Using Trading Patterns in Forex Trading

Knowing and using different types of patterns is the basis for successful trading, as every market situation requires choosing the most optimal and, consequently, profitable course of action. Therefore, it is worth taking a closer look at different Forex trade patterns.

Understanding Trading Patterns

It is the result of studying historical data on the behavior of financial markets over decades. This makes it possible to identify repeated formations, which form chart patterns. With a high probability, they are the ones that predict future price changes, which is why, along with a Forex expert advisor, they are among the main tools for a trader.

It is important to understand that chart patterns are divided into two main categories:

• Reversal
• Continuation

Each of them includes different types of charts that characterize the market and provide information about further trend changes, which is especially important for successful trading.

Common Reversal Patterns

These patterns in Forex trading indicate trend reversals. It can be a change of direction from a falling market to a rising one or vice versa. They usually take the form of head and shoulders, as well as double or triple tops and bottoms. Reversal patterns indicate a fairly high potential risk-reward ratio.

The following chart patterns in Forex are the most popular among traders.

1. Head and Shoulders. This chart has three price peaks. The one in the middle is higher, and the two on the sides are at about the same level.
2. A double-top pattern. It usually occurs after an uptrend. The chart has two peaks at almost identical heights. This pattern indicates that buyers are running out of steam. The last bottom between the two peaks is called the trigger line.
3. Double bottom. This chart is the exact opposite of the previous one. It is helpful to use it after a significant price drop.
4. The Quasimodo pattern. It is one of the most reliable patterns for determining the reversal strength. This pattern can be especially useful after a significant downtrend or uptrend.
5. Candlestick pattern. The chart resembles a candle, which is why it has such a name. If this pattern appears after a significant downtrend, it may indicate that new opportunities for price growth may appear soon.

Continuation Patterns

Typically, continuation patterns include descending and ascending triangles, rectangles, pennants, and bull and bear flags. This indicates that after a period of consolidation, the prevailing trend will continue. Elongation patterns usually appear in the middle of a trend. In general, they are a pause in price action and can have different durations. Therefore, it is worth paying special attention to different models of continuation patterns.

1. Triangle. This chart shows the convergence of a price range with higher lows and lower highs. There is a descending, ascending, and heptagonal triangle.
2. Pennants. This pattern is similar to the previous one but smaller because it is created by only a few bars. The chart appears when prices are converging and cover a small price range of the average trend.
3. Flags. Flags indicate a pause in the trend that occurs when the price is limited to a small range. This pattern usually does not last long.
4. Rectangles. This chart indicates a pause in the trend. Price action moves between parallel support and resistance lines.

Japanese Candlestick Patterns

Such charts are also called spinning tops. They indicate a certain confrontation between buyers and sellers. Prices can go up and down quite sharply, but as a result, no dramatic changes occur. If a spinning top is formed during an uptrend, you should expect its direction to reverse, as there are few buyers left. If a rotating top is formed during a downtrend, it also indicates a trend reversal, but the reason is a small number of sellers.

Also, special attention should be paid to the Marubozu model. There are Black and White versions of this chart. An extension is likely when the White Marubozu is formed at the end of an uptrend. If this chart is created at the end of a downtrend, a reversal is likely. The situation is the opposite with the Black Marubozu.

Another variant of the Japanese candlestick pattern is the Doji. They indicate the same opening and closing price, which is caused by the struggle or indecision between buyers and sellers.

Trading Strategies Based on Patterns

Recognizing different trading patterns is a particularly important skill for investors. It involves identifying patterns in the behavior of assets on the market, which makes it possible to create more accurate forecasts of market trends and, accordingly, choose the best strategies.

Among them, the most popular are the following:

• Moving average strategy;
• 50 pips per day;
• Breakout/breakdown strategy;
• Trading by graphic patterns;
• Trend following strategy;
• Scalping.

Summary

Trading models provide valuable information about the dynamics of supply and demand, as well as market psychology. With this information, an analyst can assess possible future trend changes and choose the most successful trading strategies based on it, maximizing the profit.