We have learned a lot about forex indicators. lagging indicators and also leading indicators now is the time to continue the long journey of a forex career by learning about important chart patterns technical analysis.
Why is this weapon so important in a market analysis?
Because of this if likened we will issue a fart. In our stomach, we already feel that something will come out.
This means that by studying important chart patterns, this will give an earlier signal before it actually happens. Because this is most profitable chart pattern.
Then by studying important chart patterns in candlestick patterns technical analysis, this will add to your treasury of weapons in capturing the big trends that occur in the market.
Chart patterns are simple weapons, but they can identify current trends, and also when major trends are formed. Even though it might not be easy, it’s very fun if we can catch on to the big trends and it will give us cash money.
Work from home with TenkoFX broker, a broker that serves forex traders to trade on the forex, CFD and crypto trading markets.
Regulated broker by the International Financial Services Commission (IFSC) of Belize.
Basic chart patterns and formations
Chart patterns describe market psychology, which often repeats history itself, although there are many types of chart patterns, we can learn from basic chart pattern formation, as a first step.
This chart pattern actually we study the series price action that occurs in a certain time period.
Something interesting is that chart patterns often repeat history itself, so this will be a good weapon if we are able to recognize important chart patterns.
Well, we will start with the list of important chart patterns, the most successful chart patterns, here the list.
- Double Bottom and Double Top.
- Inverse Head and Shoulders and Head and Shoulders.
- Bullish and Bearish Rectangles.
- Rising and Falling Wedges.
- Bearish and Bullish Pennants.
- Triangles (Symmetrical, Ascending, and Descending).
Chart pattern Double Bottom and Double Top
Double bottom and double top, as the name suggests, there are two valleys and two peaks that are the main concern.
If drawn, the double top will resemble the letter “M” and double bottom resemble the letter “W”.
If this pattern appears then there is a high possibility of the reversal pattern starting.
Important chart pattern double top
We already know that double top chart patterns are trend reversal patterns.
What is the shape of this chart?
Yes right like the letter “M”, this pattern appears in a bullish trend, where the body has managed to form the highest peak, then bounces back towards the neckline, and once again the price rises towards the highest peak.
But until there he failed to penetrate the highest peak and prices fell back towards the neckline.
How do to open a position? Simply, you can open a position below the neckline, if the line breaks, the price will go down even deeper.
Don’t forget about stop-loss, adjust it to your risk ratio. Although this included most powerful chart patterns. Because we never know the next movement. It’s as early prevention.
Why open position below the neckline? this is in anticipation of a bullish reversal in this zone, and stop-loss is part of risk management.
If you are lucky the profit will come and see that the distance between the neckline break with the neckline distance with the highest peak is almost the same.
You should not be greedy in capturing profit, if the target distance is further away, it might waste your profit.
Important note on the double top pattern, this will only happen after the rising trend reaches its highest peak.
Important chart pattern double bottom
The double bottom chart pattern is just the opposite of a double top pattern.
If double top forms the letter “M” then double bottom forms the letter “W”.
This pattern appears as a sign of a trend reversal, where after a bearish trend, prices will form a new lowest valley.
After reaching the lowest valley the price will go back up to the neckline, and finally, bounce back towards the lowest valley, but he is unable to break the lowest valley.
The price then goes up to the neckline, and you can open a position above the neckline, the reason is the same as the double top pattern, in anticipation of a bearish reversal.
The target and stop-loss are the same as the double top pattern, you can measure the distance of the neckline and lowest valley to measure the target and stop-loss.
The important note is that the double bottom pattern occurs after the downtrend and reaches the lowest valley.
Chart pattern Head and Shoulders and Inverse Head and Shoulders
`Head and shoulders also inverse head and shoulders are popular chart patterns, also indicating a reversal of the direction of the trend.
Imagine you have a head and two shoulders on your right and left side, this will only make it easier for you to recognize this pattern appearing.
Important chart pattern head and shoulders
Head and shoulders pattern appears at the uptrend, where prices will form new peaks, and after prices bounce back towards the neckline it will rise again and form new highs.
Then the price goes back down to the neckline and bounces up once again to the highest peak but it cannot go beyond the highest peak.
By drawing straight lines from the first and third peaks will be aligned as the right shoulder and left, while the peak highest is your head.
Meanwhile, to draw a neckline he takes from two troughs, and the slope of the line can go up or down.
However, if the slope of the angle leads down, then the possibility of a reversal trend is quite good.
