Continuation chart patterns usually occur during price consolidation periods and offer great opportunities for traders to open positions in the direction of the dominant trend. The most common continuation chart patterns include directional wedges, flags and pennants. These patterns build up in a retracement manner and a breakout in the direction of the main trend confirms that the temporary pullback is now over.
Directional wedges can deliver reversal signals. Falling wedges form at the bottom of a downtrend whereas rising wedges form at the top of an uptrend. Directional wedges inform about the struggle between bulls and bears when the market is consolidating. For instance, a rising wedge in a downtrend is an indication that buyers are actively pushing the price higher, but they are forming higher lows faster than they are forming higher highs.
This is a signal of buyer exhaustion and prices are likely to break lower to resume the downtrend. Pennants usually signal a small pause in a strong trend. They form in the shape of triangles, but they are very brief, with the resulting move duplicating the movement that preceded the formation of the pennant.
In an uptrend, a bullish pennant will form when a small period of consolidation is followed by a strong desire by bulls to drive prices higher. It will be a signal that bulls are charged up for another strong push higher.
Flags form when prices consolidate after sharp trending moves. The preceding sharp trending move is known as a flagpole. In an uptrend, a flag pattern will form when prices consolidate by forming lower highs and lower lows to signal a period of profit-taking.
A break outside the upper falling trendline will be a signal that bulls are ready to drive prices higher for the next phase. A rectangle chart pattern is a continuation pattern that forms when the price is bound by parallel support and resistance levels during a strong trend. The pattern forms in both bullish and bearish trends. When a rectangle forms, traders look to place a trade in the direction of the dominant trend when the price breaks out of the range.
When a breakout occurs, it is expected that the price will make a movement of at least the same size as the range. This means that if a rectangle chart pattern forms in an uptrend, traders will look to place buy orders after the horizontal resistance is breached. The target price movement will be the size of the distance between the support and resistance lines.
Similarly, if a rectangle chart pattern forms in a downtrend, traders will look to place sell orders after the horizontal support is breached. The cup and handle chart pattern is a bullish continuation pattern that forms after a preceding uptrend to signal that upward momentum will continue after a period of price consolidation. The pattern consists of two parts: the cup and the handle. The handle is a period of price consolidation after the cup, and ideally, it should not drop below the cup which handle does?
When the cup and handle pattern forms, traders can look to place buy orders on either a breakout from the handle or a breakout off the highs of the cup. The first profit target is equal to the height of the cup formation, while stops can be placed below the handle. Gartley is a popular harmonic chart pattern that delivers continuation signals based on Fibonacci levels.
Gartley patterns are preceded by either a significant high or low X , followed by the ABCD correction pattern. Here are the characteristics of a Gartley pattern:. At point D, traders will look to enter trades in the direction of the main trend the direction of XA. The initial price targets are C and A, with the final target being A stop can be placed below X for the entire trade. Continuation chart patterns offer low risk, optimal price entry points for traders to join the direction of the dominant trend.
Reversal chart patterns form when a dominant trend is about to change course. If there is an uptrend, a reversal chart pattern signals that the market is about to turn lower; similarly, a reversal chart pattern in a downtrend signal that the market is about to turn higher. The most common reversal chart patterns include straight and reverse head and shoulders, double tops and double bottoms, falling and rising wedges, as well as triple tops and triple bottoms.
Reversal chart patterns happen after extended trending periods and signal price exhaustion and loss of momentum. A straight head and shoulders pattern forms in an uptrend when the price makes three highs: the first and the third highs are almost similar in height shoulders , while the second high is higher head. A neckline is drawn to connect the lowest points of the troughs formed by the formation. A reverse head and shoulders forms in a downtrend, with the second low being lower than the first and third lows.
The target price will be the distance between the neckline and the head when the price breaks above the neckline. Double tops and double bottoms form after the price makes two peaks or valleys after a strong trending move. They signal price exhaustion and a desire by the market to reverse the current trend. Price targets, when trading double tops and bottoms, are equal to the same height as the formation. Similarly, triple tops and triple bottoms form after the price makes three peaks or valleys after a strong trending move.
They also signal fading momentum of the dominant trend and a desire for the market to change course. The height of the formation also serves as the price target for a reversal when the neckline is breached. A rounding bottom is a bullish reversal pattern that forms during an extended downtrend, signalling that a change in the long-term trend is due.
