The pink lines and the two arrows on the chart measure and apply the size of the pattern starting from the moment of the breakout. To clarify, we use a small top after the creation of the second big top to position the Stop Loss order.

Notice that the Double Bottom chart pattern works exactly the same way but in the opposite direction. Similarly, the Head and Shoulders is another famous reversal pattern in Forex trading. It comes as a consolidation after a bullish trend creating three tops. The first and third tops are approximately at the same level. However, the second top is higher and stays as a Head between two Shoulders.

This is where the name of the pattern comes from. The Head of the pattern has a couple of bottoms from both of its sides. The line connecting these two bottoms is called a Neck Line. When the price creates the second shoulder and breaks the Neck Line in a bearish direction, this confirms the authenticity of the pattern. When the Neck Line breaks, you can pursue the bearish potential of the pattern that is likely to send the price action downward on a distance equal to the size of the pattern — the vertical distance between the Head and the Neck Line applied starting from the moment of the breakout.

Your Stop Loss order in a Head and Shoulders trade should go above the second shoulder of the pattern. The inclined pink line is the Neck Line of the figure.

The two arrows measure and apply the size of the Head and Shoulders starting from the moment of the breakout through the Neck Line. The red circle shows the head and shoulders chart pattern breakout. You need to hold a bearish trade until the price completes the size of the pattern in a bearish direction.

At the same time, your Stop Loss order should go above the second shoulder as shown on the chart. As with the other patterns we have discussed, the Head and Shoulders chart pattern has its opposite version — the Inverse Head and Shoulders pattern.

It acts absolutely the same way, but everything is upside down. If you would like to learn more about the Head and Shoulders chart pattern, check this live trading example. One of the best-kept secrets from seasoned traders lies around a chart pattern recognition indicator.

The good news is you can also have it. It is built into the default version of the MetaTrader 4 trading platform. The indicator is called ZigZag. What it does is to represent the general price action with straight lines by neglecting smaller price fluctuations and putting emphasis on the real-deal price moves.

This way you can very easily visualize a real pattern on the chart. To clarify, let me show you our chart pattern recognition algorithm in action:. The chart includes the ZigZag indicator expressed by the straight red lines on the chart. In the middle of the chart, we see that the ZigZag lines are creating descending tops and descending bottoms, which is a symptom of a Falling Wedge chart pattern.

See that the highs and the lows of the pattern stand out in a very pleasant way thanks to the ZigZag indicator. You can hardly miss the pattern on the chart. In the red circle we see the breakout through the upper level of the pattern — the confirmation. Then we can trade for the two targets of the pattern. The first one equals the size of the wedge — marked with the smaller pink arrow.

The bigger pink arrow measures the size of the Pole. Both should be applied starting from the moment of the breakout. Notice that you should protect your trade with a Stop Loss order that needs to go below the lowest bottom of the Falling Wedge pattern, as shown in the image.

Click here to download our cheat featuring all the patterns that were explained in this guide. To sum up, the forex chart patterns technical analysis is a crucial part of the Forex price action trading. We had a look at the most common price formations and which ones are our favorites to trade.

Now is the time for you time apply what you have learned in this guide and drop a comment below if you have any questions. Your email address will not be published. The Forex Chart Patterns Guide with Live Examples Muhammad Awais May 13, No comments.

There are 3 main types of Forex chart patterns: Continuation: this group includes price extension figures like the flag pattern, the pennant or the wedges rising or falling. Candlestick charts are used by traders to determine possible price movement based on past patterns. Candlesticks are useful when trading as they show four price points open, close, high, and low throughout the period of time the trader specifies.

Many algorithms are based on the same price information shown in candlestick charts. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the close was higher than the open.

Bar charts and candlestick charts show the same information, just in a different way. Candlestick charts are more visual, due to the color-coding of the price bars and thicker real bodies, which are better at highlighting the difference between the open and the close. Candlesticks include the opening, high, low, and closing prices for a specified period, all in one candle.

Forex chart patterns are on-chart price action patterns that have a higher than average probability of follow-through in a particular direction. These trading patterns offer significant clues to price action traders that use technical chart analysis in their Forex trading decision process.