How to trade? similar to using a double top, you can place orders below the neckline.
For stop loss you can use a risk-reward ratio of 1: 1 at least, you can also use the neckline distance with the shoulders to calculate the target and stop-loss.
If you are lucky the price will actually go down further after the neckline breakout.
Pay attention to the target and don’t be greedy, because this will destroy you.
Important chart pattern Inverse Head and Shoulders
Inverse head and shoulders are the opposite of head and shoulders, they are only in the reverse position.
If you imagine your head and shoulders facing downward, this is very strange but it only makes it easier for you to remember the inverse head and shoulders pattern.
This pattern will emerge after a downtrend, where the lowest prices form a new valley, then bounce and form a new valley lower, and bounce again to form a new valley but not past the previous lows.
Head and shoulders pattern rules, draw a neckline in the same way as the head and shoulders pattern, only you use a peak where the price bounces to form the head and shoulders. If the line forms an upward slope, the chances of an upside reversal are quite high.
The entry method is the same as the head and shoulders and double top patterns, using the neckline as the entry reference.
But you place orders above the neckline, stop loss and targets adjust to the ideal distance. don’t be too wide for the target. If you’re lucky the price will really go up after the neckline break. This pattern is good shape as candlestick patterns for day trading.
Bullish and bearish rectangle
Read also How to trade using ichimoku kinko hyo
Rectangle pattern shows market doubt, where this pattern forms support and resistance in parallel.
The price moves up and down from support to resistance or vice versa for several times, but prices failed to cross the support and resistance zone.
This shows that buyers and sellers fight each other but bounce a few times before finally a breakout occurs, this area is a consolidation, where prices move within the range of support and resistance.
But when a breakout occurs, it can breakout up or breakout down.
Above is an image with a rectangle pattern that forms a box, where prices in parallel form support and resistance.
We have to wait for the price to break out from the rectangle to open a position.
Important chart patterns Bearish rectangle
Bearish rectangle pattern appears when downtrend, where the seller’s strength will start to weaken and there is a consolidation, maybe the seller is getting tired and wants to pause for a moment.
When the rectangle pattern appears, we can make a rectangular box at the level of support and resistance as the limit of the consolidation movement range.
How to trade?
We will use the breakout level by opening a position outside the box.
The example above the rectangle that appears only consolidates and it turns out the next price breaks low and continues the bearish trend.
We open the short below the rectangle and place the target by looking at the distance of the resistance support from the rectangle, don’t forget your stop loss.
Why do we use the rectangle distance to take a profit?
Because the tendency of the breakout movement is the same as the rectangle distance.
However, sometimes it is narrower and can be wider, in the example above after the target breakout has been reached but the trend still continues, the opportunity to gain more profit.
Important chart patterns Bullish rectangle
The bullish rectangle pattern is the opposite of the bearish rectangle, it appears after the uptrend.
At the time of the uptrend, buyers began to get tired and pause for a moment as consolidation, then prices fluctuate at the level of support and resistance several times before the breakout.
It should be noted that the rectangle pattern is consolidating, it might break up or break down.
How to trade?
Basically the same that is waiting for a breakout, in the example above a continuation of the trend occurs so that a long position will provide a nice profit.
Adjust the target with a rectangle distance, and stop-loss with a ratio of 1: 1.
After the breakout the price may form a strong trend, you can also use a trailing stop to maximize profits.
Rising and falling wedges
Read also Popular indicator summary
Chart patterns can form like a wedge, where prices become narrower as a result of weakening trends.
This is a sign that the trend will stop for a moment before finally breaking out.
This pattern may give an indication of the continuation of the trend or trend reversal.
Rising wedge occurs at an uptrend, where the slope of support and resistance when drawn straight lines it has a narrow-angle at the end.
Look at the picture above, it forms a rising wedge, after the uptrend, prices form a higher low, but the high is no longer able to form a much higher price, it seems buyers are getting tired, thus forming a wedge.
How to trade?
We wait for the breakout, in the example above it turns out the seller began to dominate and make a break low as a trend reversal.
That is an opportunity for profit, by placing a target on par with the initial distance of the wedge.
Don’t forget your stop loss.
This pattern is just the opposite of a rising wedge, this happens in a downtrend, where the strength of the trend begins to weaken.
Falling wedges, as well as rising wedges, can be a signal of reversal and continuation.
