Instead of breaking through and putting in another higher high, the buying pressure evaporates and the price is unable to surpass its previous high. When the price fails to break above the prior high, it breaks the pattern of an uptrend and signals possible weakness.

Perhaps it will take a bit more time for buyers to attain a new high or perhaps sellers are about to take control. You can assume that sellers are strong enough to reverse the trend or at least drive the market into an extended consolidation. The double top pattern is completed when the neckline breaks. Traders often set a profit target by measuring the distance between the neckline and the high of the pattern and projecting it to the neckline break.

This guide belongs to ForexSpringboard. Do not copy without permission. The double bottom is the mirror image of the double top. When the price reaches a new low, it shows conviction behind the downtrend. As we have pointed out, trends consist of impulse and consolidation moves. The situation turns interesting when the price resumes its trend and reaches the low again. This is problematic because the downtrend should follow the pattern of lower highs and lower lows.

When the price fails to break below the prior low, it signals a possible issue with the trend. That said, this is not yet a buy signal. Now you can assume that buyers are strong enough to reverse the trend or at least drive the market into an extended consolidation.

The double bottom pattern is completed when the neckline breaks. Traders often set a profit target by measuring the distance between the neckline and the low of the pattern and projecting it to the neckline break.

Do you want to learn more about trading reversals with double top and double bottom forex patterns? Take a look at this guide. The head and shoulders pattern is a fairly complex formation consisting of three peaks, with the center peak being the highest of the three. The neckline can slope in any direction and is a good predictor of the severity of the price decline. You can project the height of the pattern to the neckline break and set your profit target accordingly.

For a beginner trader, the head and shoulders pattern might be more difficult to recognize. You can always zoom out a bit from the price action or switch to a line chart. The inverse head and shoulders pattern is the bearish equivalent of the head and shoulders. It can be found at the bottom of downtrends and indicates a bearish-to-bullish trend reversal. We have a separate guide on Head and Shoulders patterns that you can access via this link if you want to learn more about them.

The rising wedge pattern forms when the market makes higher highs and higher lows within a shrinking range that slopes upward.

This pattern is trickier than those we have discussed so far because its signal depends on the trend. That is, a rising wedge in an uptrend signals reversal while a rising wedge in a downtrend signals continuation. The price makes higher highs and higher lows, which fulfills the characteristics of a healthy uptrend.

The reason the rising wedge acts as a reversal signal despite being indicative of a strong trend is the extent of the price increase. If you take a closer look at the pattern, you will notice that the lower trendline rises at a steeper angle.

While the market keeps reaching higher highs, the subsequent consolidations are shorter and shorter. This happens when investors are so enthusiastic that every time the market dips, they rush to buy and immediately bid up the price.

Unfortunately, this can go on for only so long before the interest dries up and the market collapses. Every trend has a point where everybody who wanted to buy has already bought. This is when short-selling intensifies and the market begins ticking down. Thus, people cash out on their long positions, which further fuels the downward pressure.

The rising wedge in a downtrend is created by the same overconfident buyers, except that this time the market is in a downtrend. Each time the market begins consolidating after a drop, traders are speculating on a reversal. If these traders are in the majority, the market can indeed reverse.

There is no reason to risk getting stopped out by the imminent correction. It makes more sense to wait until the correction occurs and enter at a better price. When enough traders think this way, the selling pressure will ease, allowing buyers to bid up the price. When buyers finally run out of steam, however, all the traders sitting on the sidelines will flock to the market with their shorts.

This is why the rising wedge suggests continuation in a downtrend. It marks the point where the bull run fails, and sellers force the market back into trend. The falling wedge pattern forms when the market makes lower highs and lower lows within a shrinking range that slants downward. As the price moves to the downside, the two trendlines that connect the highs and the lows will eventually converge.

This suggests continuation if the trend is up, or reversal if the trend is down. Often, after a new high is reached, the market will enter a period of consolidation. The falling wedge forms when this temporary decrease happens in a rather aggressive manner but loses its momentum before it threatens the trend.

When people see that the consolidation is about to end, they begin buying at the discounted price, which results in the quick price jump at the end of the pattern AKA the breakout. A falling wedge in a downtrend occurs after a severe price drop. It signals an intensifying buying pressure, which is not surprising, as the price at this point is heavily depressed.

When the supply finally dries up, invigorated buyers lift the price, providing you with a chance to catch a market reversal. Go to this ultimate guide to learn even more about trading wedges, including strategies for different trading styles.

