How would someone know if the price movement will reverse, trade beyond its support and resistance level, or simply consolidate?
The battle between the buyers and sellers forms a chart pattern, indicating the potential market movement.
If buyers overpower sellers, the market will appreciate. On the other hand, dominating selling pressure would lead to market depreciation.
If no one's winning—the market consolidates.
This lesson guides you on how to trade chart patterns in forex. Read on and explore the different forex patterns you can spot to predict forex price movement.
At first glance, predicting the price movement and potential trend is challenging for new traders. This situation carries weight because a wrong entry or exit point can wipe your investment.
But here's the thing: you can tell where the market will move by simply looking at your trading chart, the battle between the buyers and sellers, and identifying the patterns it forms.
Here are the four common trends that the trading patterns indicate:
Remember, always confirm your pattern before acting on it. The gold rule is to always analyze the pattern in conjunction with other indicators like moving averages, Relative Strength Index (RSI), and moving average convergence divergence (MACD) to confirm the trend formation.
Also, no one beats the practical insights of other traders. However, it's crucial to ensure that the information you receive is verified and credible. Joining a reliable trading community can provide valuable support, helping you learn from others and avoid potential pitfalls.
| Chart Pattern | Preceding Trend | Trading Signal | Following Trend |
| Double Top | Uptrend | Bearish Reversal | Downtrend |
| Double Bottom | Downtrend | Bullish Reversal | Uptrend |
Double tops and double bottoms are reversal patterns.
The double-top pattern is characterized by a chart with two peaks of almost the same height. After the second peak, the market is likely to reverse its bullish trend to bearish.
It confirms the pattern once the price breaks below the neckline (the support level between the two peaks). Traders typically expect a downtrend at this point and enter a sell position.
On the other hand, the double bottom is the mirror image of the double top—you just flip it upside down.
When a double bottom forms, you'll see the market hit two troughs at the same level. After the two troughs, the market will reverse from being bearish to bullish.
When the price breaks above the neckline (the resistance between the two troughs), it confirms the pattern. Confirmation is the signal to enter a buy position, but remember to place a stop at the lowest point of the pattern.
How do these two patterns form?
| Chart Pattern | Preceding Trend | Trading Signal | Following Trend |
| Head and Shoulders | Uptrend | Bearish Reversal | Downtrend |
| Inverse Head and Shoulders | Downtrend | Bullish Reversal | Uptrend |
Head and Shoulders and Inverse Head and Shoulders both signal a potential market reversal.
The formation of the head and shoulders suggests that the primary uptrend is ending, and a downtrend is about to start. This signal is confirmed when the price trades beyond its neckline. At this point, you can enter a sell position with the neckline as the resistance.
It's characterized by a head and two shoulders:
On the other hand, the inverse head and shoulders pattern is the exact opposite of the former.
Basically, when a bearish market forms an inverse head and shoulders pattern, it will reverse to bullish. It has three lows, the middle trough (lower low), and two shoulders (higher lows).
You can enter a buy position when the price breaks through the neckline, the support level. Typically, you can target the distance from the neckline to the head as a take-profit level.
How do these two patterns form?
| Chart Pattern | Preceding Trend | Trading Signal | Following Trend |
| Rising Wedge | Dowtrend or Uptrend | Continuation or Bearish Reversal | Downtrend |
| Falling Wedge | Uptrend or Downtrend | Continuation or Bullish Reversal | Uptrend |
A rising wedge and falling wedge can signal a continuation trend if they appear after an uptrend (falling wedge) or downtrend (rising wedge).
However, both also signal a trend reversal.
A reversal rising wedge occurs after an uptrend. It forms a narrowing price range with higher highs and lower lows. This price movement forms a converging wedge with trendlines sloping upwards. The price should trade below the lower trendline to confirm the reversal signal.
On the flip side, a reversal falling wedge suggests a bullish reversal market if it forms after a downtrend. It features a narrowing price range with lower highs and lower lows, indicating weakening bearish momentum and a potential bullish trend.
Before entering a buy position, you must wait for the price to trade above the upper trendline. Remember, wait for confirmation before you trade.
| Chart Pattern | Preceding Trend | Trading Signal | Following Trend |
| Bearish Pennants | Dowtrend | Continuation | Downtrend |
| Bullish Pennants | Uptrend | Continuation | Uptrend |
Pennant patterns both signal continuation trends.
A bearish pennant pattern forms a steep downward movement followed by a price consolidation. The consolidation phase resembles a series of small symmetrical triangles, which are the pennants.
On the other hand, the bullish counterpart of the bearish pennant pattern forms a steep upward movement and is followed by a consolidation phase.
You can execute a buy position or set a higher target once the market forms bullish pennants and the price trades about the pennant. When shorting on a bearish pennants market, you wait until the price trades below the pennants.
Trading the chart is one of the most common strategies technical traders use. However, these patterns don't guarantee returns and can sometimes bring false signals.
Remember to use it with other indicators or ask the community to confirm the signal of the pattern.