The formation of the pattern implies that downward momentum is declining, and sellers are gradually losing the battle to buyers. Prices then begin to advance from the low point so as to complete the right half of the pattern, a process that takes roughly the same time it took the initial left half of the pattern to form.
A bullish reversal is confirmed if prices break above the neckline of the pattern. Traders will look to place buy orders after the breakout, with the profit target being the size of the actual pattern the distance between the neckline and the low of the pattern. It is important to note that reversal chart patterns require patience as they usually take a long time to play out.
This is mainly because it requires a strong conviction before investors can fully back up the opposite trend. Neutral chart patterns occur in both trending and ranging markets, and they do not give any directional cue. Neutral chart patterns signal that a big move is about to happen in the market and traders should expect a price breakout in either direction. Symmetrical triangles are some of the most common neutral chart patterns. A symmetrical chart pattern forms when the price forms lower highs and higher lows.
The slopes of the highs, as well as that of the lows, converge to form a triangle. The formation illustrates that neither bulls nor bears are able to apply enough pressure to form a definitive trend.
No group has an upper hand, and as the price converges, one of them may have to give in. The entry is provided at 1. The stop can be placed below the right shoulder at 1. The profit target is determined by taking the height of the formation and then adding it to the breakout point.
In this case the profit target is 1. The profit target is marked by the square at the far right, where the market went after breaking out. Triangles are very common, especially on short-term time frames. Triangles occur when prices converge with the highs and lows narrowing into a tighter and tighter price area.
They can be symmetric , ascending or descending , though for trading purposes there is minimal difference. The chart below shows a symmetric triangle. It is tradable because the pattern provides an entry, stop and profit target. The entry is when the perimeter of the triangle is penetrated — in this case, to the upside making the entry 1. The stop is the low of the pattern at 1.
The profit target is determined by adding the height of the pattern to the entry price 1. The height of the pattern is 25 pips , thus making the profit target 1. Candlestick charts provide more information than line, OHLC or area charts. For this reason, candlestick patterns are a useful tool for gauging price movements on all time frames. While there are many candlestick patterns, there is one which is particularly useful in forex trading.
An engulfing pattern is an excellent trading opportunity because it can be easily spotted and the price action indicates a strong and immediate change in direction. In a downtrend, an up candle real body will completely engulf the prior down candle real body bullish engulfing. In an uptrend a down candle real body will completely engulf the prior up candle real body bearish engulfing.
The pattern is highly tradable because the price action indicates a strong reversal since the prior candle has already been completely reversed. The trader can participate in the start of a potential trend while implementing a stop. In the chart below, we can see a bullish engulfing pattern that signals the emergence of an upward trend.
The entry is the open of the first bar after the pattern is formed, in this case 1. The stop is placed below the low of the pattern at 1. There is no distinct profit target for this pattern. Ichimoku is a technical indicator that overlays the price data on the chart. While patterns are not as easy to pick out in the actual Ichimoku drawing, when we combine the Ichimoku cloud with price action we see a pattern of common occurrences. The Ichimoku cloud is former support and resistance levels combined to create a dynamic support and resistance area.
Simply put, if price action is above the cloud it is bullish and the cloud acts as support. If price action is below the cloud, it is bearish and the cloud acts as resistance. By using the Ichimoku cloud in trending environments, a trader is often able to capture much of the trend. In an upward or downward trend, such as can be seen in below, there are several possibilities for multiple entries pyramid trading or trailing stop levels.
In a decline that began in September, , there were eight potential entries where the rate moved up into the cloud but could not break through the opposite side. Entries could be taken when the price moves back below out of the cloud confirming the downtrend is still in play and the retracement has completed.
The cloud can also be used a trailing stop, with the outer bound always acting as the stop. In this case, as the rate falls, so does the cloud — the outer band upper in downtrend, lower in uptrend of the cloud is where the trailing stop can be placed. This pattern is best used in trend based pairs , which generally include the USD. There are multiple trading methods all using patterns in price to find entries and stop levels.
Forex chart patterns, which include the head and shoulders as well as triangles, provide entries, stops and profit targets in a pattern that can be easily seen. The engulfing candlestick pattern provides insight into trend reversal and potential participation in that trend with a defined entry and stop level. The Ichimoku cloud bounce provides for participation in long trends by using multiple entries and a progressive stop.
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