Price changes are usually represented using candlesticks, and after a series of time periods, candlestick patterns form on a chart, telling the price action story of the underlying asset. Chart patterns are powerful tools for performing technical analysis because they represent raw price action and help traders to feel the mood and sentiment of the market.

They essentially allow traders to ride the market wave, and when well understood and interpreted, they can help pick out lucrative trading opportunities with minimal risk exposure.

Broadly speaking, there are four different types of chart patterns that you need to be able to read, namely Continuation Chart Patterns, Reversal Chart Patterns, and Bilateral Chart Patterns. Continuation chart patterns are those chart formations that signal that the ongoing trend will resume.

Usually, these are also known as consolidation patterns because they show how buyers or sellers take a quick break before moving further in the same direction as the prior trend. Continuation patterns are an indication traders look for to signal that a price trend is likely to remain in play. These patterns occur in the middle of a trend and signal that once a pattern has been completed, the trend will most likely resume.

All kinds of time frames can be scoured for continuation patterns, such as tick charts, daily or weekly charts. Triangles, flags, pennants, and rectangles are examples of continuation patterns that market traders often work with. A continuation pattern is labeled as such because there is a slight tendency for the trend to continue after the pattern completes, assuming the right context of price action. Not all continuation patterns will result in a continuation of the trend, though. For example, the price may reverse the trend after forming a triangle or pennant.

Continuation patterns tend to be most reliable when the trend moving into the pattern is strong, and the continuation pattern is relatively small compared to the trending waves. For example, the price rises strongly, forms a small triangle pattern, breaks above the triangle pattern, and then keeps moving higher. If the continuation pattern is almost as big as the trending waves that preceded it, that is more indicative of increased volatility, a lack of conviction in the trending direction, and larger moves against the trend, all of which are warning signs.

Another thing to be aware of is small trending waves that are followed by a continuation pattern. If the price inches higher, then forms a continuation pattern, then inches higher then forms a continuation pattern, which is less compelling and is less reliable than a strong move higher that then forms a continuation pattern. The latter shows strong buying strength. The former shows buyers are hesitant to push prices higher aggressively. The most common continuation pattern trading technique is to wait for the pattern to form, draw trendlines around the pattern, and then enter a trade when the price breaks out of the pattern in the direction of the prevailing trend.

Triangles are a common pattern and can simply be defined as a converging of the price range, with higher lows and lower highs. The converging price action creates a triangle formation. There are three basic types of triangles: symmetrical, ascending, and descending. For trading purposes, the three types of triangles can be traded similarly.

Flags are a pause in the trend, where the price becomes confined in a small price range between parallel lines. Flags are generally short in duration, lasting several bars, and do not contain price swings back and forth as a trading range or trend channel would. Flags may be parallel or upward or downward sloping. Pennants are similar to a triangle, yet smaller; pennants are generally created by only several bars. If a pennant contains more than 20 price bars, it can be considered a triangle.

The pattern is created as prices converge, covering a relatively small price range mid-trend; this gives the pattern a pennant appearance. Rectangles, also known as trading ranges, can last for short periods or many years. This pattern is very common and can be seen often intra-day, as well as on longer-term time frames. Reversal patterns are those chart formations that signal that the ongoing trend is about to change course. If a reversal chart pattern forms during an uptrend, it hints that the trend will reverse and that the price will head down soon.

Conversely, if a reversal chart pattern is seen during a downtrend, it suggests that the price will move up later on. The price highs and lows following the reversal would be lower than the highs and lows before it. A reversal pattern can also occur at the end of a downtrend if the stock price begins steadily rising and produces higher highs. Bullish reversal patterns should form within a downtrend.

In other words, they must be followed by an upside price move which can come as a long hollow candlestick or a gap up and be accompanied by high trading volume. This confirmation should be observed within three days of the pattern. The bullish reversal patterns can further be confirmed through other means of traditional technical analysis—like trend lines, momentum, oscillators, or volume indicators—to reaffirm buying pressure.

Bearish reversal patterns can form with one or more candlesticks; most require bearish confirmation. The actual reversal indicates that selling pressure overwhelmed buying pressure for one or more days, but it remains unclear whether or not sustained selling or lack of buyers will continue to push prices lower.

