Introduction of Forex Chart Patterns
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Very often we find certain patterns forming, time and again, on our trading charts. These common patterns are nothing but a reflection of mass psychology and the price action because of that. For example we see the price going up strongly to one level, fails to sustain and falls back. The price action rises again and move to the same level again and falls again to the previous low. Such action is clearly indicating that traders are fearing any price action beyond those peaks. This fear for further gains is also an indication that short-selling may start and the prices may drop even further. This gives us our famous double top chart pattern which is discussed in detail later.
These psychological indications are further fueled because many of the trades may not be going into the depths of this analysis but may be simply taking trading positions by simply following these patterns i.e. by the book. This increases the probability of getting expected results from these patterns.
In a way chart patterns are an extended or more complex version of trend lines. The trend lines are straight lines which represent the support and resistance levels. However the supports and resistance levels may not always follow a straight line and may follow some more complex patterns.
Earlier we had mentioned that the chart patterns are a representation of mass psychology or sentiments. If we go a little deeper we find that these chart formations or patterns are observed during the times of uncertainty or when the price action is lacking a clear direction. Any technical indicator would tend to generate more and more false signals when there is a clear lack of a directional movement. The confusion may be so large that even the price action may not follow any straight trend lines for supports and resistances. Well, the hope is not lost even at such times because if we are watching closely, we may find some or other pattern in the price action which may indicate the underlying sentiments and hence the possible upcoming direction.
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.
The chart patterns can be classified in two ways, either :
- Reversal patterns And
- Continuation patterns OR
- Bullish Patterns And
- Bearish Patterns
Reversal patterns represent the possibilities of a reversal of the ongoing trend. Reversal patterns may mean a reversal all the time. During a trend there would be frequent consolidations before the price action moves in the direction of the trend, once again. Hence the reversal patterns indicate either a trend reversal or possibilities of deeper consolidations.
During strong trends there are occasions when the price action pauses and go into a sideways mode or in an uncertain volatile mode. At such times either it may end up in reversing the direction or continue in the direction of the trend. Continuation patterns indicate that the possibilities of trend continuation are higher.
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.