Forex chart patterns and their meanings
They offer information, long-term insight and can potentially assist you in making trading decisions. Want to know more? Introduction to chart patterns If the notion of charts leaves you hyperventilating, just think of them as visual representations of price movements; a picture of how the market, or a single instrument, moves.
A chart pattern is simply a specific formation on a chart that can be viewed as a trading signal, or as an indication of future price movements. Further rates » Chart types There are several chart types that traders use. They all, essentially, feature the same basic information - price movement across time - but they display it differently and go into different levels of detail.
Here are just three of the most popular types of trading charts… Line chart A line chart is the easiest chart to explain. The name really says it all: It shows a simple line where each movement represents the movement from one closing price to the next. This type of chart is perhaps the most basic one, so it has its limitations, but if you just want to get a clear - albeit general - view of price changes over time, it can be quite useful.
Here is an example of a line chart of one of our most popular instruments: WTI oil. Bar chart If a line chart is one of the simpler forms of trading charts, then a bar chart is one step up in complexity. It features the opening price, closing price, highs and the lows of every unit of time. The highs and lows are easiest to spot — the highest point of the bar being the high and the bottom of the bar being the low.
A vertical line on the left of the bar represents the opening price and a similar bar on the right represents the closing price. Just like a bar chart, a candlestick chart shows the highs and lows of each unit of time — the top is the high, the bottom the low.
A different color is used to indicate if an instrument closed higher or lower than it opened. If you feel that this is complicated, just give it a go. After browsing candlestick charts for a while you will quickly realize how convenient they are and how easy it is to read the information they present. Here is an example of a WTI crude candlestick chart Are there other types of charts? Of course there are.
The three we discussed are just the more commonly-used ones. Investors have different preferences and there are many types of charts to accommodate them. Want a couple of additional examples? Got it? The main groups of chart patterns There are three main groups of chart patterns that you are likely to encounter: Reversal, continuation and bilateral.
We will give you a quick review of each. It signals that a trend could reverse once the pattern is complete. In simple words, if you spot a reversal chart pattern during an uptrend, it theoretically suggests that the price will start to move down soon. If you see a reversal chart pattern during a downtrend, it implies that the price will move up soon. Continuation patterns If you understand the concept of reversal patterns, continuation is exactly the same, only — pun intended - reversed.
According to the theory, a continuation pattern signals that a trend could continue after the pattern has run its course. Bilateral patterns Bilateral chart patterns are a bit confusing, because they essentially mean that the price can move up or down, in either direction. Most commonly, this pattern is shown as a triangle formation. You might be thinking that such an indicator is little to no help, but the importance of bilateral patterns is that they indicate anything can happen, and that investors need to prepare to react to any possible scenario.
Both of these cases involve extended theory: How to trade them, when do investors commonly place orders, etc. While we will not go into such depth here, we will give you a quick insight into these patterns and their possible meaning. First, the price moves up to the price level. Then, it bounces down slightly before returning to the price level.
Once it bounces down again, the chart forms a double top. Just imagine a kind of a camel hump. Typically double tops can be seen on line, bar and candlestick charts. According to theory, double top reversal usually suggests a certain change, sometimes a long term change in trend, indicating a possible move from bullish to bearish. This is why some investors look for double tops following a significant uptrend.
You want an example? Look at this one… Double bottoms Much like double tops, the double bottom is a trend reversal formation, commonly used as part of technical analysis. If you would prefer to use an ad-free service, there are three different paid-for options which offer a range of additional benefits. How to Read Forex Charts Forex charts can help traders to recognise patterns, gain an understanding of how many traders are trading in a market and identify areas of support and resistance.
Choosing a timeframe is one of the most important aspects of reading forex charts. To toggle between timeframes, zoom in and out of the chart. To view historical data, move to the left of the chart. In simple terms, a downtrend can be identified by looking for a line that moves downwards from left to right, whereas an uptrend is depicted by a line moving upwards from left to right.
The three main charts used in forex trading are: 1. Line Charts These are the most straightforward type of forex chart to read so they are a good starting point for new traders. A line chart is simply a line between one closing price to the next. It can give traders an overall feel for how a currency pair has performed during a specific timeframe. They show closing prices but, at the same time, they also give low and high indications of opening prices. Within each bar, the lowest part of the vertical line represents the lowest traded price for the specified currency pair during a certain timeframe.
Similarly, the highest part of the line shows the highest traded price during the same timeframe. Each of the vertical lines meets with two shorter horizontal lines. The one on the left-hand side shows the opening price for the chosen currency pair at a specific time; the one on the right-hand side shows the closing price for the currency pair at that time.
Candlestick Charts The candlestick chart has Japanese origins and is probably the most useful of the three main chart types. When reading a candlestick chart, it is important to understand the basic candle structure. Each candlestick represents a timeframe — this could be anything from one minute to an entire week.
After this level has been reached, the price tends to dip slightly before returning back up to the top level again. If it bounces back down again, this is known as a double top. After reaching the second top, it is likely that the price will dip again. This bullish forex chart pattern is usually seen following a downtrend — the price will drop down to a new low, increase slightly and then dip back down to the lowest point. After reaching the second low point, it is likely that the price will increase again.
After the second peak, it is likely that the price will fall. Inverse Head and Shoulders: In contrast to the standard head and shoulders pattern, the inverse version is bullish. Look out for an initial dip, a slight increase followed by an even lower dip, another slight increase and finally a further dip that is not as low as the middle one.
After the second dip, it is likely that the price will rise again. Rising Wedge: Sometimes called the ascending wedge, this bearish pattern often forms during an uptrend and can signify either a reversal or continuation trend. Look out for the price consolidating between rising sloping support and resistance lines. If this pattern shows just after an uptrend it usually indicates a reversal pattern, so you can expect the price to start dropping again. Falling Wedge: Just like the rising wedge, the falling wedge can indicate either a reversal or continuation trend.
If it forms at the end of a downtrend, this bullish pattern indicates that an uptrend can be predicted. If it forms during an uptrend, the price can be expected to continue increasing. Bearish Rectangle: Rectangle patterns appear when the support and resistance levels of the price are parallel. A bearish rectangle appears when the price increases for a period during a downtrend. If you spot this pattern, you can expect that the price will continue to fall. Bullish Rectangle: A bullish rectangle appears following an uptrend.
If you spot this pattern, you can expect the price to continue going up. Bearish Pennant: Following a significant upward or downward move in price, there is usually a short pause before further movement in the same direction.
As a result, the price tends to consolidate. In a forex chart, this can be identified by a small symmetrical triangle shape called a pennant. Bearish pennants form during vertical, steep downturns. Following a sudden drop in price, some traders will choose to close their positions whereas others opt to join the trend, meaning that the price consolidates for a short time. Once enough sellers have moved into the trade, the price drops below the bottom point of the pennant and it can be expected to continue moving down.
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