A thorough understanding of these forex chart patterns is an essential part of every successful swing trader’s armory. For some traders, these patterns are a critical part of their strategy. In this post, we’ll take a look at some of the most important.
Each of the forex chart patterns has its distinctive features, but all are best understood in the context of the current price trend revealed by the chart.
Most will indicate a likely continuation or reversal of an existing trend.
Continuation and Reversal: The Two Main Types of Forex Chart Patterns
Joining an established trend is one of the simplest and most popular swing trading strategies.
But timing entries correctly can be challenging, because no trend is ever seen as a straight line on a chart. There will always be pullbacks and periods of consolidation.
Fortunately, though, these tend to form predictable continuation patterns, and in doing so they frequently offer very attractive entry opportunities.
Triangles, flags, pennants and rectangles, are the most important of these forex chart patterns, and they’re very common in both up and downtrends.
They seldom if ever appear as perfect geometrical shapes, but to the trained eye they can nevertheless provide excellent evidence of the underlying price action, which is vital information for us as traders.
Triangles typically present as either ascending (uptrend), descending (downtrend), or symmetrical (either up or downtrend).
The ascending triangle appears when a strong bull trend hits a resistance level that the highs of a number of consolidation candles fail to break.
At the same time, these candles form a series of higher lows, demonstrating continued buying pressure from the bulls.
The Ascending and Descending Triangles
As price approaches the apex of this right-angled triangle there will likely be a breakout to the upside as the resistance of the bears is broken.
Flip this pattern, and you have the classic descending triangle.
A strong downtrend hits a support level and price tracks sideways, reaching a number of lower highs, before finally breaking out to the downside.
The Symmetrical Triangle (Bullish/Bearish)
Unlike the ascending and descending variants, symmetrical triangles may appear in either up or downtrends. With symmetrical triangles, the most likely outcome is a continuation of the existing trend.
Flags and Pennants
Similar to triangles, flags and pennants are among the commonest of all forex chart patterns. They appear regularly in both up and downtrends across all time frames.
Generally, the pennant will be more like a triangle in appearance than the squarer looking flag. However, the precise formation is much less important for us as traders than an understanding of the underlying price action, which is very similar in both cases.
Typically, both patterns begin with a prominent bull or bear candle. This is followed by a horizontal or slightly up/down consolidation towards a support or resistance level. This is often an Exponential Moving Average (EMA) line.
Swing traders often regard price approaching these support or resistance levels as a signal to resume buying or selling.
If enough swing traders re-enter the market there is likely to be a breakout in the direction of the existing trend.
Bull Flag or Pennant
Bear Flag or Pennant
Often very similar to bull or bear flags, rectangles form when price consolidates horizontally during a trend. Price will touch the horizontal trend lines several times. These upper and lower boundaries are the resistance and support levels which lock the trading range.
Like all ranges, these patterns can be tricky to swing trade. , Price may breakout to either the high or low side so the more conservative approach is to expect a continuation of the existing trend.
The Bullish/Bearish Rectangle
The Cup and Handle
The classic cup and handle forms within a bull trend. At some point, a pullback will begin, and that point marks the left rim of the cup.
Price then gradually falls, and consolidates to form a flat or rounded bottom. Then it will climb back to form a right rim at or slightly below the level of the left.
A handle now forms as price tracks horizontally or in a gently falling wedge. When we see a right rim, left rim and handle forming at a similar price, it’s a good indication of an important resistance level.
But the recovery from the bottom of the cup also tells us that the bulls are back in the market. They will be trying to force price higher. So we will look to trade a breakout above the close of the left rim bull candle.
The low point of the cup handle is generally a good stop-loss, but ideally, we will want to see a short and near-horizontal handle. If price goes below the half-full level of the cup it is generally an indication that the pattern has broken down and is no longer valid.