It forms when the price quickly shoots up and then begins consolidating. The advance is expected to continue after the consolidation. The first part of the pattern is the flagpole, which is a huge advance that breaks through a previous resistance level. This huge advance is usually triggered by a news event. Following the advance, the price goes through a consolidation phase that looks like a flag — hence, the name of the pattern. The flag consists of two parallel trendlines that point slightly down and retraces a small portion of the trend.

Note that if the retracement is too substantial, the flag is invalidated, as a reversal becomes increasingly likely. When the price breaks out from the flag to the upside, the pattern is finished. This indicates that the market is about to make another impulse move in the trend direction. The bearish flag is a continuation pattern just like its bullish counterpart.

It forms when the price tumbles and then embarks on a modest rise. The selloff is expected to continue after the consolidation. A bearish flag pattern has the same components as its bullish counterpart. However, everything points in the opposite direction. The market experiences a negative surprise shock, which results in a sharp decline. This is the flagpole. Following this decline, the price goes through a consolidation phase consisting of two parallel trendlines that point slightly upward.

This is the flag itself. The flag must retrace only a small portion of the trend, as an extended consolidation might lead to a reversal. The pattern is finished when the price breaks out from the flag to the downside. Warning: Flag patterns can be quite dangerous due to the heightened volatility. Plus, they tend to be paired with unfavorable market conditions: slippage and wide spreads. Be very cautious if you decide to trade them. In this case, our dedicated flag pattern guide is the ideal place to advance your knowledge.

The bullish pennant looks like a short triangle bounded by two converging trend lines. It occurs in advancing markets and hints at a price move in the direction of the prior trend leg. After the upward move, buyers pause to catch their breath and the market begins consolidating. This is where the difference lies between the two patterns. In the case of bullish pennants, the consolidation phase shows a less intensive effort to reverse the trend.

Remember that flags usually form in high-volatility situations such as news releases. Traders often overreact to positive news; thus, the price jump is quickly met with aggressive short selling.

The great thing with pennants — at least from our experience — is that you can often catch the breakout from the pattern. This is because, from the higher chart perspective, the pennant is often a simple impulse move toward the trend. Unfortunately, the drawback is that trading pennants can be quite frustrating. When you trade flags, you will be less likely to catch the breakout.

That said, if you do catch it, you can often capture the entire rally that comes. The bearish pennant is also characterized by a triangle-like appearance and two converging trend lines. Valutrades Limited is a limited liability company registered in England and Wales with its registered office at 51 Eastcheap, London, EC3M 1JP, United Kingdom. Company Number Valutrades Limited is authorised and regulated by the Financial Conduct Authority.

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Regulatory Number SD Back to Blog Common Chart Patterns: A Forex Cheat Sheet. October 18, By Graeme Watkins.

Head and Shoulders The head and shoulders pattern is one of the most common patterns on forex markets. This post was written by Graeme Watkins CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms. Read more articles by Graeme Watkins. Valutrades Blog Stay up to date with the latest insights in forex trading.

Compared to the seemingly endless numbers of strategies, there are far fewer trading styles. While the exact figure is debatable, I would argue that there are less than ten popular styles in existence. Exclusive Bonus: Download the Forex Swing Trading PDF Cheat Sheet that will show you the exact 6-step process I use when trading the Forex market. If you have identified swing trading as a candidate—or just want to know more about it—then this post is for you.

I will also share a simple 6-step process that will have you profiting from market swings in no time. As I mentioned above, there are far fewer trading styles than there are strategies. Within each of these, there are hundreds if not thousands of strategies. In other words, there are many different ways to day trade just as there are many ways to swing trade. For instance, one day trader may use the 3 and 8 exponential moving averages combined with slow stochastics.

Another trader of the same style may use a 5 and 10 simple moving average with a relative strength index. The same goes for swing trading. The endless number of indicators and methods means that no two traders are exactly alike. In summary, trading styles define broad groups of market participants, while strategies are specific to each trader.

In fact, attempting to catch the extreme tops and bottoms of swings can lead to an increase in losses. The best way to approach these trades is to stay patient and wait for a price action buy or sell signal. For now, just know that the swing body is the most lucrative part of any market move. On the opposite end of the spectrum from swing trading we have day trading.

As you now know, the goal with swing trading is to catch the larger swings in the market. Naturally, this requires a holding period that spans a few days to a few weeks.

