Lesson 9: What Are the Three Main Groups of Chart Patterns?

The market either moves upward, downward, or sideways. But how do profitable traders know when these movements will happen?

They master forex charting and pattern spotting to predict the potential market movement.

In this lesson, you'll walk through the three different types of chart patterns – namely, reversal pattern, continuation pattern, and bilateral pattern. Learn here how you can use these patterns to yield high returns.  

Lesson Overview

A chart pattern provides a visual insight into the market's historical trends and prices.  

The battle between the bulls (buyers) and bears (sellers) is the primary reason behind the formation of chart patterns.  

When you spot a significant chart pattern, it tells you the trend will reverse or continue. However, it could also signal that the market could move either way.

Why Should You Care About Chart Patterns?

The most common way to profit from the forex market is to know when, how, and where it will move in the future.  

But how do you do it? Do you follow what your guts are telling you? Do you need a shaman or a crystal ball to predict it?  

No, and super no!  

One way to gauge the future price trend is by spotting chart patterns.  

A chart pattern gives you a visual insight into the market's historical trend—an important aspect of trading any financial instrument. It tells you what happened in the past and how that event would influence the market movement in the coming period.  

The effectiveness of these patterns relies on market psychology – how traders expect the past market trend can predict the future movement.  

This belief can create self-fulfilling prophecies, where the collective actions of traders based on these expectations actually influence the market to behave in a certain way.

The Battle Between the Bulls and the Bears

The bulls (buyers) and bears (sellers) move the market to profit from it.  

If the market is in an uptrend, the buyers overpower the sellers. Meanwhile, sellers are in control when the price is in a downtrend.

If it moves sideways, it indicates that the market is showing no clear trend. In trading language: it's in a consolidation phase.  

During this phase, neither the bulls nor the bears push the price in their preferred direction.

Three Main Groups of Chart Patterns

In the forex market, the currency pairs may move in three primary directions: upward, downward, and sideways.  

But how would you know when these movements will happen? You can verify it by looking at the type of pattern you're looking at.  

Reversal Chart Patterns

A reversal pattern means that the primary trend that the price is trading will reverse after the formation of the pattern – usually once the price trades beyond the patterns' upper or lower trendlines (support and resistance level)

What does this tell you?  

Simple: If the patterns' preceding trend is bullish, the price will likely break its support level and decline. If it follows a bearish trend, it will trade upward by trading above the resistance level.  

Here are the different kinds of reversal chart patterns:  

Continuation Chart Patterns

As the name suggests, a continuation chart pattern indicates that the price will continue to trade on its primary trend after it enters a consolidation phase.    

These patterns often suggest that the prevailing trend, whether bullish or bearish, will resume once the pattern is completed.  

Using continuation chart patterns to identify potential entry points to capitalize on the trend's persistence.

Here are the different kinds of continuation chart patterns in forex:

Bilateral Chart Patterns

The bilateral pattern is the trickiest pattern of them all. Why?

It signals that either a bullish or a bearish breakout may happen after the consolidation.  

• A symmetrical triangle has converging upper and lower trendlines, forming a roughly perfect triangle.  
• An ascending triangle establishes a clear resistance level by forming a perfectly horizontal trendline and a slopping lower trendline that registers higher lows.  
• A descending triangle forms lower highs that creates a slopping upper trendline. Additionally, the price established a clear support level (lower trendline)

When trading a bilateral chart pattern (basically all triangles), you should place an entry order on either end of the trendlines.  

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