Forex Patterns – Basics of Technical Charting
You can think of forex patterns, as dance patterns. You gotta find a pattern, memorize it, and use it as a signal for the next (dance) move.
As naughty as the currency pairs may be, they often give us signals before they break out, or change directions.
The forex dance floor (chart) records each and every move they make. Memorizing forex patterns and analyzing the currency pair's movements on the chart can help you get a better idea of the market. This will eventually lead to a better investment decision.
Forex Patterns vs. Dance Patterns - Just gotta remember the patterns!
The million dollar trading question is this:
"Will the currency pair's price continue dropping, or will its trend shift?"
One way to figure this out is to study the patterns. Identifying these patterns on the charts makes it easier for us to make short-term or long-term forecasts.
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Our ancestors (trading grandpas) have already created cool and catchy names for different patterns. So the road has already been paved for us. Now all we have to do is to get comfortable with the patterns and to use them in our analysis.
Forex patterns are generally divided into two categories:
- Reversal patterns
- Continuation pattersn
Reversal forex patterns are chart patterns that, when confirmed, indicate that the trend of a currency pair will reverse. Here is a list of some of the coolest and most trusted ones:
- Double top or double bottom
- Triple top or triple bottom
- Head and shoulders top or bottom
- Saucer top or saucer bottom
Aren't these names cute? Wait to see their images in our coffee break beginners video course. They are going to blow your mind. Depending on the direction of the trend (up or down), each of these patterns can indicate either a top or a bottom.
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Continuation forex patterns indicate a pause in a trend. It’s as if the pair takes a rest for a while before it resumes dancing in the previous direction. It is also called consolidation. Many patterns that are known to indicate continuation often turn out to be reversal patterns, so they can be very tricky. That is why we have to be very careful before we develop a trading strategy based on a continuation pattern. We should refrain from jumping to conclusions too quickly.
The best-known continuation patterns are:
How to Get Comfortable with Forex Patterns
Here are a few steps that you need to take in order to become comfortable with chart pattern analysis:
- Memorize the patterns
- Memorize the interpretation of the patterns
- Practice identifying the patterns in different charts over and over again
- Follow up with the patterns that you identified. See whether the interpretation came true or not
- Hang a copy of the Chart Patterns Cheat Sheet on your fridge, and review it every day.
- Join our trading group to get notifications when solid new forex patterns have formed
Based on the IDDA approach to strategy development, you can’t rely on only one method of forex analysis. Let alone one method of technical analysis. Identifying forex patterns and recognizing what they forecast can become biased even at the best of times. We should always use other types of analysis and tools of technical analysis to confirm a pattern. In other words, we should always use the IDDA approach to trading.
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