Without confirmation, many of these patterns would be considered neutral and merely indicate a potential resistance level at best. Bearish confirmation means further downside follow-through, such as a gap down, long black candlestick, or high volume decline. Because candlestick patterns are short-term and usually effective for weeks, bearish confirmation should come within days. A Double Top is a chart pattern where the price reaches a high twice and fails to break out higher during the second attempt.

The pattern comprises two peaks of nearly the same size and a bottom between them. The line running through the tops is the resistance line which should be nearly horizontal. The pullback between the two highs should be moderate. The pattern is confirmed once the price breaches the low of the pullback between the two highs. A Double Bottom is a chart pattern where the price holds a low two times and fails to break down lower during the second attempt, and instead continues higher.

The Double Bottom reflects very strong levels of support and often indicates a strong change of trend. Double Bottoms appear in a downtrend and reverse it to the upside as the price breaks through the resistance line. It is considered a bullish reversal chart pattern since the price holds a low two times and eventually continues with a higher high. The Head and Shoulders is a chart pattern described by three peaks, the outside two are close in height and the middle is highest.

The Head and Shoulders chart pattern is considered by many traders and analysts to be one of the most reliable and accurate of all reversal chart patterns. When a Head and Shoulders formation is seen in an uptrend, it signifies a major reversal. The strength of this reversal, measured as the declining amount after the breakout, is proportional to the rise before the pattern appears.

Stronger preceding trends are prone to more dramatic reversals. Volume is usually the highest at the left shoulder but most likely to deplete by breakout point. Conditions, where the volume is trending up, are more favorable.

It is similar to the standard Head and Shoulders pattern, except that it is inverted. When a Head and Shoulders formation is seen in a downtrend, it signifies a major reversal.

Just like in the straight Head and Shoulders pattern, the strength of this reversal, measured as the rising amount after the breakout, is proportional to the decline before the pattern appears. Volume trends are exactly the same as in Head and Shoulders, where it is usually the highest at the left and trending downward. A rising wedge is a chart pattern formed by drawing two ascending trend lines, one representing highs and one representing lows. The upper line also moves up to the right and its slope is less than that of the lower trend line.

Because the trend lines that describe the rising wedge are ascending, rising wedges are occasionally falsely thought of as continuation patterns for an overall upward trend.

The seeming upward trend in price invites bullish traders to continue buying, while bearish traders continue selling off their holdings which maintains the strong upper line of resistance. Since the price refuses to break the upper level of resistance, buying pressure gradually decreases, the lower level of support is broken, and the price breaks down and begins a strong downward trend. When following a downtrend, the rising wedge shows a weak rally which, in most cases, will end up breaking through the lower line, continuing the prior trend.

Upward breakouts are less common, but do happen and are more probable than downward breakouts in falling wedges. Watch out for when the Rising Wedge accompanies an uptrend: Its versatile nature can make it a reversal pattern, not a continuation pattern as it typically is. A falling wedge is a chart pattern formed by drawing two descending trend lines, one representing highs and one representing lows.

It is categorized as a bullish reversal chart pattern. Because the trend lines that describe the falling wedge are descending, falling wedges are occasionally falsely thought of as continuation patterns for an overall downward trend.

The seeming downward trend in price invites bearish traders to continue selling, while bullish traders continue buying which maintains the strong lower line of support.

Since the price refuses to break the lower level of support, selling pressure gradually decreases, the upper level of resistance is broken, and the price breaks out and begins a strong upward trend. The falling wedge should be taken as a strong buy signal and an indication that a trend reversal is imminent. A falling wedge is the opposite of a rising wedge.

In this scenario, the price within the falling wedge is usually not expected to fall below the panic value, ending up breaking through the upper trend line. During the pattern formation, volume is most likely to fall. Better performance is expected in wedges with high volume at the breakout point.

In the uncommon scenario where a falling wedge is following an uptrend, the pattern shows a gradual decline in price.

In most cases, the price will end up breaking through the upper line, continuing the prior trend. Bilateral chart patterns are triangular patterns that prices are bound within. The signal either upwards trends or downwards trends, it depends on how the price breaks the triangles. An asymmetrical triangle is a bilateral chart pattern where the resistance of highs is angled downwards, and the support of lows is angled upwards.