I spend most of my time on the daily charts. I use a specific type of chart that uses a New York close. My suggestion is to start with the daily time frame. Once you become profitable at swing trading with the daily, feel free to move to the 4-hour time frame. As a general rule, price action signals become more reliable as you move from the lower time frames to higher ones. Think of drawing key support and resistance levels as building the foundation for your house.

These are the most basic levels you want on your charts. They provide a great foundation for trading swings in the market and offer some of the best target areas. If you want to know how to draw support and resistance levels, see this post. Not all technical traders use trend lines. They not only offer you a way to identify entries with the trend , but they can also be used to spot reversals before they happen. Be sure to review the lesson I wrote on trend strength see link above.

It will explain everything you need to know to use trend lines in this manner. At this point, you should be on the daily time frame and have all relevant support and resistance areas marked. Notice how each swing point is higher than the last. You want to be a buyer during bullish momentum such as this.

On the opposite end of the spectrum we have a downtrend. In this case, the market is carving lower highs and lower lows. Last but not least is a ranging market. As the name implies, this occurs when a market moves sideways within a range. Although the chart above has no bullish or bearish momentum, it can still generate lucrative swing trades.

In fact, ranges such as the one above can often produce some of the best trades. This is mostly due to the way that support and resistance levels stand out from the surrounding price action. Steps 1 and 2 showed you how to identify key support and resistance levels using the daily time frame. This tells you whether the market is in an uptrend, a downtrend or range-bound. My two favorite candlestick patterns are the pin bar and engulfing bar.

You can learn more about both of these signals in this post. The goal is to use this pin bar signal to buy the market. By doing this, we can profit as the market swings upward and continues the current rally. On the flip side, if the market is in a downtrend, you want to watch for sell signals from resistance. The idea is to catch as much of it as possible, but waiting for confirming price action is crucial.

When looking for setups, be sure to scan your charts. Scanning for setups is more of a qualitative process. Most traders feel like they need to find a setup each time they sit down in front of their computer. This is called searching for setups. The first rule is to define a profit target and a stop loss level. Many traders make the mistake of only identifying a target and forget about their stop loss.

In order to calculate your risk as explained in the next step, you must have a stop loss level defined. The second rule is to identify both of these levels before risking capital.

This is the only time you have a completely neutral bias. As soon as you have money at risk, that neutral stance goes out the window. It then becomes far too easy to place your exit points at levels that benefit your trade, rather than basing them on what the market is telling you.

Remember that the goal is to catch the majority of the swing. Once they are on your chart, use them to your advantage. That involves watching for entries as well as determining exit points. See this lesson to find out how I set and manage stop loss orders. Before I discuss how to identify stop loss levels and profit targets, I want to share two important concepts. The first is R-multiples. This is a way to calculate your risk using a single number.

A favorable risk to reward ratio is one where the payoff is at least twice the potential loss. Written as an R-multiple, that would be 2R or greater. You can learn about both of these concepts in greater detail in this post.

When calculating the risk of any trade, the first thing you want to do is determine where you should place the stop loss. For a pin bar, the best location is above or below the tail. The same goes for a bullish or bearish engulfing pattern. This is where those key levels come into play once more. Remember that when swing trading the goal is to catch the swings that occur between support and resistance levels.

So if the market is trending higher and a bullish pin bar forms at support, ask yourself the following question. The answer will not only tell you where to place your target, but will also determine whether a favorable risk to reward ratio is possible.

There is no right or wrong answer here. After more than a decade of trading, I found swing trades to be the most profitable. Before I experimented with everything from one-minute scalping strategies to trading Monday gaps. Finding a profitable style has more to do with your personality and preferences than you may know. Most Forex swing trades last anywhere from a few days to a few weeks.

This means holding positions overnight and sometimes over the weekend. There are, of course, a few ways to manage the risks that accompany a longer holding period. One way is to simply close your position before the weekend if you know there is a chance for volatility such as a government election. Swing trading Forex is what allowed me to start Daily Price Action in On average, I spend no more than 30 or 40 minutes reviewing my charts each day.

Spending more time than this is unnecessary and would expose me to the risk of overtrading. Because swing trading Forex works best on the higher time frames , opportunities are limited. You may only get five to ten setups each month. For instance, my minimum risk to reward ratio is 3R. In fact, a slower paced style like swing trading gives you more time to make decisions which leads to less stress and anxiety. Having the ability to trade Forex around my work schedule was a huge advantage.

