CHART PATTERNS IN TECHNICAL ANALYSIS

Chart patterns are a crucial part of the Stock technical analysis. Patterns are born out of price fluctuations, and they each represent chart figures with their own meanings. Each chart pattern indicator has a specific trading potential. This is why Stock traders spot chart patterns for day trading – to profit from the expected price moves.

In fact, chart patterns represent price hesitation. When you have a trend on the chart, it is very likely to be paused for a while before the price action undertakes a new move. In most cases, this pause is conducted by a chart pattern, where the price action is either moving sideways, or not very persuasive with its move.

This is a brief sketch of how a chart pattern indicator could look like on the chart. In the example above we have a trend that turns into a consolidation, and then the trend is resumed again.

TYPES OF CHART PATTERNS IN Stock

There are three types of chart pattern figures in Forex based on their potential: neutral, continuation, and reversal chart patterns. Next, I will share with you a Forex chart patterns cheat sheet for each of the three types.

CONTINUATION CHART PATTERNS

Continuation chart patterns are the ones that are expected to continue the current price trend, causing a fresh new impulse in the same direction.

Example: If you have a bullish trend, and the price action creates a continuation chart pattern, there is a big chance that the bullish trend will continue.

Some of the most popular continuation chart patterns are Flag, Pennant, and Wedges.

This chart pattern cheat sheet shows six of the most common continuation chart patterns in Forex trading. Each of these six formations has the potential to activate a new impulse in the direction of the previous trend.

REVERSAL CHART PATTERNS

Reversal patterns are opposite to continuation patterns. They usually reverse the current price trend, causing a fresh move in the opposite direction.

Example: If you have a bullish trend and the price action creates a trend reversal chart pattern, there is a big chance that the previous bullish trend will be reversed. This is likely to cause a fresh bearish move on the chart.

Some of the most popular reversal chart patterns are Double Tops and Bottoms, Head and Shoulders, Wedges, Expanding Triangles, Triple Tops and Bottoms, etc.

Notice that the Rising and the Falling Wedge could act as reversal and continuation patterns in different situations. This depends on the previous trend. Just remember that the Rising Wedge has bearish potential and the Falling Wedge has bullish potential, no matter what the previous trend is.

NEUTRAL CHART PATTERNS

The neutral chart patterns are the ones that induce a price move, but the direction is unknown. In the process of the pattern confirmation, traders realize the pattern’s potential and tackle the situation with the respective trade.

Example: The Forex pair is trending in the bullish direction. Suddenly, a neutral chart pattern appears on the chart. What would you do in this case? You should wait to see in which direction the pattern will break. This will give you a hint about the potential of the pattern.

The most popular neutral chart patterns are the Ascending Triangle, Descending Triangle, Symmetrical Triangle, and Symmetrical Expanding Triangle.

These are the most common neutral chart patterns that have the potential to push the price in either the bullish or the bearish direction.

Now you have 20 different chart pattern examples. But which are the best chart patterns to trade?

This will be discussed in the next part of the article.

CONCLUSION

1. The chart patterns technical analysis is a crucial part of the Forex price action trading.
2. Chart patterns represent price hesitation (consolidation) that comes after a trend.
3. After the consolidation is completed, the price action usually creates a big move.
4. There are many chart patterns in Forex trading and each of them has its own different meaning.
5. There are three types of chart patterns in technical analysis based on their potential.
   • Continuation Chart Patterns: Flag, Pennant, Wedges, etc.
   • Reversal Chart Patterns: Double Tops and Bottoms, Head and Shoulders, Wedges, Expanding Triangles, Triple Tops and Bottoms, etc.
   • Neutral Chart Patterns: Ascending Triangle, Descending Triangle, Symmetrical Triangle, Symmetrical Expanding Triangle, etc.
6. The three best chart patterns for intraday trading are:
   • Flags and Pennants
     • Open a trade when the price breaks out of the Flag/Pennant in the direction of the previous trend.
     • Put a Stop Loss order at the other side of the pattern.
     • Stay in the trade for a price move equal to the size of the Flag/Pennant. If this target is reached and the price keeps trending in your favor, stay in the trade for an additional price move equal to the size of the Pole applied starting from the moment of the breakout.
   • Double Top and Double Bottom
     • Open your trade when the price breaks the Trigger Line of the pattern.
     • Put a Stop Loss order inside the pattern, somewhere near the mid point.
     • Stay in the trade for a minimum price move equal to the size of the pattern.
   • Head and Shoulders
     • Open a trade when the price breaks the Neck Line of the pattern.
     • Put a Stop Loss order beyond the second shoulder.
     • Stay in the trade for a minimum price move equal to the size of the pattern.