Technical analysis is very important in forex trading because it helps traders identify patterns and deduce probable future movements in the market. This is done using various analysis tools, which include forex trading charts. Forex trading charts are the graphical representations of a pair of currencies or more relative price performance.
Forex charts are an essential tool of trading, and learning how to read them can give novice traders a sense of direction. This article looks into the different types of forex chart patterns and gives an informed guide on the best chart to use.
With time traders will realize that there are three types of Forex charts. It then becomes a matter of identifying the most convenient of them all to use. These patterns inform the trader on how the charts will behave in certain market conditions.
The Different Types of Forex Chart Patterns.
There are many chart patterns, but the main types are three. The others are based on the three or borrow most of their structure from either of the three. Understanding the three patterns is definitely of the essence. The three chart patterns are:
· Reversal chart patterns
· Continuation chart patterns
· Bilateral chart patterns.
Reversal Chart Patterns
These are the most common chart patterns and the easiest to identify. They signal that the ongoing trend is about to change course. They signal that downtrends or uptrends will come to an end, with a change of course in the opposite direction.
Thus when a reversal chart pattern is noted in a downtrend, it hints that the trend will reverse upwards soon. Conversely, if a reversal chart pattern is witnessed in an uptrend, then it suggests that the price will reverse and head downwards in due time.
The Following are the Chart Patterns that Exhibit Reverse Signals. They are:
- Double Top
- Bottom top
- Rising and falling Wedge
- Head and shoulders
- Inverse head and shoulders.
These patterns can either be bullish or bearish. This means that when the trend reverses from an upward trajectory, it takes a bearish form. Similarly, when it takes a reverse on a downward trend, then the market trend is bullish. For instance, an ascending wedge with widening volume is most likely on the brim of a bearish breakout.
Trading these chart patterns is simple. One needs to understand and rightfully identify the current trend and align their strategies with it. Afterward, a trader can place an order beyond the neckline and in the same trajectory as the new trend. After that, opt for a target that is almost the same height as that of the formation. The neckline is usually where the breakout occurs, and it can be identified by determining the resistance and support levels.
Continuation Chart Patterns.
These patterns are also known as consolidation patterns. They indicate the continuation of a pricing trend. Usually, they show reduced trading volume. Their movement pattern is different in that rather than moving lower or higher in a straight line, they pause and move sideways. This pause is meant to correct the lower or higher trend and then regain the overall continuing trend. Some continuation patterns are in the form of:
Pennants;
Wedges;
Channels and rectangles
To trade with this pattern, watch for volume. Open a position when volume shows signs of increasing. Good practice will be to place a target that is equal to the formation’s height.
Bilateral Chart Patterns
These chart patterns do not show reversal or continuations but rather suggest trends that could result in either of the two. In short, they indicate that prices could move either way. They are usually in the form of triangles.
Trading with them is pretty simple. One should contemplate both situations and place an order on top of the formation and the other at the bottom. When one reacts, you should then cancel the other.
In summary, chart patterns exist in three major types, namely: reversal chart patterns, continuation chart patterns, and bilateral chart patterns. They are very easy to use, and one should identify a convenient pattern to their strategies.