This is the kind of freedom swing trading can offer. There is nothing fast or action-packed about swing trading. Most day traders, on the other hand, make a much smaller amount per profitable trade. They make up for it in volume, but the return per execution is relatively small.

Most swings last anywhere from a few days to a few weeks. As such, swing traders will find that holding positions overnight is a common occurrence. I have held several positions for over a month.

Longer-term trades such as this require patience. It may take several days, weeks, and sometimes months before you know if your analysis was correct.

That said, trailing your stop loss to lock in some profit along the way does help to relieve most of that pressure. Drawdown is something all traders have to deal with regardless of how they approach the markets. However, drawdown can last longer for a swing trader. It allows for a less stressful trading environment while still producing incredible returns. Having accurate levels is perhaps the most important factor. In my experience, the daily time frame provides the best signals. Just make sure you use New York close charts where each session ends at 5 pm EST.

Check with your broker to be sure. The best way to remove emotions from trading and ensure a rational approach to the markets is to identify exit points in advance. Above all, stay patient. Remember that it only takes one good swing trade each month to make considerable returns.

Swing trading is a style of trading whereby the trader attempts to profit from the price swings in a market. These positions usually remain open for a few days to a few weeks. Day trading is a style of trading where positions are opened and closed within the same session. Swing trading, on the other hand, uses positions that can remain open for a few days or even weeks. Most swing traders prefer the daily time frame for its significant price fluctuations and broader swings.

However, the weekly and even 4-hour time frames can be used to complement the daily time frame. If so, you definitely want to download the free Forex swing trading PDF that I just created. It contains the 6-step process I use. Save my name, email, and website in this browser for the next time I comment.

Forex chart patterns are patterns in past prices that are supposed to hint at future trends. There are many different patterns, with various suggestions depending on the situation. Before we get started, download a copy of our forex chart patterns cheat sheet. These patterns are highlighted below for a quick overview. Each pattern is discussed in detail later in the guide.

A pattern consisting of two up-sloping trend lines that consciously narrow as the market moves higher. A pattern consisting of two down-sloping trend lines that consciously narrow as the market moves lower. A pattern consisting of a large price increase and a subsequent consolidation bounded by two parallel trend lines that point down.

A pattern consisting of a large price drop and a subsequent consolidation bounded by two parallel trend lines that point up. Forex chart patterns are patterns in historical price data that can indicate when there is a greater probability of one thing happening over another. Many people believe that prices evolve randomly and that there is no way to predict the future. Those who subscribe to this hypothesis avoid trading and invest in index funds. Others believe that prices are at least somewhat predictable.

Those who belong to this group want to beat the market through fundamental analysis, technical analysis, or the combination of the two. Fundamental analysis uses financial data such as GDP reports or expectations of future interest rates to determine proper exchange rates.

Thus, while fundamental analysts rely on economic data, technical analysts examine patterns of past price behavior.

Some forex patterns relate to only one or a few price bars. These are called candlestick patterns and not chart patterns. The distinguishing feature of chart patterns is that they take a long time to form and consist of several price bars. In their book, Technical Analysis of Stock Trends , Robert D. Edwards and John Magee were the first to provide a systematic overview of the most commonly recognized chart patterns.

The idea is that if you can develop an understanding of various forex chart patterns, you can become a better trader. The traditional academic view has always centered on the notion that investors are rational and market prices properly reflect whatever information is available to them.

This suggests that regardless of how high or low the price is, it must be the correct price based on currently available information. Now, here we run into a problem—at least as far as chart patterns are concerned.

If currently available information is already priced in, only new information can cause price changes. How could past price data help you predict the future if the market reacts only to new information, which is obviously unpredictable? These people are the proponents of the economic theory referred to as the efficient market hypothesis EMH , introduced by Fama. Behavioral finance argues that people are not always rational , and their decisions are subject to various biases.

You can probably recall situations when you threw your analysis through the window and acted based on your feelings. Perhaps you were afraid of missing out on an opportunity or you held on to your losing position for too long. Now, if people are consistently influenced by their emotions, it is logical to expect that some patterns are observable on price charts and repeat themselves around important psychological areas. This last point is important. You can find chart patterns on any chart, but chart patterns at important psychological levels are more meaningful.

It is safe to assume that your ultimate trading system will influence your success with chart patterns. Chart patterns alone will get you into more trouble than they are worth. How difficult was it to find this article about chart patterns? Chances are, it took only a simple Google search.

