As a trader, I believe that chart patterns are great instruments of getting detailed info from the market. With their help, we can predict the trend, find entry points, follow the dynamics of the whole Forex market.
In this article I’ll tell you how to “read” the most popular and effective Forex and stock chart patterns, so you’ll understand how the price moves in a new better way. There are 4 main Forex and stock chart patterns which will help you in making important trading decisions. I can even say that they are the best chart patterns I know. I’ll tell you about all of them soon. But firstly, let’s talk about their components.
3 main components of the Forex & stock chart patterns
All the chart patterns consist of the same components. You’ll understand how they work if you know those components. So, let’s shed the light on them:
1. Highs and lows (the foundation)
This may sound easy, but in fact, this is the basis of any analytical Forex or stock chart pattern.
Higher highs, lower lows.
Higher highs signalize an uptrend, lower lows tell us about upcoming downtrend. Soon I’ll tell you more, but now it’s all you need to remember. It will be our starting point.
Higher lows and lower highs.
If you see such situation, it may be a sign of upcoming trend changing. Look at the screenshot below. This is how price creates lower highs and higher lows. In this situation, it means the end of a downtrend and the beginning of an upward one. Note, that the whole chart pattern can be identified as ‘Head and Shoulders’ and ‘Cup and Handle’. You’ll meet these chart patterns later in my article.
2. Trend-waves length and steepness (trend strength)
The truth is that the most often chart analysis focuses on average highs and lows, but forgets about what happens between them.
Individual trend waves define the trend strength. They can be found between highs and lows. We should pay attention to the steepness and size/length of those waves to identify the trend strength.
You can see the 1st trend wave on the chart below. It is a steep and long one. The second wave is shorter and less steep. The final one is short but steep. It has broken the high of the previous wave. Price wicks can be exhaustion signals, and, as we see here, the trend becomes downward and our waves ended in a reversal point.
3. Pullback depth
After you have found out what trend is there on the market, look at pullbacks, as they can tell you what will happen next.
Look at the screenshot. It shows an upward trend that has various retracements and consolidations. But the final retracement was the largest and longest, and only after it ended, the downward trend was emerged. This long retracement is an evidence of changing on the Forex market. It tells us that buyer-seller balance is going to change soon.
Little short retracements are normal phenomena for an ongoing trend, but more frequent and larger ones can foreshadow a probable trend shift.
4 most effective Forex & stock chart patterns
If you’ve read some Forex literature, and tried to trade live, you may notice that chart patterns are not always looking the same. They are mostly unclear and far from the literature examples. So, you should learn how to decode them really like an expert to trade successfully. Here is how it’s done.
This figure signalizes a consolidation period of some trend and the further start of a new one. When there is an upward trend, a triangle appears when pullbacks and retracements become smaller.
During already established trends, triangles are reliable, as they show us positions accumulation before the continuation of a trend. I can agree with those traders who say that triangles are really the best Forex & stock chart patterns. This figure works well on different timeframes.
Head and shoulders
This chart pattern tells us about a possible reversal. You can see how a sentiment changes on the chart.
Price makes its higher high from the left shoulder. Such pattern is often formed after an upward trend where the head is the last quotes’ push. The right shoulder is another high that usually indicates the trend ending. The neckline break shows a possible reversal of a trend. Highs and lows are the main parts of the ‘Head and shoulders’ formation.
These are reversal Forex and stock chart patterns, underlying principles of which are similar to the previous one.
2nd top fails to break the 1st high. It tells us that there are not so many buyers left on the market. And they can’t push the quotes higher any more. So, if you notice the double top or the double bottom patterns, it’s a signal of upcoming trend change. The confirmation for this changing can be a break lower and emergence of new lows.
Cup and handle
This Forex and stock pattern can be called a series of highs/lows as well. The formation is a slow shift of a downtrend to an uptrend. There is a row of lower lows at first, then a consolidation on the cups bottom takes place, after this higher highs begin to appear. An upward trend is confirmed at the top of the cup.
Note that if the price can’t break the highs, this pattern can transform into a double top one. It’s one of the best and most effective Forex & stock chart patterns which signalizes a reversal.
As you have already understood, all charts can be analyzed by using just highs and lows. Even if you won’t use this knowledge during trading, learning how to work with the best chart patterns will give you the better understanding of the Forex market and improve your analytical abilities. Reading the best chart patterns is not a very difficult task.
Let’s repeat the main points of this article on working with the Forex & stock chart patterns once more:
- Highs and lows are the basics of the chart analysis.
- The trend shift usually takes place after the last higher high or lower low.
- The trend strength can be defined with the trend waves steepness.
- The volume of retracements between that waves shows us the balance between bulls and bears.