot point (resistance level), a second rally to test a new low ( bottom 2 or support 2) followed by a moderate pull back up to the neckline (resistance level) and finally a third rally to test a new low ( bottom 3 or support 3).
The three lows (bottoms or support levels) are at approximately the same level. What follows is a pull back up to above the neck line (resistance).
Buy above the Neck Line/Pivot Point (support level) when there is a breakout from its third bottom and goes above the neck line (pivot point). Place your stop loss order a little below the three bottoms level. Please note that many times there will be some pull back after the price breaks above the neck line and hence you may wait to buy at little lower price.
Your target must be an upward movement at least equal to the distance from the three bottoms level to the neck line (pivot point. The figure above explains it clearly.
Example: If the three bottoms are approximately 135.20 and the neckline (pivot point) is at 136.00 then your target level must be at least 80 pips above the neck line or pivot point i.e. 136.80.
The above chart shows Triple Bottom formation on GBP/CHF Daily Chart.
Another of our favorite and also the most occurring patterns in trading.
The Head and Shoulders formation indicates a reversal in an uptrend market and is extremely popular in trading. Head and Shoulder formation consists of the following:
1) A peak (left shoulder) and then a pull back to lower level (neck line or pivot point)
2) Second peak higher than the first peak. This is called as Head and then a pullback. This pull back may not be equal to the previous pullback.
3) A third peak (right shoulder) which is less than the head and then again a pullback to the neckline/pivot point level and then below the neck line.
The neckline can be horizontal, slope up or slope down and is formed by drawing a line connecting two low points of the formation.
The pattern is complete when the support shown by the neckline is “broken." This happens when the price, falling from the high point of the right shoulder, moves below the neckline.
Unlike the Double Top, we should wait a little more downward movement before going short (a bit of more confirmation).
The reverse of Head & Shoulders (Head & Shoulders Bottom) also happen during a downtrend and we can trade in opposite way.
Go short (sell) when the price goes below (closes for that period below) the neckline. Put a stop-loss a few pips above the previous peak i.e. the right shoulder.
We may target the take-profit target of 1.5 times the height of the right shoulder from the neck line i.e. if the peak of right shoulder is 100 pips above the neck line, we may target to take profit at 150 pips below the neckline.
EUR/USD 1 Hour Head & Shoulders Top reversal pattern
The above chart shows Head & Shoulders formation on a 3-hourly chart of AUD/JPY.
Please note that the Head and Shoulders Top formation does not need to be perfectly symmetrical i.e. the left and right shoulders may not be of the same heights and the neck line may not be perfectly horizontal. It is clear in the above chart of AUD/JPY, where the right shoulder is higher than the left and the neckline is slopping downwards.
The reverse of Head & Shoulder pattern (bottom reversal) also works in the similar way but in opposite direction i.e. the market can be expected to move up.
As the name suggests, the ascending triangle chart pattern has two converging trend lines (trend lines for support levels &resistance levels) and the support level trend line slops upwards (the green line in the following diagram). This is a bullish formation that usually takes place during the uptrend.
Ascending Triangle pattern is confirmed when there is a break above the ascending triangle formation and goes above the trend line of resistance (the red dotted line in the following diagram). Please note that if there is a breakout downwards (below the red dotted line in the following diagram), it may indicate the reversal in the trend.
The ascending triangle has two trend lines. At the top, there is resistance trend line (the red dotted line in the diagram above), where traders are either selling or taking profit on the bought positions. And at the bottom we have a rising support trend line where traders are buying.
The support trend line is rising in slope and shows that support level is increasing. The resistance trend line is almost horizontal. When this resistance level is broken, we can look forward to an upward movement.
Buy when there is a breakout (upwards) of the upper resistance trend line of the ascending triangle formation. Take profit at the first resistance level. In two lot-strategy, take profit on one lot at first resistance level and wait for the second lot by increasing your stop-loss for that order higher.
The above chart shows ascending triangle formation on EUR/JPY daily chart.
This pattern is just reverse of the ascending triangle chart pattern. it has two converging trend-lines. The upper resistance trend line (red dotted line in the diagram below) slops downwards and the support trend line (green dotted line in the following diagram) is almost horizontal. Descending triangle is a bearish formation that usually forms when there is a downtrend and indicates possibilities of further downward move.
This pattern is confirmed when there is a breakout of the descending triangle formation below the support trend line (the green dotted line in the diagram below). Please note that if there is breakout to the upside (upwards and above the red dotted line in the following diagram), it may indicate the reversal in the trend.
The descending triangle is marked by two important trend lines. At the top, there is a line of resistance for the upward movement (the red dotted line). The resistance trend line is slopping down i.e. the resistance is increasing. The support line (green dotted) is almost horizontal. Now with increasing resistance for upward movement when the support line is broken, the price tends to go further down.
Sell when there is a breakout of the descending triangle formation downwards. Take profit at the first resistance level. In two lot strategy, take profit on one lot at first resistance level and wait for the second lot by lowering down your stop-loss for that order higher.
The above chart shows Descending Triangle formation on EUR/JPY 1 Hour Chart.
Look out for the breakouts. Using trend lines can do wonders. Using these simple and chart patterns which occur frequently along with the technical analysis, while keeping an eye on the fundamentals always helps in improving the success ratio in trading.
