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Introduction to Trading Patterns

FX Scouts By Jeffrey Cammack Updated: September 11, 2019

In this article we are going to learn the basics of trading using chart patterns (also called price patterns).

We will look at:

  • What a chart pattern is
  • The different types of pattern
  • How they are used in trading

Analysing chart patterns is synonymous with technical analysis, a trading strategy often used by experienced day traders.  Technical analysis requires education and trading experience to understand; however, traders can use chart pattern recognition software that highlights chart patterns as they develop.

With experience, traders will learn to identify them in real time and see them as trading opportunities.

A chart pattern is a graphed configuration of reoccurring price movement. In other words, chart patterns, or price patterns, are a pictorial representation of the buying and selling pressure that goes on the market. The shape of the graph is what differentiates one pattern from another.

The action of trading based on price patterns is what we refer to trading patterns.

The chart patterns give the chart a voice, and behind every single chart pattern, there is a story of what is happening. For example, if we see a long upper wick at the top of an uptrend with some high volume, we know there is a lot of profit-takings, and we can anticipate that the bears are going to start to show up.

Trading based on chart patterns should not be done in isolation without consideration of what the rest of the market is doing. You need to have other supporting factors that validate the trade signals; otherwise your predictions will be inconsistent.

Types of Chart Patterns

We can distinguish two different types of chart patterns:

  1. Reversal patterns, which as the name suggests signals a change in the direction of the prevailing trend.
  2. Continuation patterns, which as the name suggests signals that the trend will continue to stay in motion.
ZARUSD Continuation & Reversal Pattern

Due to the fractal nature of the markets, the same chart pattern can work in different time frames, and it can perform both as a continuation and a reversal pattern. It all depends on the location of the pattern relative to the trend direction.

The most popular continuation patterns include:

The most popular reversal patterns include:

If you want to learn how to recognise chart patterns, strategies of how to trade them, and some real trading examples, then please click on the links above and read about each one of them more in-depth

Trading Chart Patterns

According to the chart theory, we can go one step further and make the distinction between trending patterns such as channels, and non-trading patterns like triangles. The support and resistance levels that form the channel are parallel, effectively creating a mini-trend, while in a triangle the price gets squeezed into a tighter and tighter range.

ZARUSD Trending Channel

Trading based on chart patterns has its limitations because it doesn’t tell you the trend, and how the market has moved over a particular period. For example, the pin bar, which is the most basic reversal pattern, is only the action of a single bar.

To trade successfully in the Forex market, you need to keep the chart pattern in a much broader context. You need to read the whole story behind the chart pattern and ask questions about the trend, support and resistance levels, previous swing high/low, momentum readings, overbought and oversold conditions and more.

Conclusion

Trading based on chart patterns is merely a technique or a tool that you can use in your trading to help you make better trading decisions and to better time the market.

Chart patterns give you a way to read the charts and can help you identify profitable trading opportunities. It’s important to focus and master one chart pattern at a time. Take it slow and make sure you’re absorbing all the information that the chart pattern is trying to tell you before committing to the trade.

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Trading Forex and CFDs is not suitable for all investors and comes with a high risk of losing money rapidly due to leverage. 75-90% of retail investors lose money trading these products. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.