Top 7 trading chart patterns you must know

16 Oct 2023
7 trading chart patterns you must know

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.

Head and shoulders

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.

Double tops and bottoms

3. Rounding bottom

Rounding bottom

4. Cup and handle

Cup and handle

5. Wedges

6. Triangles

7. Pennant (flags)

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.

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