Pattern trading in forex is a popular method of technical analysis based on the observation of similar chart patterns in the past which helps in predicting future price movements. As market psychology is formed by the actions of traders, it results in the distribution of trades across price and/or time which we call patterns. These can be grouped as a continuation pattern (the trend is likely to continue in that direction) or a reversal pattern (the trend is about to change direction).
In this article, we will be looking at two of the most popular continuation patterns in Forex Trading: the flag pattern and the triangle pattern. Recognizing these patterns enables traders to take advantage of high-probability setups in trending markets.
Forex Flag Pattern
Flag pattern is continuation pattern and its formed after price has moved strongly in one direction (impulse) and suggests that price will continue into the original trend direction after a period of consolidation. Think of it as little mini rectangular “flags” attached to a flag pole of prior price action. Such a pattern can form in a bullish and a bearish trend as well.
Key Characteristics:
Flagpole: The first huge price movement (either up or down) that occurs before the flag is formed.
Flag: A small, horizontal consolidation area with prices moving sideways or in a slight retracement against the larger prevailing trend
Flag Break: The price then breaks the flag shape either to the upside or the downside, before continuing on the path of the original trend.
Types of Flag Patterns:
Bullish Flag: Appears following a bullish price action The flag slopes downward or drifts sideways.
Bear Flag: Appears after a downtrend. The flag might drop a little below current price action, or drift out to the side.
How to Trade a Flag Pattern:
Identify the Pattern: A strong price move (flagpole) followed by a consolidation zone (flag). Wait for the Break Out.
Set Entry and Exit Points:
After the breakout, enter the trade (for bullish flags above the high of the flag and for bearish flags below the low).
Set a stop loss just outside the other side of the flag. Project the flagpole length from the breakout point and set your profit target at that level.
Example:
Bullish Flag pattern forms after a strong upward movement in EUR/USD After that, the price goes into a short consolidation, creating a flag with a downward angle. Traders go long when the price breaks up from the flag as it indicates the trend continuation
Forex Triangle Pattern
The triangle pattern is also a continuation pattern that appears when the price consolidates within two converging trendlines to form a triangle shape. Triangles show a phase of indecision, when the market creates lower highs and higher lows before breaking out. Similar to flag pattern, triangle can form in a bullish or bearish trend.
Types of Triangle Patterns:
Ascending Triangle:
The trend line at the top is horizontal, and the trend line at the bottom is upward sloping. Shows buyers are stepping in, usually a bullish breakout.
Descending Triangle:
While the lower trend line is horizontal, the upper trend line is sloping lower. Shows more and more selling pressure, often signalling a bearish breakout.
Symmetrical Triangle:
The two trendlines slope toward one another to create a triangle. Shows uncertainty and the price will breakout either side
Trading a triangle pattern:
Find the convergence points Before price bounces from either of these levels (support or resistance)
Be Patient + Wait for the Breakout: The breakout is obviously going to be in the direction of the trend as it is usually the case with symmetrical triangles.
Set Entry and Exit Points:
Place an entry where the price breaks the triangle and closes above the trendline. Put a stop-loss slightly outside of the opposite end of the triangle.
To set your profit target, measure the height of the triangle (the distance between the widest points) and project it from the breakout point.
Example:
GBP/USD could make a series of higher lows while testing a resistance level on several occasions, forming in an ascending triangle. More buying pressure breaks the price through resistance, and confirms a bullish continuation.
How to Trade These Forex Chart Patterns
Study with Indicators: Confirm breakouts with volume indicators like OBV or the Accumulation/Distribution Line. More the volume on a breakout, more its validity.
Use Higher Timeframes — you see that patterns are always more reliable if you use higher timeframes, for example, higher than the 1-hour chart because that breakouts typically will show less false breaks.
Wait Patiently: Never trade in the pattern, wait for a confirmed breakout and the confirmation is to close the candle in the pattern boundary.
Risk Management: Use a stop-loss always to protect yourself from an unexpected reversal.
How to Become a Forex Pattern Trader
Forex pattern trading is one of the best tools to find high-probability trades in trending markets. The flag pattern allows traders to profit from short periods of consolidation and the triangle pattern represents periods of indecision before a breakout. When used with appropriate risk management and confirmations from other indicators, these patterns can make a trader far more consistent in their profitability in the forex markets.