Trading chart patterns is one of the best and result oriented strategy among long term price action traders. In this article we are going to take a look on some major chart patterns in forex trading.
Head & Shoulder (H&S)
Head & Shoulder (H&S) is a frequently occurred chart pattern which offers long term trading opportunity with some nice risk and reward ratio. It comprises of:
- Left Shoulder
- Right Shoulder
Consider the above chart; a head is emerged on two shoulders while the neckline is basically a trendline drawn by joining the lowest values of two shoulders. Traders open positions on a breakout through the neckline, often considered as the confirmation signal for the validity of head & shoulder pattern. The neckline acts as critical resistance level once it is broken out. The H&S Pattern may also be in inverse form as demonstrated in the following chart.
The only difference in an inverse H&S pattern is that it acts in opposite direction i.e. bullish or upward trend.
Double Bottom & Double Top Price Patterns
Double top and bottom patterns are also very famous in price action trading. They yield good return with considerably lower risk. The pattern consists of two bottoms/tops and a neckline. The neckline is the lowest/highest point between the two bottoms/tops as demonstrated in the following diagram
Traders enter a position once the neckline is broken out while the target is kept usually around the highest/lowest level of the preceding upward/downward wave.
Symmetrical triangles provide good trading opportunities on breakouts. Consider the following diagram. The triangles may be in any direction. Traders open positions once price is closed above/below the triangle trendline.
Not to mention, breakout is confirmed once a candle is closed below or above the trendline. The symmetrical chart patterns are considered reliable when appeared on four-hour or higher timeframes.
Bullish and bearish ABCD price patterns are also very effective in price action forex trading. Consider the following diagrams, traders usually open positions when price is pulled back from the D wave.
The reversal or pullback may be confirmed with the help of pin bars, engulfing candles, hammer or shooting star near some critical support or resistance level.
Above mentioned price patterns may occur at any timeframe however you should avoid trading these patterns at timeframe smaller than four-hour. The higher the timeframe, higher will be reliability of a price pattern. Similarly premature entry must also be avoided, for example if you are trading H&S or double top price pattern, you must not open a position until neckline is broken out.
Moreover, patience is very much needed while trading price patterns. Many of these patterns may take days, weeks or even months for completion, particularly when they occur at higher timeframe. So always be patient and never close your trade before completion of a price pattern.