Chart patterns in forex are probably the oldest form of technical analysis going and the funny thing is they still work.. not because theres anything magical about a triangle or a head and shoulders but because enough traders are watching for them that they become self fulfilling. When half the market sees the same neckline break at the same time and everyone hits sell at once yeah price is going to move.
The Patterns You Need to Know
Triangles are everywhere and they come in three flavours.. ascending descending and symmetrical. Ascending triangles with a flat top and rising lows are generally bullish because buyers keep stepping in at higher prices while sellers hold the same level until eventually something gives. Descending triangles are the opposite with sellers pushing lower highs into a flat support until it cracks. Symmetrical ones are a coin flip until the breakout and trying to predict which way theyll go before it happens is a mugs game. The triangle pattern guide on this site goes deeper into the mechanics if you want the full breakdown.
Head and shoulders is probably the most well known reversal pattern and it works best on higher timeframes like the 4 hour or daily. The problem is that by the time most people identify it the move is half done already. The neckline break is where the volume comes in and if youre not seeing a noticeable increase in momentum at the break its probably a fake out. Inverse head and shoulders at the bottom of a downtrend is the bullish version and honestly tends to be more reliable in my experience.
Double tops and double bottoms are simple and effective. Price hits a level gets rejected comes back for another go and gets rejected again.. that tells you the level is genuine and a reversal is likely. The key is waiting for the confirmation candle after the second rejection rather than jumping in early. Loads of double tops turn into ranges or even breakouts if you dont wait for proper confirmation.
Flags and pennants are continuation patterns that form during strong moves when price takes a breather before carrying on in the same direction. Bull flags are basically a small pullback within an uptrend.. price rallies hard consolidates in a tight downward channel then breaks out to the upside. Theyre great for adding to winning positions if youve already caught the initial move.
Wedges rising and falling are trickier because they can be both continuation and reversal patterns depending on context. A rising wedge in an uptrend is usually bearish because the buying pressure is clearly weakening as the range compresses. A falling wedge in a downtrend tends to resolve bullish for the same reason in reverse. The key with wedges is volume.. it should be declining throughout the pattern and then spike on the breakout.
Cup and handle patterns are slower to form but when they work they really work. Youre looking at a rounded bottom followed by a small pullback before price breaks through the rim of the cup. These tend to appear on the daily chart and the measured move target gives you a realistic profit objective rather than just hoping and praying that the trend continues forever.