This article covers 4 of the main forex chart patterns that are necessary to understand some of the chart patterns which help traders make profitable decisions.
Symmetrical Triangles.
Symmetrical triangles represent areas of indecision. These patterns usually occur when the market pauses and future direction is questioned . Such patterns usually represent a graphical representation of equal forces of demand and supply. Attempts to push higher are quickly met by selling and dips are seen as bargains. Each new lower top and higher bottom becomes more shallow than the last taking on the shape of a sideways triangle. An interesting characteristic of markets which are exhibiting these movements is that transaction volume usually decreases until there is a breakout.
Eventually, when there is a breakout from the pattern, volume and volatility increase thus providing new opportunities for traders.
Symmetrical triangles more frequently resolve themselves in the direction of the trend. Symmetrical triangles are easily recognizable and in my opinion, are great patterns to use.
The ascending triangle is a variation of the symmetrical triangle.
Ascending Triangles.
Ascending triangles are considered bullish and are most reliable when found in an uptrend.
The top part of the triangle usually appears flat but still can have a slight upward angle. The bottom part of the triangle has an upward slant. In ascending triangles, the market becomes overbought and prices fall back. Buying then starts again and prices soon reach their old highs, where they once again fall back. Buying then resurfaces at a higher level than before. Prices eventually break through the old highs and thrust even higher as new buying comes in. Breakout from the pattern usually results in an increase in volume as the trend re-establishes itself.
Descending Triangles.
The descending triangle is also a variation of the symmetrical triangle and is generally considered to be bearish. It is usually found in downtrends. Unlike the ascending triangle the bottom part of the triangle appears flat or has a slight downward sloping angle.
The top part of the triangle has a downward slant. Prices drop to a point where they are oversold. Low volume buying tends to come in at the lows with prices subsequently rising. Because of the downward trend the higher price entices more sellers and prices fall and re-test the old lows.
Buyers then once again enter the market and the price movement is repeated.
Sellers are in control and push through the old lows of this pattern, while the previous buyers (long positions) rush to dump their positions and reverse their positions. Volume tends to increase on breakout.
The Head and Shoulders.
The head and shoulders pattern is a reversal pattern and it is most often seen in uptrends. It is most reliable when found in an uptrend.
The pattern is exhibited when the market begins to slow down.
Sellers come in at the highs (left shoulder) and the downside is probed beginning at the neckline. Buyers soon return to the market and ultimately push through to new highs which is represented by the head.
The new highs are quickly turned back and the downside is tested again – a continuation of the formation of the neckline. Buying then re-emerges and the market moves up again but fails to take out the previous high. The last top is considered the right shoulder.
Buying ceases and the market again tests the downside. Your trendline for this pattern should be drawn from the beginning neckline to the continuing neckline.
Volume is of greater importance in the head and shoulders pattern in comparison to other patterns. Volume generally follows the price higher on the left shoulder. However, the head is formed on diminished volume indicating the buyers aren’t as aggressive as they once were. On the last rally attempt the left shoulder volume decreases compared to the head volume which signals that the buyers may now be out of the market. New selling comes in and previous buyers get out. The pattern is complete when the market breaks the neckline.
These are 4 of the 7 main forex chart patterns necessary to understand for profitable trading.