When this happens, both the support and resistance lines bound the price in a symmetrical triangle, which looks like below. An ascending triangle is a bilateral chart pattern where the resistance of highs is a straight line, and the support of lows is angled upwards. This occurs due to buyers being able to gain some momentum, but not being able to break the strong level of resistance.

A descending triangle is very similar in nature to that of an ascending triangle pattern, however, it occurs when the sellers are pushing the price. It occurs when the support of lows is a straight line, and the resistance of highs is angled downwards. This occurs due to sellers being able to gain some momentum, but not being able to break the strong level of support.

In the international forex market, investors, shareholders, and retailers influence the relative value for converting one currency into another by acquiring and trading currency pairs. Successful forex traders benefit from the changes in value between different international currencies by choosing two currencies and predicting which will go up in value compared with the other. Traders often use forex charts to help them to gain a better understanding of past performance; this information is then used to help them make informed trading decisions in the future.

Since forex charts can signal uptrends and downtrends in currency performance, they can be a helpful resource when it comes to planning your next trading move. Flag patterns are typically more reliable when the trend wave prior to the flag has been strong; it makes a trend continuation likely.

Again, a trend without proper consolidations often leads to boom-and-bust behavior and then a trend becomes unsustainable. The most important factor when analyzing triangle patterns is the sequence of highs and lows and how the trendlines of the upper and lower boundary relate to each other. We wrote a complete guide on how to trade triangles , which explains all the nuances in depth.

When it comes to trading consolidations, there are three concepts traders need to be aware of which make trading more profitable and less risky. The hardest part of trading consolidations is to avoid getting caught in false breakouts. The following three concepts help you identify high probability breakouts during consolidations. The clues given by volume analysis are typically subtle but they can tell you a lot about what is happening in that consolidation and what is likely to happen next.

During a range, the volume is usually low and flat. But when price moves towards one end of the consolidation and volume picks up, it can foreshadow a potential breakout. The screenshot below shows that each time price broke out, or was about to break up, volume showed an uptick. At the same time, whenever we saw a fake or failed breakout, volume was either low or declining.

A consolidation is often referred to as a pot where the pressure slowly builds up while somebody is holding down the lit. The longer a consolidation period and the narrower the boundaries of the consolidation, the stronger the subsequent breakout. However, the longer the range, the more traders will start paying attention to it and; long ranges will often have more false breakouts as the professionals try to shake off the amateurs.

During long ranges, waiting for a confirmed breakout and not entering prematurely — predicting a breakout — is the key to successful trading. Whereas volume analysis is helpful for stocks traders, the principle of retest-confirmation is especially valuable for Forex trading. Thus, a trader can either choose to trade the initial breakout — and run into false breakouts frequently — or wait for the retest while fighting the urge to trade and chase the initial breakout.

Further reading: Trading supply and demand zones. Consolidations happen frequently and they are a natural and necessary market structure during long periods of trends or before the existence of a new trend.

Volume analysis, the length and width of the consolidation, shaking off amateur traders before breakouts, or failed breakout are all clues which help the attentive trader to connect the dots and enable him to make sophisticated decisions about the sentiment within that range. This content is blocked.

Technical Analysis. Markets spend a great amount of time ranging and going sideways. As traders, we call those periods consolidations. It pays off to know how to interpret and trade consolidations because they happen so frequently. Consolidations happen either during trending market phases or before a new trend. All consolidations represent a period in which the markets pause, where indecision about the next price move exist and where traders position themselves for the next move.

We distinguish between three consolidation patterns: sideways ranges, downward or upward sloping ranges also called flags , or triangular consolidations triangles, wedges and pennants. We will take a brief look at each pattern before exploring how to trade consolidation patterns. A range is defined by highs and lows which can be connected using horizontal lines.

Price spends a lot of time ranging and knowing how to trade consolidations can be an important skill for traders. To shake off amateur traders, you can frequently see false breakouts and breakdowns during horizontal ranges. Below you see that the market moved sideways at the top and the price had fake breakouts to the bottom and the top as well. It is, thus, very important to wait for a confirmed breakout where the price actually closed outside of the range.

Flags are consolidation patterns that form during trends and they can be found between two trend waves. Whereas amateurs often mistake flag patterns for a reversal, the professionals wait for the successful breakout and the trend continuation. Flag patterns are typically more reliable when the trend wave prior to the flag has been strong; it makes a trend continuation likely.

