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Chart Pattern Trading: Learn how to optimise your trading potential through the identification of higher probability FX pairs to trade.
Risk Warning:
Trading in the Foreign Exchange and CFDs market involves a significant and substantial risk of loss and may not be suitable for everyone. You should carefully consider whether trading is suitable for you in light of your age, income, personal circumstances, trading knowledge, and financial resources. Only true discretionary income should be used for trading in the Foreign Exchange and CFDs market. Any opinion, market analysis or other information of any kind contained is subject to change at any time. Nothing in this presentation should be construed as a solicitation to trade in the Foreign Exchange or CFDs market. If you are considering trading in the Foreign Exchange or CFDs market, before you trade, make sure you understand how the spot market operates.
Why do chart Patterns Occur?
The concept is similar to support & resistance: At any one time market participants have one of three choices - to buy, sell or stand aside. As this ratio between the three groups change over time, so does the supply and demand for any given market. As this force changes, so does price. This is all based upon participants (and groups of) opinions of where price ‘should’ be. As the battle towards the ‘correct’ market price unfolds we see trends and oscillations develop, which when combined form familiar patterns.
If we can identify familiar patterns, technical analysts believe that [to a certain degree] price can become predictable.
The collective individuals within any market constantly changes, along with personal opinions of where price ‘should be’, or why they should move in the first place.
Regardless... a Technical Analyst always takes comfort in the fact that history does repeat itself as long as prices are always governed by supply and demand.
Long-Term Patterns (LT)
long-term patterns as those which take several (and usually much more) bars of data to create and they are also commonly referred to as Western Chart Patterns.
They are not related to the trading timeframe they are seen on, as LT patterns can be seen on any timeframe. However a rule of thumb is that the higher the timeframe you see a chart pattern it is generally considered to be more reliable, and the lower the timeframe tends to generate more fail signals.
You can see the same (or similar) patterns on a 1-minute chart which may only take 5 minutes to create, whilst also seeing patterns which last years or decades on the Monthly timeframes.
Below is an example of a Double Bottom pattern which took 18 bars to create. I have hidden the timeframes as it is irrelevant – this could be a 1 minute chart or a 1 day chart, but the concept is the same.
LT Patterns Provide
- Structure (Once combined with trends and S/R)
- Future Direction
- Price Objectives (Targets)
Examples:
- Double Bottom (pictured), Triple Bottom, Double Top, Triple Top,
- Wedge, Head & Shoulders,
- Symmetrical Triangle, Ascending Triangle, Descending Triangle,
- Pennant, Flag
Structure:
If we are familiar with these patterns and can identify the potential for one to appear, then it helps us gauge very roughly at what stage of the pattern we are at. In turn this either helps us to anticipate the breakout of a pattern to build our trading plan, or avoid jumping in too early.
Potential Future direction:
Once a pattern is confirmed, regardless of whether it is a continuation or reversal pattern, we then have a directional bias for price to continue trading.
Profit Objectives:
Once we have profit objectives (or targets) defined we can then see if these overlap areas of S/R to build a stronger case for price reaching or reacting at these levels.
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