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
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.
A flag trading pattern is one of the forex charts that is formed in both bullish and bearish markets after the currency pair price breakouts in the opposite direction of the current trend. The market continues in the direction in which the currency pair price breaks out temporarily. The sharp incline or decline in the price makes the flagpole, and the temporary price reversal makes the flag's body in a flag pattern. Thereafter, the market continues in the initial direction, making it a continuous pattern.
- A bullish flag is formed during an uptrend after a sharp price incline, followed by a temporary price decline, signalling traders an upward market continuation as currency pair prices start rising again after the temporary fall.
- A bearish flag is formed during a downtrend after a sharp decline, followed by a temporary price incline, signalling traders a downward market continuation as currency pair prices start falling again after the temporary increase.
Wedges are forex price patterns indicating reversal signals that occur either during a downtrend or uptrend. It consists of converging trend lines formed by connecting the currency pair's high price and low price level. As the price breaks out in the current trend, it starts moving in the opposite direction, providing traders with suitable market signals.
- A rising wedge occurs during an uptrend by connecting higher highs and higher lows to form the upper and lower trendlines, respectively. As the currency pair price moves out of either of the two trendlines, a breakout in the downward direction occurs, signalling a downtrend reversal where traders can exit the market.
- A falling wedge occurs during a downtrend by connecting lower highs and lower lows to form the upper and lower trendlines, respectively. As the currency pair price moves out of either of the two trendlines, a breakout in the upward direction occurs, signalling an uptrend reversal where traders can enter the market.
4. Double tops and bottom
The double tops chart is a bearish reversal pattern that is formed in an uptrend after the currency pair price reaches its highest price level twice, consecutively. The second high price is a little lower than the first high price, signalling a downtrend reversal. The reversal is confirmed once the currency pair price falls below the support price, which is equal to the low price level between the two high price levels. The double bottoms chart, on the contrary, is a bullish reversal pattern that is formed in a downtrend after the currency pair price reaches its lowest price level twice, consecutively. The second low price level is a little above the first low price level, signalling an uptrend reversal. The reversal is confirmed once the currency pair price rises above the resistance price, which is equal to the high price level between the two low price levels.
Pennants patterns are forex chart patterns that occur during a significant upward or downward movement in a currency pair's market price, indicating a continued trend. After the large upward or downward movement, the currency pair trades between a price range of its support (where falling prices stop falling and start increasing) and resistance (where rising prices stop rising and start falling) level. Thereafter, the price breaks in the direction of the initial trend and signals traders to place market orders accordingly.
- A bullish pennant occurs during an uptrend wherein, after a large price increase, the currency pairs start trading between a range before finally breaking out in the upward direction and signalling traders to place buy orders.
- A bearish pennant occurs during a downtrend wherein, after a large price decrease, the currency pair starts trading between a range before finally breaking out downward and signalling traders to place sell orders.
An engulfing chart is one of the many candlestick charts that occur in bullish or bearish markets signalling market reversals. It indicates that the currency price has either reached its maximum or minimum price value and will not trade above or below it for the time period.
- A bullish engulfing pattern occurs during a downtrend and indicates an uptrend reversal after the currency price reaches its resistance (maximum) price level in the market. It is formed by two candlesticks, starting with a small body black candlestick, indicating the current close price being more than the previous day's close price. It is followed by a large body white candlestick that indicates a higher level of closing price when compared to its opening price on the same day, confirming the uptrend reversal signal. This pattern sends traders a signal to long the trade.
- A bearish engulfing pattern occurs during an uptrend and indicates a downtrend reversal after the currency price reaches its support (minimum) price level in the market. It is formed by two candlesticks, the first of which is a white candlestick, followed by a larger black candlestick that indicates a confirmed downtrend reversal. This pattern sends traders a signal to short or sell the trade.
Which chart pattern is best for trading?
Candlestick chart patterns are considered the best for trading as they provide all information about the currency pair's price in the market. Each candlestick provides information about the currency pair's prices for that particular trading period and captures the most important price data like opening price, closing price, high price and low price. Candlestick chart patterns are based on historical and current trends to indicate future market trends. Through these patterns, traders can identify if a market is going to continue or reverse and place trade orders accordingly.
Trade forex with chart patterns to generate results
Using chart patterns in the forex market helps traders determine the potential future price direction of the currency pair. It also helps them identify the overall market direction through continuous and reversal chart patterns. Start trading forex with our platform to enjoy multiple technical analysis tools, tight spreads, and fast order execution. Sign up for a live trading account or try a risk-free demo account.
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