Most people getting into forex spend a significant amount of time learning about different indicators, especially stochastic ones.
While these indicators are good, they have one major flaw: their reliance on past data. The trader ends up making decisions on patterns that have already played out.
To avoid falling victim to the indicator trap, it is best to focus on chart patterns. Chart patterns help you take advantage of following the price action as it plays out. By learning about different types of forex charts, you can predict moves before they happen and trade in the direction of the overall market momentum.
Let’s now go through some reliable and convenient trading charts that you can easily learn, apply, and improve your trading odds.
The heads and shoulders pattern happens when the market is about to reverse. There are two types of head and shoulder patterns.
Heads and shoulders pattern (Top)
This chart pattern occurs when the market is about to turn bearish. The market peaks after an uptrend, and a pullback follows. However, since selling volumes are still low, the uptrend continues, eclipses the earlier peak, and with high volumes. However, bears still creeping into the market manage to push the price lower and retest the lows that were established when the left peak (shoulder) formed. Bulls still believe that the earlier rally will continue to push the price back up, but this time volumes are not high enough to push the price back to the previous high (head).
Instead, the price matches the left shoulder, and the head and shoulder pattern is completed. At this point, bears are pretty energized, and late incoming bulls feel the pressure as the price goes against them. As selling volumes increase, panic selling follows, and the neckline (support level for both shoulders) is broken. The result is a bear trend that continues until market dynamics change again.
Heads and shoulders pattern (Bottom)
This is a reversed heads and shoulders pattern (top) version. The only difference is that this pattern points to a potential bullish reversal. It starts with a bullish reversal during a clearly defined downtrend forming the left shoulder. However, the bear trend resumes, with most traders believing that the downtrend will continue.
Selling volumes are usually high and create a new low (head). However, early short sellers start to exit the market as more buyers enter the market and trigger another reversal. However, with some short-sellers still believing that the price will go lower, bulls hit strong resistance at the highest price the trading pair hit in the left shoulder. This price action forms the right shoulder of the pattern.
Late entering short sellers try to drive the price lower though they don’t have much volume. As more bulls enter the market, the late entrant short sellers are forced out of their positions, triggering a complete bullish reversal.
By following the price action that is created by the heads and shoulders pattern, you can significantly increase your odds of making money when trading forex.
The double top is a bearish signal and, if traded well, guarantees good returns from short selling a forex pair. The mechanics behind a double top are simple. Bulls are usually in control until the price reaches a level where those who bought early start exiting the market. This causes the price to peak out and reverse.
However, since the upside momentum is still overall strong, new buyers who expect the price to keep going higher enter the market. However, smart short sellers have started entering the market after the first peak. The result is that the price fails again at the exact same peak that it had made earlier. This emboldens short-sellers, and the late entrant buyers start to panic. A combination of short-sellers and panic selling from late incoming buyers triggers a selloff that causes the price to reverse and form a new bear trend.
A double bottom is the exact opposite of a double top. It signals an end to a bear trend and the beginning of a new uptrend. The working mechanism of a double bottom is similar to that of a double top. The price drops sharply but reaches a point where early entry short sellers start to exit. This triggers a peak out that sees buyers start entering the market.
However, buyers are not strong enough, and late entry short-sellers push the price back to its earlier peak. The price lags at the peak, energizing bulls to enter the market in large numbers and trigger a reversal. The liquidations of short-sellers fuel the new bull run.
As you can see, with chart patterns, you rely more on the current price action. This increases the odds of making a correct move as you get to take advantage of the market momentum. However, chart patterns are not foolproof either. Sometimes the market forms false patterns. To avoid falling into the trap of false patterns, it is best to wait until a chart pattern is fully confirmed rather than anticipating a pattern. There are many other chart patterns that you can try out, too. The ones above are just the most popular.