This is because chart patterns are publicly available information. They are easy and costless to obtain. If forex chart patterns were very reliable, every market participant would closely monitor them. Once a signal was present, the market would be flooded with orders and the price would immediately rise or fall to the foreshadowed rate. On the one hand, this is clearly not the case.

You might have an outstanding internet connection, but good luck beating the speed of Wall Street firms that spend millions of dollars on things like smart routers, algorithms, and high-speed connections to exchanges. You can find just as many failed patterns as successful ones. On top of that, chart patterns are subjective. The psychological forces that are supposed to form these patterns also require time to play out.

Patterns on higher charts such as the daily might be more meaningful than intraday patterns. You can be sure that most market participants closely monitor the 1.

The point is that a lot of market interest is clustering around a particular level. You know this because the market is hovering around that level for a long time. Besides, spotting a pattern is just the beginning. What you do next will have a profound impact on your results as well as your perception of the reliability of chart patterns. Chart patterns can serve as a basis for a wide variety of trading systems.

They can help you carve out an edge over the market and make money in forex. While they are no silver bullet, they provide some information, which is better than having no information.

Chart patterns are often simple formations such as two failed attempts to achieve a new high price. Successful trading systems that incorporate chart patterns also account for a variety of factors. We recommend that you bookmark our guides on how to create a trading strategy and how to create a trading plan. With each chart pattern, you can use the formation height and add it to the breakout price to get the profit target.

Stock traders usually consider volume to be an important factor in identifying chart patterns. They look at how volume changes during the formation of the pattern, and might reject or favor set-ups based on that.

While this is fine, the forex market is decentralized. This means that whatever volume data you have, it relates to only a small portion of the market such as volume at your broker and might not represent the entire market. Chart patterns are subjective, meaning that different traders might do and interpret things differently. For example, someone might draw trendlines using wicks, while someone else might use closing prices.

Instead of worrying about every little detail, focus on what certain formations reveal about the balance between buyers and sellers. Sometimes you have to be more flexible and throw in some extra reps or rest a bit more. The same goes for chart patterns. Every situation will be slightly different, which is fine. The double top is one of the simplest patterns on charts.

When the price reaches a new high, it shows conviction behind the uptrend. Each trend alternates between impulse and consolidation moves, so the correction following the high is to be expected. The situation turns interesting when the price resumes its trend and reaches the high again.

Instead of breaking through and putting in another higher high, the buying pressure evaporates and the price is unable to surpass its previous high. When the price fails to break above the prior high, it breaks the pattern of an uptrend and signals possible weakness.

Perhaps it will take a bit more time for buyers to attain a new high or perhaps sellers are about to take control. You can assume that sellers are strong enough to reverse the trend or at least drive the market into an extended consolidation.

The double top pattern is completed when the neckline breaks. Traders often set a profit target by measuring the distance between the neckline and the high of the pattern and projecting it to the neckline break. This guide belongs to ForexSpringboard. Do not copy without permission. The double bottom is the mirror image of the double top.

When the price reaches a new low, it shows conviction behind the downtrend. As we have pointed out, trends consist of impulse and consolidation moves. The situation turns interesting when the price resumes its trend and reaches the low again. This is problematic because the downtrend should follow the pattern of lower highs and lower lows. When the price fails to break below the prior low, it signals a possible issue with the trend.

That said, this is not yet a buy signal. Now you can assume that buyers are strong enough to reverse the trend or at least drive the market into an extended consolidation. The double bottom pattern is completed when the neckline breaks.

Traders often set a profit target by measuring the distance between the neckline and the low of the pattern and projecting it to the neckline break. Do you want to learn more about trading reversals with double top and double bottom forex patterns?

Take a look at this guide. The head and shoulders pattern is a fairly complex formation consisting of three peaks, with the center peak being the highest of the three. The neckline can slope in any direction and is a good predictor of the severity of the price decline. You can project the height of the pattern to the neckline break and set your profit target accordingly.

For a beginner trader, the head and shoulders pattern might be more difficult to recognize. You can always zoom out a bit from the price action or switch to a line chart.

Thank you once again, Justin. It then becomes far too easy to place your exit points at levels that benefit your trade, rather than basing them on what the market is telling you. This pattern is trickier than those we have discussed so far because its signal depends on the trend. I much prefer the pace of swing trading the daily charts and the time you get to analyse trades before pulling the trigger. Candle with a small body. This style features an ABCD type formation which starts with an upper or lower swing originating from X points. Martine Otieno Owino says Very proud to be part of this noble lessons.

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