Forex trading isn’t just about looking at the numbers while trying to figure out what’ll happen next. Beginners and veterans of Forex trading should know and understand one of the most practical tools for a trader – chart patterns. It is the basis of all the underlying buying and selling pressure that takes place in the activity.
Charts are pure price-action and have a proven track record for traders to identify reversal and continuation signals, as well as recognize price targets and open positions.
What are Chart Patterns?
Now we know that chart patterns are an essential part for any trader to understand the flow of trading, beginners might still be perplexed regarding these price formations.
Chart patterns help traders predict the future of any movement in prices. Popular patterns in trading would often show that a specific type of movement will follow a high probability of moving through a certain formation of price. Traders can then follow patterns into two major categories, them being reversal patterns and continuation patterns.
Reversal patterns signify a turnaround of the underlying trends, whereas continuation patterns indicate a carry-over of the underlying trend. Here are some examples of reversal and continuation patterns worth checking out.
- Head and Shoulders
No, this is not the popular shampoo brand; this reversal chart pattern signifies that there will be a change in the underlying trend. It shows three swing highs, then a middling swing high (which is the highest), and then a lower high right by the end. The lower high portion of the pattern indicates buyers didn’t deliver enough strength to bring the price to a higher point. This chart pattern is named as such because it looks like a head with shoulders.
- Rounding Top
A rounding top chart pattern usually takes a bit of time before it forms as it shows gradual changes instead of quick movements. The pattern forms a “rounded top,” hence its name. The trigger for the pattern is the break located at the support line as the price target is in line with the distance from the support line to the top of the range.
Rectangle chart patterns don’t mean it forms the shape in the graph. Instead, it means it verifies that the underlying trend should continue. Traders can see that the chart divides into bullish and bearish rectangles, but do take note it depends on the situation of the underlying trend. As the price enters a congestion phase, a bullish rectangle appears on the uptrend while in a sideways trading. However, the price will likely break out in the direction of the previous trend.
Another continuation chart pattern worth mentioning is the wedge. In a price chart, a bullish wedge will form during an uptrend. This scenario takes place when the price trades within the converging trendlines. It implies that sellers are trying to make moves to push the price to a lower position, but they don’t have enough strength to win against the stronger force displayed by the buyers.