A Collection of Frequently Used Forex Chart Patterns

There are many ways one can trade currencies in the foreign exchange market and picking some common methods can save a lot of effort and money. As a trader, you can develop a complete trading plan using regularly occurring patterns, simply by fine-tuning some common methods used. Some of the common forex chart patterns are candlesticks, Ichimoku, and head and shoulders, and all of them provide valuable visual clues that can tell you when to trade. 

While there are some complex methods, you should look to take advantage of the simpler methods and note some of the commonly used elements in these patterns. Two of the most common forex trading patterns are the Head and Shoulders(H&S) as well as the triangles. 

Triangles

Triangles are common chart patterns that appear mainly in short-term time frames. They occur when high and low prices converge with each other and narrow into a tighter price area. Triangles are mainly symmetric, descending, or ascending. 

In the above EUR/USD chart, a triangle is highlighted. As a trader, you can easily trade this pattern as it provides a stop, entry, and profit target. In this case, the entry is at 1.4032 while the stop is at the low at 1.4025. You can add the height of the pattern (25 pips) to the entry price, to get a profit target of 1.4057. This level was hit and exceeded. 

Head and Shoulders (H&S)

The Head and Shoulders pattern is a type of topping or bottoming formation. A topping formation can be defined as a price high, followed by a retracement. This is followed by a higher price high, a retracement, and a lower low. A bottoming formation is an exact opposite, where a price low is followed by a retracement, a lower low, another retracement, and finally a higher low.

The H&S can form after an uptrend as a topping formation and after a downtrend as a bottoming formation. When the trendline or neckline connecting the two highs or two lows is broken, the pattern is complete. 

You can easily trade H&S patterns as it provides a clear entry-level, profit target and a stop level. In the above chart, the entry-level is at 1.24. This is also where the trendline has broken.

You can place a stop at 1.2150 below the right shoulder if you’re a more conservative trader. For a riskier approach, you can place it at 1.1960, below the head. This is a riskier approach but has fewer chances of being stopped before prices hit the profit target. 

To get the profit target, simply add the height of the formation to the breakout point. 

Ichimoku Cloud Balance

You can use Ichimoku as a technical indicator to overlay price data on a chart. It’s not easy to pick out patterns from the actual Ichimoku drawing. However, by combining it with price action, you can spot some common occurrences. It’s formed by taking support and resistance levels that have already formed, combining them together.

This creates dynamic support and resistance area. In other words, If the price action is below the cloud, it acts as resistance and considered bearish. If price action is above the cloud, it acts as a support and is considered bullish. The Ichimoku cloud bounce can provide you with stops and entries you won’t see commonly.

This is because it provides more dynamic support and resistance lines. You can capture much of the trend when the market is trending using the Ichimoku cloud.

 Engulfing Pattern

This is a type of candlestick pattern that you can easily spot. It indicates a strong, immediate change in direction. Since the price action indicates a strong reversal, you can easily trade this pattern. You can implement a stop while participating in the start of a potential trend.

Conclusion

The main aim of traders using forex trading charts should be usability and convenience. All the above patterns have their own strengths and weaknesses. This is one of the reasons why you should look to combine different methods and more than one pattern to create a trading system that is customizable and unique.