Introduction to technical patterns. How to use them in trading?

Technical patterns are popular tools for analyzing charts of trading instruments for the simple reason. They help traders recognize a scenario of an asset’s price dynamic and open a position in good time. It goes without saying that understanding patterns is an important skill in forex trading.

Cups with handles, saucers, diamonds, gaps, pennants, thorns, triangles, and candlesticks – these are just a few of forex patterns. Such names spook and confuse beginners, whereas forex gurus keep on discovering new regularities on charts. Technical patterns are popular tools for analyzing charts of trading instruments for the simple reason. A trader armed with the knowledge of recognizing patterns improves the accuracy of a forecast for a further price move. So, it is easy to open a position in good time. It goes without saying that understanding patterns is an important skill in forex trading.

What are technical patterns?

Technical patterns are regular graphical shapes consisting of lines and curves that provide clues to where an asset’s price might go next. So, traders can predict further behavior of an asset’s price in any financial market, including a currency or stock market. Such graphical shapes which appear in technical charts look like particular images. If you know how to identify them, you will be able to predict a trend and pick the appropriate point to open a position.

Technical patterns gained popularity among analysts thanks to their versatility. They can be applied to various assets on various time frames. Patterns of price movement are easy to discover visually. Besides, they pop up in charts under specific market conditions.

There is a plethora of technical patterns. Some basic patterns were discovered at the dawn of exchange trading. New patterns were developed as updated versions of time-proven basic patterns.

In essence, all these forex patterns signal either a trend continuation or a trend reversal.

Importantly, the lion’s share of analytical articles by InstaForex experts is based on technical patterns. Regular market analysis of various financial instruments is available in the Forex Analytics section on InstaForex website.

Essential trend continuation patterns

The most popular trend continuation patterns include:

1. A triangle is one of the prime patterns in technical analysis. It is formed when the top line and the bottom line of price fluctuations are approaching each other. As a result, an angle is clearly plotted when the lines go across each other. There is an ascending (bullish) triangle which is formed by a series of higher lows and a horizontal resistance level. The opposite of this is a descending (bearish) triangle which is formed by a series of lower highs and a horizontal support level. In both cases, the market entry point is a breakout of the horizon. Besides, there is a symmetrical triangle which is formed when the equal slopes of a resistance line and a support line approach and converge together. In this case, a breakout of either border serves as the market entry point.

2. A rectangle is recognized on a chart when the price fluctuates between parallel support and resistance levels like in a long corridor. The price tests both levels a few times and eventually makes a sharp breakout in any direction. A trader opens either long or short positions, whether a breakout is to the upside or downside.

3. A wedge is plotted by two trend lines moving in the same direction and the channel between them gets narrower but the lines do not converge. The market entry point is a breakout of either the upper or lower border.

4. A flag pattern looks like a rectangle with the borders directed against the overall trend.

5. A pennant pattern is similar to a symmetrical triangle at first glance, but with borders directed downwards.

Forex patterns such as a wedge, flag, and pennant could be both bullish and bearish depending on the direction of a series of asset’s highs and lows. As a rule, to plot most patterns a trader should identify at least 3-4 points of a price move.

Essential trend reversal patterns

The most popular trend reversal patterns include:

1. A double top means that the price reached a high twice and failed to break out higher, thus leaving two highs at the same level. In contrast, a double bottom represents two lows at the same level.

2. A triple top consists of three equal highs. Alternatively, a triple bottom represents three equal lows.

3. A head and shoulders is one of the most reliable and accurate indicators of a trend reversal. The pattern consists of three peaks. The middle one called the head is the highest point whereas the outside two points are almost at equal levels. The line that connects the bottoms marked after price peaks is called the neckline. If the neckline slopes down, this indicates a bearish trend reversal. If the neckline points upwards, it means a bullish trend reversal.

Conclusion

We have introduced you to basic technical patterns. Make sure you carefully study market conditions in which particular patterns appear as well as their practical application. It makes sense to join a multitude of traders who have already benefited from technical patterns. Forex patterns are unique tools of classical technical analysis. They have proved efficiency in various time frames. Such patterns are especially valuable in a volatile market as they help traders not to miss the moment of a trend reversal. Understanding popular patterns, you will recognize them easily on a chart and make the right trading decision. So, you will increase the odds of a profitable trade.

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