What makes a good Chart Pattern? 10 Important Patterns Every Forex Trader Must Know

Chart Pattern or sometimes called Price Pattern is one of the simple and practical technical analysis tools. Its main goal is to help traders select better entry and exit points for their trades. What makes this tool widely accepted is that even beginner Forex traders can learn and apply it quickly. Now, let’s get to know What is a Chart Pattern and study the 10 main patterns along with how to use them to help you build your own effective trading system.

What is a Chart Pattern and Why Do Forex Traders Use It

Chart Pattern refers to the movement of an asset’s price over different periods, which can appear repeatedly over time. Based on this principle, traders use Price Patterns to forecast the future direction of price movement.

From a deeper perspective, the price behaviors that occur in the past reflect the battle between (Demand) and (Supply) forces, which are the main factors determining how the price will move. When Forex traders can read signals from the price using Price Patterns effectively, they gain a better understanding of upcoming trends.

Understanding the 3 Main Groups of Chart Patterns

All Price Patterns can be divided into 3 main groups, each with different usage methods and implications.

First Group: Reversal Pattern - Signals that the current trend is about to end, and the price will reverse in the opposite direction. These patterns often appear at the peaks (Top) or troughs (Bottom) of a price cycle. It represents a fierce battle between buying and selling forces before one side wins and causes a reversal.

Second Group: Continuation Pattern - Signals a temporary pause in the trend. Similar to a trader taking a breath after a run, then continuing in the same direction. These patterns help traders recognize that even if the price is consolidating or moving briefly, the main trend remains unchanged.

Third Group: Bilateral Pattern - Patterns where the direction of the price is still uncertain, meaning it could go up or down. It is necessary to wait for a breakout from the pattern to determine the actual direction.

10 Chart Patterns Every Forex Trader Must Know

1. Head and Shoulders - The signature of a peak

Head and Shoulders (Head and Shoulders) is one of the most reliable Price Patterns, indicating that an uptrend is about to end. The pattern consists of 3 parts: the left shoulder (rise-fall), the head (higher peak), and the right shoulder (lower than the head). Then, the price breaks through the Neckline to confirm the reversal.

The target price is measured from the top of the head down to the Neckline, then this distance is projected from the breakout point, which gives the expected target.

2. Double Top - Signal of stalling progress

Double Top appears when the price attempts to reach a new high but fails, resulting in two nearly equal peaks. This signals increasing selling pressure. When the price breaks below the middle low (Neckline), it confirms a clear reversal.

3. Double Bottom - The start of a new rise

Double Bottom is the reverse of Double Top. It appears when the price drops twice but cannot go lower the second time. This indicates buying strength is emerging. When the price breaks above the Neckline, it confirms a trend reversal to the upside.

4. Rounding Bottom - The curve of hope

Rounding Bottom features a smooth curved shape as the price gradually declines and then gradually rises, forming a U or W shape within the lowest part of the cycle. It reflects a balance between buying and selling forces. When the price breaks out above the Neckline, it confirms a gentle trend reversal to the upside.

5. Cup and Handle - The classic pattern

Cup and Handle resembles a Starbucks cup, with the cup (Cup) at the lowest point and the handle (Handle) as a slight pullback after the price starts rising from the bottom. This pattern indicates that the uptrend is likely to continue.

6. Wedges - Growing wedge (Rising Wedge and Falling Wedge)

Rising Wedge appears when the price is rising but the gap between highs and lows narrows, indicating weakening buying momentum. It often ends with a sharp breakdown.

Falling Wedge appears in a downtrend, with the gap narrowing, indicating weakening selling pressure. It usually ends with a successful breakout upward.

7. Flags and Pennants - Temporary pauses

Flags are small rectangular shapes that form after a strong price move in one direction. Pennants look like small triangles. Both indicate that the trend will continue in the same direction. The target is measured by the height of the “pole” (the rapid price move) and added to the breakout point.

8. Ascending Triangle - Bullish signal

Ascending Triangle appears when the lows are rising while the resistance (highest point) remains flat. It indicates strong buying pressure. Confirmation occurs when the price breaks above the resistance level.

9. Descending Triangle - Bearish signal

Descending Triangle is the opposite of Ascending Triangle, with the highs decreasing while the support (support level) remains flat. It signals strong selling pressure. When the price breaks below the support, it indicates further decline.

10. Symmetrical Triangle - The decision zone

Symmetrical Triangle forms when the highs are decreasing and the lows are increasing, showing a battle between buyers and sellers. This pattern does not indicate a direction until a breakout occurs, after which the price tends to move quickly in the breakout direction.

Things to Watch Out for When Using Chart Patterns in Trading

However, Price Patterns are not perfect signals. Be aware of these key points:

Subjectivity - Different traders may interpret the same Price Pattern differently. Personal feelings often influence perception.

Timeframe Variability - In short timeframes, patterns can be misleading. Using longer timeframes may provide more reliable signals.

Trading Volume - Patterns formed with low volume are often false signals. Focus on patterns with high volume for greater confidence.

Combine with Other Tools - Experienced traders rarely rely solely on Price Patterns. They often use them together with other technical indicators like RSI, MACD, or moving averages to improve accuracy.

Summary: Price Pattern as the Starting Point of Trading

Price Pattern is a tool that helps Forex traders better understand price movements. Its ease of learning makes it suitable for beginners, but it can also assist experienced traders with various tools. Regardless of how you use Price Patterns, the key is to practice observation to become more proficient. Remember, combining them with other tools will help you trade more confidently and systematically.