Usually for reversal signals occur in a downtrend, and continuation of the trend occurs in an uptrend.
This means that when after a downtrend then a falling wedge pattern appears, the possibility of a trend will reverse.
Conversely, after the uptrend appears falling wedge pattern, this can be a continuation of the trend,
In the example above the falling wedge pattern, appears after a downtrend.
Where prices form a lower high, and a higher low so that if drawn a trendline will become steep.
How to trade?
We use a breakout strategy, if the price has broken the wedge line then it is a position signal.
In this example is a reversal signal, then a long position can provide a nice profit with a target equivalent to a wedge line.
Above is an example of the falling wedge as a reversal marker, while for a continuation of a trend, it starts from an uptrend, then prices weaken and form a falling wedge, after that, a breakout occurs a continuation of the trend
Bearish and bullish pennant
The pennant pattern is formed after a downtrend or uptrend movement then the price starts to consolidate and forms symmetrical like a triangle, which is a kind of pennant.
When the consolidation condition is over usually the buyer or seller will increase and breakout the pennant line.
Bearish pennant often appears after the price drops sharply, then some sellers take action to take profit so that the trend weakens, and forms a pennant pattern.
In this condition the price is consolidating, if you draw a trend line, from higher highs and lower lows, it will form a symmetrical triangle.
How to trade?
Same with the strategy on the wedge pattern, it waits for a breakout from the pennant line.
In the example above the price finally breaks again, and the price continues the trend.
A short position right order to get profit, with the target according to the distance the trend starts to the pennant line.
To place a stop loss you can use it above the pennant line.
Bullish Pennant often occurs when the trend rises sharply, then some buyers begin to take profits so that the trend weakens and forms a pennant.
This condition is a consolidation, but often a bullish sign indicates a continuation of the trend.
How to trade?
Simply by waiting for the breakout of the waiting line,
Bullish Pennant often signals a continuation of the trend, then after the breakout above the pennant line, the right position is to buy or long.
With the target in accordance with the initial distance of the trend with pennant lines.
Stop-loss you can place below the pennant line.
Triangle chart patterns
Triangle chart patterns are also a consolidation pattern, there are three types of a triangle that are popular and known, symmetrical, ascending, and descending.
The symmetrical triangle is a consolidation pattern where prices between higher highs and lower lows gather to form a symmetrical triangle.
The fight between buyer and seller is drawn, not yet seen which is more dominant.
In this condition, it is not clear where the price will move, it can go up or down.
How to trade?
Simply put, we can place a pending buy stop order above the higher high, and sell stop below the lower low.
No matter where the price will go, both pending orders are traps when a breakout occurs.
In this example the price turns high and rises, the long position will be active and you can cancel the sell stop order.
Your profit target can be placed according to the distance of higher highs and lower lows of the symmetrical triangle.
With a stop loss below the lower low.
An ascending triangle pattern is formed when a higher high form the same line if drawn it will become a horizontal line, while prices are low, tend to be higher than the previous low.
This also indicates consolidation, where buyers are unable to break highs and sellers have begun to weaken.
If you look at the picture above, it appears that the buyer has begun to press, but he is stuck at a higher high level of the triangle line.
How to trade?
This condition might be a dilemma because buyers will not necessarily break the high, so the right way is to place a pending buy stop order above the triangle line, and sell stop below the triangle line, or lower high.
No matter where the price will move, if one pending order becomes active, then cancel the other pending order.
In this example, it turns out that the price moves down so that short positions will be active.
For target, profit can take the lower low price of the ascending triangle and stop-loss above the higher high of the ascending triangle.
This pattern is the opposite of the ascending triangle, if the ascending triangle horizontal line is formed at higher high, conversely at the descending triangle horizontal line is formed at lower low prices.
This condition is a consolidation area, prices can move up thereafter or move down across the lower low.
But often that this pattern will bring prices move up and support is too strong.
How to trade?
Same with the strategy in the ascending triangle, we can use pending orders buy stop and sell stop, with a plan if one pending order is active it will cancel the other pending orders.
On the target profit, you can use the higher high from the descending triangle, or use the high to low distance from the triangle.
The above description is an important chart pattern basic formation, there are still other patterns that are part of the chart pattern.
There are cup and handle, triple bottom, rounding bottom, continuation flag.
But by utilizing an important chart pattern basic formation, this is enough you can apply to your trading daily.
You can choose TenkobyFX broke which is a broker regulated IFSC.
Are you ready to start trading?