Again, a trend without proper consolidations often leads to boom-and-bust behavior and then a trend becomes unsustainable. The most important factor when analyzing triangle patterns is the sequence of highs and lows and how the trendlines of the upper and lower boundary relate to each other. We wrote a complete guide on how to trade triangles , which explains all the nuances in depth.

When it comes to trading consolidations, there are three concepts traders need to be aware of which make trading more profitable and less risky. The hardest part of trading consolidations is to avoid getting caught in false breakouts. The following three concepts help you identify high probability breakouts during consolidations. The clues given by volume analysis are typically subtle but they can tell you a lot about what is happening in that consolidation and what is likely to happen next.

During a range, the volume is usually low and flat. But when price moves towards one end of the consolidation and volume picks up, it can foreshadow a potential breakout. The screenshot below shows that each time price broke out, or was about to break up, volume showed an uptick. At the same time, whenever we saw a fake or failed breakout, volume was either low or declining.

A consolidation is often referred to as a pot where the pressure slowly builds up while somebody is holding down the lit. The longer a consolidation period and the narrower the boundaries of the consolidation, the stronger the subsequent breakout. However, the longer the range, the more traders will start paying attention to it and; long ranges will often have more false breakouts as the professionals try to shake off the amateurs. During long ranges, waiting for a confirmed breakout and not entering prematurely — predicting a breakout — is the key to successful trading.

Whereas volume analysis is helpful for stocks traders, the principle of retest-confirmation is especially valuable for Forex trading. Thus, a trader can either choose to trade the initial breakout — and run into false breakouts frequently — or wait for the retest while fighting the urge to trade and chase the initial breakout. Further reading: Trading supply and demand zones.

Consolidations happen frequently and they are a natural and necessary market structure during long periods of trends or before the existence of a new trend. Volume analysis, the length and width of the consolidation, shaking off amateur traders before breakouts, or failed breakout are all clues which help the attentive trader to connect the dots and enable him to make sophisticated decisions about the sentiment within that range.

This content is blocked. Accept cookies to view the content. click to accept cookies. This website uses cookies to give you the best experience. Agree by clicking the 'Accept' button. How To Trade Consolidations Home Technical Analysis How To Trade Consolidations. Advertisement - External Link. How To Trade Consolidations. Rolf Technical Analysis 4. Intro — what is a consolidation? Ranges A range is defined by highs and lows which can be connected using horizontal lines.

Flags Flags are consolidation patterns that form during trends and they can be found between two trend waves. Pennants and wedges triangle patterns The most important factor when analyzing triangle patterns is the sequence of highs and lows and how the trendlines of the upper and lower boundary relate to each other.

How to trade consolidations When it comes to trading consolidations, there are three concepts traders need to be aware of which make trading more profitable and less risky. Further reading: Trading supply and demand zones Conclusion Consolidations happen frequently and they are a natural and necessary market structure during long periods of trends or before the existence of a new trend.

Dealing with emotions is a very important aspect when it comes to trading successfully and the impact psychology has on. How To Trade Breakouts — Things To Look For In A Successful Breakout. Everyone can catch great trades when the market is trending nicely and just shoot in one direction. But markets spend. Trading The Bull Trap — Eliminating Losing Traders. How often did you experience a situation where a trade looked so obvious but then immediately reversed on you and.

How To Create A Trading Routine That Allows You To Reach Your Full Potential As A Trader. Are you also struggling to find the time to establish a serious trading routine besides working your regular day job,.

What Is The Best Timeframe For Your Trading? The power of simplicity — How to understand price charts. You have probably seen that our first book is out on Amazon and the feedback so far is overwhelming. Comments 4 Graeme. Very detailed analysis. Easy to understand lessons on Consolidation.

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Of course, such power is quite rare on the market but they still exist. The price reaches the level and starts consolidation without breaking it out. The Minimum Deposit for 1st-time traders might vary based on. Hi pipbear, does this apply to all trading? I like price action trading and you educated me a lot. The Head of the pattern has a couple of bottoms from both of its sides. Place your Stop Loss order below the lowest point of the Flag.

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