Recognizing chart price patterns is an important aspect of technical analysis that forex traders should master. These patterns act like a highlighter on the chart showing a potential trade. With so many ways to trade currencies, picking common methods can save time, money and effort. By fine tuning common and simple methods a trader can develop a complete trading plan using patterns that regularly occur, and can be easy spotted with a bit of practice.
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. Each chart pattern has the potential to push the price toward a new move. Thus, forex traders tend to identify chart patterns in order to take advantage of upcoming price swings.
Chart patterns put all buying and selling into perspective by consolidating the forces of supply and demand into a concise picture. More importantly, chart patterns and technical analysis can help determine who is winning the battle, allowing traders and investors to position themselves accordingly. Chart pattern analysis can be used to make short-term or long-term forecasts. The data can be intraday, daily, weekly or monthly and the patterns can be as short as one day or as long as many years.
While using these patterns traders must always keep in mind that at any moment any unexpected event can easily disrupt a perfectly developing pattern. Indeed, in the currency market, they are very often derailed by large orders submitted for very mundane reasons: the managing of an overdue position, closing of a deal, etc. In general, it is not advisable to base one’s entire trading method on these patterns, but they do provide an excellent early-warning system for identifying a potential trade, provided that it’s backed by good causes supplied by other aspects of analysis.
The vast majority of chart patterns fall into two main groups: reversal and continuation. Reversal patterns indicate a change of trend and can be broken down into top and bottom formations. Continuation patterns indicate a pause in trend and indicate that the previous direction will resume after a period of time. Many patterns can be classified as either reversal or continuation. Much depends on the previous price action, volume and other indicators as the pattern evolves. This is where the science of technical analysis becomes the art of technical analysis.