Going Back to Chart Patterns

Trying to figure out the world of forex hasn’t gotten less complex, but it has gotten more accessible. You’re better off making sure that you go back to the fundamentals at the start of the year, so you can become an even more effective forex trader.

We wanted to cover chart patterns, because charting is so important. You can’t move far in the world of forex if you don’t understand patterns at all.

You can think of chart patterns like little canaries in the great coal mine of forex. When you look at a chart, you will be able to hear the canaries “chirp”, which is always a good thing.

The goal with chart patterns is that you want to spot big movements before they actually happen. This allows you to make good forex profits, if you do it correctly. Here’s how to connect things together.

The top patterns consist of the double top and double bottom, head and shoulders (and reverse head and shoulders), rising and falling wedges, bullish and bearish rectangles, bearish and bullish pennants, and triangles (symmetrical, ascending, and descending).

The Double Top

This is a reversal pattern that is formed after there is an extended “move up”. You’ll find that the tops are actually peaks that come about when the price hits a level that can’t be broken. After hitting this level, the price will bounce, but it’ll return to that level again — if the price bounces again, then that’s when you have a double top.

So, what about the double bottom?

This is a trend reversal formation, where price has dropped and formed a valley twice over.

Head and Shoulders

Again, this is a pattern that follows a trend reversal formation. The core of this pattern is a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder). A “neckline” is drawn by connecting the lowest points of the two troughs. The slope of this line can either be up or down. Typically, when the slope is down, it produces a more reliable signal.

The head and shoulders pattern is pretty easy to spot, once we actually identify it for ourselves. You also have the inverse head and shoulders, where there is a valley (shoulder), then a lower valley (head), then a higher valley (shoulder). These come into play after prolonged downward movements.

If you saw this formation, you’d want to place a long entry order above the neckline.

Wedges

Wedges are a pause in the current trend, and they are very important. A lot of traders ignore wedges to their peril. There are two different types of wedges: rising and falling. The rising wedge is where price consolidates between upward sloping support and resistance lines. You’ll notice that the slope of the support line is generally steeper than that of the resistance. You know that a big splash is coming, so you can see it from the top or the bottom.

Falling wedges can be a reversal or a continuation as well, except that it forms a little differently. It can form at the bottom of a downtrend, or it can form at the beginning of an uptrend. The falling wedge can be a bullish chart pattern in many ways.

A lot of this is based on the sentiments in the market. Paying attention to everything that’s going on is incredibly important. The last thing that you want is to get behind when you could be adding more money to your bottom line with ease! Charting works!