The whole Forex technical analysis is based on the assertion that history repeats itself in the market; therefore, the trader periodically is actually watching the same type of similar events of trading situations. The pattern is a chart figure, allowing us to predict with high probability the future price movement in the market. In this article, we will focus on the most popular, reliable and relevant patterns in Forex.
Patterns can be divided into two categories: continuation patterns, and reversal ones. The first group includes those which confirm the continuation of the trend, while the second indicates the possibility of a market reversal.
Here are the most common patterns that you may find on the chart:
Gap
Gap is a chart pattern which occurs when there is an instant of a sharp change. In practice, it looks like a sharp jump in prices on the chart, which is formed as a result of a large gap between the levels of closing one period and opening the next. It can also look like a missing signal.
The simplest reason for the appearance of gaps is the misses in the data stream. It is understood that this should not mean anything for you.
The second case, of course - is more important. When a break occurs in a continuous stream of quotations (often after fundamental events), it is a signal of a sharp change in market conditions. If the opening of a new period held far above the previous closing, the gap shows a tendency to rapid growth of quotations. After the break-up usually occurs significant increase in prices. If the opening of a new period held substantially below the previous closing, it indicates a downward tendency.
Sometimes gaps in Forex can appear during holidays, on the eve or after important economic news, or in the last day of the month or year.
Head and Shoulders
This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend. In this case, you will see in the graph a shape consisting of three peaks. Middle peak is the highest, and that it is considered the head, and the other two highs are the shoulders. When a trader sees the formation of the second arm, he is preparing for the opening of the transaction, as there sharply increases the probability of price movement.
You will note that the middle part of the figure is higher than the shoulders, which are roughly equal in height. Through the base of the head, marked in blue, there is the level of support, which will play a major role in the trade. The figure is formed gradually and becomes recognizable, perhaps, when the second arm is formed. At this time is already happening market price rebound from the support level formed by the first base of the head. The ideal shape of shoulders should be aligned and symmetrical, but in reality the right shoulder may be slightly higher or lower than left one.
Double tops and double bottoms
Double top is a reversal pattern (which means the trend is changed when the pattern is formed) that is formed on the top of an uptrend. It is formed when the price gets to a strong resistance level and cannot break it. The price rolls down for a while, but then it comes back to test this level. If the price pulls back from the resistance level again, then we have this pattern formed.
 |
 |
As a rule, you will notice in the chart two peaks right after a strong uptrend. Generally, between the peaks, there must be at least 6 candles, to look like two highs rather than just two or three adjacent candles.
Double bottom is the same trend reversal pattern explained above, but this time it takes place in a downtrend. The same principle is applied. When the market is bearish, right after a fresh trend which goes down, there are formed to lows as the price cannot break support level. Then, a trend reversal is expected.
Triple tops and triple bottoms
Triple top is a pattern of technical analysis which is formed after a long uptrend and indicates a possible reversal of trend. It consists of three successive peaks and is often regarded as a type of head and shoulders pattern. Considering the similarity in principles, whenever you read triple top, you can think image a mirror of triple bottom, so there won’t be explanations apart. The only difference is that triple tops are usually formed in a shorter period of time.
In the growing trend the price sets a new high, and after two more attempts, it cannot exceed the level of resistance and falls, possibly with acceleration and gaps.
Through the tops, there is formed a horizontal line (resistance) and trough regional lows - its parallel, which is support line. The ideal shape would require the tops to be at the same levels; however, in reality there may be slight deviations. The model is considered complete only after the price breaks down the support line.
Triangles
Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical triangle, ascending and descending triangle. These patterns are for longer time frames: from a couple of weeks to several months.
The trader is building a triangle when he sees that the market is forming local lows and highs in lines that are about to cross soon. Lines are carried out in fractals, local peaks and lows, extremes, you can call these how you want. In any case, these are the points indicating that the market could not break through.
 |
 |
The figure may be inclined towards just one or on both sides. In any case, there is a narrowing of the market, which implies a strong movement after the breakdown of one of the triangle sides. For example, if the price breaks the upper side, it is more likely that any further movement of the market will be up, and vice versa.
Flags and Pennants
As a rule, when a flag or a pennant pattern appears on the chart, the trader concludes that the trend will soon be resumed. The flag consists of two parts, marked on the graph below. The first part is a straight line, which we will call flagpole, and the second is the flag itself. The flagpole is formed by a pulse of price movement, when in a short time. When the market jumps or falls through a large amount of points in a short time, the flagpole is formed.
The second part of the pattern is formed by almost parallel lines as shown above. Theoretically, at a penetration of flag line, the price should continue to move in the direction of the trend.
The pennant is different from flag in the sense that the construction has intersecting lines on local peaks and lows and not parallels. Moreover, the maximum values are gradually reduced, and the lows go up. It is somehow similar to a triangle, but in order to be considered a triangle pattern, it should have more than 30 candles, and obviously exclude the preceding flagpole. Pennant follows the same rules as the flag.
Cup and Handle
The cup with handle is a continuation pattern of the bullish trend (downwards) on which you can identify opportunities for opening long positions. We can determine the continuation of the upward trend in the price chart. In appearance, the figure resembles a cup with handle, from which derives its name.
At the beginning we will see the initial upward price movement, after which the cup is formed, covering the most part of the pattern. The handle follows the cup and precedes the continued upward movement.
For the pattern formation, there should be a sharp rise in prices, and then - a small correction, resulting in the formation of the cup. In this way there is formed a rounded bottom. Further, price rises a bit and have a correction, this time more clearly, there is formed a part of the figure called a "handle." Finally, the price begins to grow again and rises above the high achieved in the first movement.
The depth of the cup should be 1/3-2/3 of the initial upward movement. In this case, the figure can be considered reliable.
