Profiting From Short-term Price Patterns In Forex – Chart patterns provide excellent trading opportunities as they provide objective and recurring price events that can be studied in great detail. The 9 Forex chart patterns discussed in this article are both trend-following and trend-reversing patterns. So you can use them in different market conditions. Additionally, chart patterns can be traded on different timeframes. You can find the same chart patterns on a 1-minute, 60-minute, daily or even weekly time frame. In this article, we’ll take a look at the most commonly traded chart patterns to understand what’s really going on behind the scenes. A deep understanding of chart patterns allows traders to apply their knowledge to all types of chart situations, improving their understanding of price action in general. Cup and Handle Cup and Handle is a great complex breakout pattern that can be traded as a trend following chart pattern. The screenshot below shows a classic Cup and Handle Forex chart pattern within an ongoing uptrend. During the uptrend, the market traded below the horizontal resistance level. The key to understanding the cup-and-handle pattern is the reaction around the resistance level and how the behavior of the price action changes with each subsequent resistance touch: while the price fell sharply after hitting resistance twice the first time, the last reaction shows significantly more bullish power . The price did not go down much at the last touch of the resistance and the price quickly returned to the resistance. Second, the distance between each return to the resistance level also shortens. This means that the price returns to the same level sooner and the bullish market participants drive the price up faster. This is called absorption. Although the price seems to be stuck in a sideways period, the price is still showing strong bullish signals. After the breakout, the bullish trend continues. Generally, traders wait for a confirmed breakout where the price closes completely above the resistance level. It is important to wait for such a breakout, as the price can remain within the cup and handle pattern for an extended period of time. Wedge The wedge pattern is considered a Forex chart pattern that ends a trend and reverses. In the screenshot below, a wedge is formed during a mature downtrend after the price has been falling for an extended period. Looking for reversal patterns in mature trends is a recommended approach, as mature trends have a higher chance of reversing compared to new trends that are just starting. At the confluence of the lowest parts of the wedge pattern, fading bearishness is evident. The lower trend line is showing a shallow angle, confirming that the price cannot fall as quickly lower than it used to. This is an important sign of a bearish trend fading. It is important to wait for the price to clear the previous high. Ideally, you want to see a strong momentum breakout that easily breaks through the last top. The stronger the breakout and the stronger the bull sequence before the breakout, the better the chances of a successful uptrend reversal. After the breakout, the trend turned strongly in a bullish direction. Few price signals predict such a strong release of bullish pressure: The longer the previous trend, the greater the chances of a strong reversal. The longer a bearish trend lasts, the fewer new sellers enter the market. Also, several traders are sitting on a significant amount of unrealized profits and are ready to exit their trades. A prolonged wedge pattern in which the price cannot advance lower may indicate a large-scale shift from a market dominated by sellers to a market dominated by buyers. A strong sequence before a breakout can improve the quality of the pattern as it can signal a momentum shift in progress. Triangle Triangles are versatile Forex chart patterns, but they are best traded as trend continuation patterns. In the example below, the market is in an uptrend. The trend is currently stalling and is dealing with a horizontal resistance level and the trend has not continued. The key to a good triangle chart pattern is how the dips are formed. The arrows in the scenario below show that each low is higher than the previous one. This confirms that buyers are buying dips earlier every time and sellers are not interested in participating. This pattern shows a lot of pressure. Although the price is currently not moving in the direction of the trend, buyers still seem to be in full control. The final situation on the chart shows that after the first successful breakout of the triangle, the market formed a second chart pattern shortly after. The second triangle is much narrower in height, which is also a strong bullish indicator as there appear to be very few sellers and still many buyers buying dips. The next continuation occurred with remarkable strength, which may be due to the narrow range of the triangle and the strong excess of buyers. Fakeout / Trap Fakeout is a failed trend continuation pattern that often leads to a complete trend reversal. In the screenshot below, the price was initially in an uptrend and then moved into a sideways continuation. The price did break out, which at the time could look like a continuation of the trend, but in just two candlesticks, the price returned within the pattern and below the resistance. The evolution of volatility is also noteworthy. Around the fakeout, volatility started to increase and the candles got bigger. While it is common to see an increase in the number of bullish candles during a breakout, larger bearish candles are not something you want to see during a bullish trend continuation breakout. Some aggressive traders may decide to go short as soon as the breakout fails. A more conservative entry approach involves waiting for a complete reversal and a breakout to a new low. In the screenshot below, the price broke out with a high trigger candle. At this point, the situation looks extremely bearish. Fakeouts are interesting Forex chart patterns and can often provide high risk/reward trading opportunities. However, due to the increase in volatility at trend tops, such patterns are often considered advanced trading concepts and may not be as suitable for newer traders. Continuation Flags Flags are among the most popular Forex chart patterns and are exclusively trend continuation patterns. The flag indicates a weak corrective phase during the existing trend. In the screenshot below, the trend initially made a strong downtrend. The bullish corrective phase, however, does not show much strength in the bullish direction. This difference in bearish strength and bullish weakness confirms the general sentiment of a bearish trend. The greater the difference between the two market phases, the greater the probability of a successful continuation of the trend. For this type of reversal trading, moving averages or pivot points are an ideal confluence indicator. During the trend phase, the price will generally stay below the moving average without touching it. During the correction phase, the price will start trading around such a moving average or back to the central pivot. Thus, we can use these tools to find corrective phases and time trade entries. When the price falls below the trend line and the moving average, it is usually a signal to continue. The bearish trend continues after the breakout. A moving average helps us monitor the strength of a trend. During a healthy and strong downtrend, the price will stay away from the moving average. If the price then returns to the moving average, it may signal the next correction or even a reversal depending on the overall situation and the current chart pattern. Head and Shoulders The head and shoulders pattern is usually seen as a trend exhaustion and trend reversal pattern. However, I also set up the example as a continuation trend setup that follows the next one. In the first scenario below, the Head and Shoulders pattern is a trend exhaustion pattern. The market is in a mature uptrend and has been rising for a long time. From the left shoulder to the head, the price made a higher top. However, the distance between the two higher peaks is very short and already indicates the weakness of the trend. From the head to the right shoulder, the price then shows extreme weakness. The price cannot reach a higher value and the price trades sideways for a long time. These are not signals that indicate a high probability of a continuation of the bullish trend. After a long right shoulder and head weakness, the price exploded lower. Long bullish periods often lead to strong trend reversals. Head and Shoulders Continuation The Head and Shoulders pattern in the example below is a Forex chart trend continuation pattern. After the reversal of the fakeout trend at
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