Top Trading Chart Patterns

Predicting future currency pair prices help in confirming market continuation and reversal signals. Trading chart patterns assist in identifying these potential price movements by using historical price actions of the particular currency pair. In our article, we will discuss the top trading patterns and how to read them.

What are trading chart patterns?

A trading chart pattern is a shape that is formed by connecting several currency pair prices over a period of time. These patterns help traders identify where the market is headed and what possible price turns the market can make based on historical observations. Forex price patterns help traders in making market order decisions accordingly.

Types of chart patterns

1. Continuation chart patterns

Continuation chart patterns signal that the forex currency pair prices are going to continue in the same direction as before. Such patterns occur in the middle of the trend and resume after the pattern is completed. Traders receive buy signals during a continued uptrend and sell signals during a continued downtrend.

2. Reversal chart patterns

Reversal chart patterns signal that the forex currency pair prices are going to reverse in the opposite direction after a particular trend has occurred. Such patterns mostly occur after the prior trend has ended, as they form a completely new trend in the market, sending traders a signal to long or short an order accordingly.

A prior uptrend suggests that the market is going to reverse and fall, and sends traders a signal to exit the trade.
A prior downtrend suggests that the market is going to reverse and rise, and sends traders a signal to enter the trade.

3. Bilateral chart patterns

Bilateral chart patterns are a hybrid of the continuation and reversal chart patterns as they signal that the currency pair prices either continue with the prior trend or reverse in the opposite direction and move against the prior trend. One can trade with a bilateral pattern by opening two opposite positions with an assumption that the trade can move in either an upwards or downwards direction.

How to read chart patterns

A chart pattern in the financial market can be read by first understanding the important elements that form a price chart.

1. Price and volume of the asset

You cannot identify the actual buying or selling pressure of an asset by only analysing its price or volume. It is essential to look at the price and volume of the asset together to understand the actual direction in which it is headed. When one compares the asset price change with the volume traded, they receive confirmed market signals that help in placing successful trade orders.

If a currency pair's price drops with a greater fall in its volume, it signals that most traders are not selling the currency pair, signalling you to keep holding onto the currency pair.
If a currency pair's price increases with a more significant rise in its volume, it signals that buying pressures are high and it is the right time to enter the market.

2. Moving Average line

Moving Averages determine the average price change in the currency pair over a period of time and compare it with the currency trading price to provide traders with successful trading signals. A Moving Average line depicts several average prices of the currency pair over several periods to smooth out minor price fluctuations. They track the currency pair's price movement and help traders identify where the market is headed.

When the price of the currency pair falls sharply below the moving average lines, it signals a potential downtrend where traders can exit the market.
When the price of the currency pairs goes beyond the moving average lines, it signals a potential uptrend where traders can enter the market.

3. Relative Strength Index line

The Relative Strength Index (RSI) is used to measure the changing currency pair prices' speed that helps identify overbought and oversold market conditions. The RSI line helps traders to identify if the currency pair is performing well or depreciating in the market.

When the RSI line is following an uptrend, it signals that the currency pair is performing well in the market and that traders can open buy positions for the same.
When the RSI line is following a downtrend, it signals that the currency pair is not performing well in the market and that traders can open sell positions for the same.

Most important trading chart patterns

1. Triangles

Triangle chart patterns help in identifying buying and selling pressures in the market. They are drawn by connecting the low or high price points along with a resistance or support level trendline. Triangles are continuation patterns and signal traders to place buy orders during an uptrend and sell orders during a downtrend. There are three types of triangles patterns –

Ascending triangles are bullish chart patterns that are formed in an uptrend by connecting the rising low currency pair prices (lower trendline) and high currency pair prices (upper trendline). Ascending triangles signal that the uptrend is going to continue, and hence, traders should enter the trade.
Descending triangles are bearish chart patterns that are formed in a downtrend by connecting the falling high currency pair prices (upper trendline) and low currency pair prices (lower trendline). Descending triangles signal that the downtrend will continue, so traders should exit the trade.
Symmetrical triangles are formed in a market that does not follow any particular direction. They are formed by connecting the high and low currency pair prices that indicate upper and lower trendlines, respectively. You can make an order decision as soon as the currency pair price breaks in the current trend's direction. This means if the price breaks above the current uptrend, it sends you a buy signal and if it breaks below the current downtrend, it sends you a sell signal.