We’ve already discussed candlestick patterns in the previous articles. In this article, we will talk about chart patterns and compare which of these two patterns can help traders analyze the Forex market better. Although some traders use both of these tools, most of them aren’t quite sure about the distinction between the two.
So, let’s dive deep into the subject to finally understand the difference between chart patterns and candlesticks, and who wins. Once it’s clear, it will be easier for you to predict the future direction of price movement and use the tools that allow you to identify trading opportunities better in each given situation.
Let’s quickly recall what candlestick patterns are
As you may already know, candlestick trading patterns help gain information regarding an asset’s price change. Candlestick charts are definitely popular components of technical analysis as they enable traders to interpret the current situation in no time and from just a few price bars. A group of candles together reflects what’s happening on the market at a certain point in time. For instance, what sellers and buyers are doing at the moment, how the price is moving, and what will happen next. In other words, a candlestick pattern is a method that allows traders to read a price chart.
It’s time to dig deeper into chart patterns
Now that we quickly recollected candlestick patterns, it’s time to move to chart patterns. A chart pattern represents price movement that consists of a series of peaks and troughs. Naturally, if you could predict the situation on the market at any given moment, you could make a significant amount of money. Sadly, the Forex market as well as other financial markets is unpredictable. However, things aren’t that bad! Various chart patterns tend to repeat themselves. If you learn to recognize these patterns and catch the moment they start to form, you will be able to predict what’s going to happen in the future. Chart patterns are phenomena marked by fluctuations in the price of a financial asset. It’s influenced by a variety of causes that may even include human behavior.
What you should know about chart patterns
Chart trading patterns are an inherent part of technical analysis. No chart pattern is better than another simply because they all illustrate different trends in a wide variety of markets. Some patterns are more suitable for volatile markets, while others are best used in a bullish or bearish market.
With this being said, knowing which chart pattern is more appropriate for your particular market is crucial. If you utilize the wrong one or have no clue which one to use at all, you may end up missing out on a chance to profit.
Therefore, it’s always best to gain more information about them before you can start utilizing Forex patterns with the utmost efficiency. To help you get an idea, we’re going to discuss the most popular patterns you need to know about. By learning more about these types of chart patterns, you will be able to tell how prices might change in the future based on how they’ve changed in the past.
Types of chart patterns
Trading chart patterns can be divided into three categories: reversal, continuation, and bilateral patterns.
- A reversal chart pattern signals that a trend might change its direction;
- A continuation pattern indicates that the current trend will continue;
- A bilateral chart pattern points to a highly volatile market, which means that an ongoing trend could move either way.
The important thing to keep in mind though is that none of the top chart patterns can guarantee that a market will move in this or that particular direction. They are rather a sign of what might happen to an asset’s price soon.
1. Head and shoulders
The first chart pattern we’re going to talk about is Head and shoulders. In these chart trading patterns, a large peak is situated between two smaller peaks. This pattern allows a trader to predict a bullish-to-bearish reversal.
As you can see, the side peaks are smaller than the middle one. However, they all fall back to the neckline which means the same level of support. Once the third peak has reached the neckline, most likely a bearish downtrend will occur.
2. Double tops and bottoms
These Forex trading patterns are reversal formations that indicate to traders that a sustained trend is probably about to reverse.
When two successive moves higher are sold into, it’s about double tops. That way they create two peaks on the chart. The pattern culminates with a break through the neckline.
A double-bottom chart pattern is about a period when an asset’s price drops below the level of support. It will then reach the level of resistance before starting its movement downward. Eventually, the trend will reverse again and begin an upward motion when the market becomes more bullish.
All in all, it’s a bullish reversal pattern. It indicates the end of a downtrend and a shift towards an uptrend.
3. Rounding bottom
More often than not, these stock chart patterns mark a reversal or continuation pattern. For example, an asset’s price was in a downward trend. A rounding bottom was formed before the trend reversed and entered a bullish uptrend.
4. Cup and handle
This pattern is used to recognize a period of bearish market sentiment before the overall trend continues a bullish motion. The cup is similar to a rounding bottom chart pattern, while the handle is similar to a wedge pattern which will be explained in the next section.
According to the rounding bottom, an asset’s price will likely enter a temporary retracement – the handle. After reversing out of the handle, the asset will continue its overall bullish trend.
This pattern is about an asset’s price movements between two sloping trend lines. It’s obvious that the wedge can be rising and falling.
When the trend line is caught between two upwardly slanted lines of support and resistance, it is a rising wedge. In this case, the line of support is lower than the resistance one. In general, this pattern indicates that the price of an asset will eventually decline more permanently.
A falling wedge occurs between two levels that are sliding downward. In this case, the line of resistance is lower. Most likely, an asset’s price will rise and break through the level of resistance.
Triangles can be ascending, descending, and symmetrical.
The ascending triangles are bullish patterns. They reflect the continuation of an uptrend. It can be drawn onto charts by placing the resistance line atop and then drawing the support (an ascending trend line) along the swing lows.
Ascending triangles have some identical peak highs to draw the horizontal line. The trend line reflects the overall uptrend of the pattern and the horizontal line indicates the common level of resistance for each given asset.
On the contrary, a descending triangle comes within bearish patterns. Naturally, it indicates a downtrend when a trader enters a short position striving to profit from a falling market during a descending triangle.
In general, descending triangles shift lower and break through the support because successively lower peaks are likely to be prevalent and unlikely to reverse.
Their sign is a horizontal line of support and a downward-sloping line of resistance. Later on, the trend will break through the support and continue its downfall.
Symmetrical triangle patterns can be divided into bullish and bearish types. In any case, it’s a continuation pattern, which means the market goes in the same direction.
Such triangles occur when the price converges with a series of lower peaks and higher troughs. However, the market could break out in either direction, if there wasn’t a clear trend before forming the triangle pattern. This is what makes these patterns bilateral. It makes sense to use them in volatile markets without a clear indication of the way an asset’s price can start moving.
7. Pennant (flags)
Pennant patterns, which oftentimes are called flags, are also a part of technical analysis. They are created after an asset faces a period of upward movement, followed by a consolidation. In most cases, it signals a significant increase during the early stages of the trend.
So who wins?
Once you get a funded trading account, learning about patterns is one of the most crucial tasks for any trader out there. As we already know, trading candlestick patterns are formed when a group of candlesticks combine. A chart pattern emerges when the price changes over a certain period depending on fundamental and psychological factors. Another important thing to know is that a candlestick pattern occurs for a short time, while chart patterns emerge on longer timeframes. Candlestick patterns are best used for quick entry and exit points. At the same time, chart patterns are best used for long-term operations on the market.
All patterns we’ve explained are technical indicators that allow you to understand why an asset’s price changed in a certain way and how it might move later on. By knowing all this, you will be able to decide whether you should open a short or long position, or if you have to close out your open positions in case of a possible trend reversal.