Chart patterns are an essential part of price action analysis in fx trading. They are used to identify potential entry and exit levels in all types of forex pairs. This article will explore some of the most
important trading chart patterns that traders need to know.

Types of trading chart patterns

Broadly, there are two main types of chart patterns in forex trading: continuation and reversal. A continuation pattern usually signals that an asset will resume the existing trend. An asset whose price is rising will continue with this trend after a certain period. Examples of continuation patterns are bullish and bearish flags and pennants, cup and handle, and ascending and descending triangles.

A reversal pattern, on the other hand, signals that an existing trend is about to end and usher in a new one in the opposite direction. Some of the most popular reversal patterns are double and triple tops, rising and falling wedges, and head and shoulders.

In addition to chart patterns, forex traders also use candlestick patterns to identify reversals and continuations. Some of the most popular candlestick patterns in fx trading are doji, hammer, engulfing, an abandoned baby, shooting star, and evening star among others.

Double-top

A double-top is a popular reversal pattern in fx trading. It usually happens when a strong trend of a forex pair is fading. As it starts to firm, the currency pair finds an initial resistance and then pulls back for a few trading sessions. This pulling back happens as existing traders start exiting their positions. After pulling back, the pair then rebounds and find substantial resistance at the previous level.

Finally, a reversal is confirmed when the forex pair moves below the neckline of the double-top pattern.

Cup and handle in fx trading

A cup and handle is another popular chart pattern in the forex market although it takes more time to form. The pattern has a close resemblance to a conventional cup. It forms when a forex pair is in a bullish trend and finds resistance at a key level. After this, the pair retreats slowly resumes a bullish trend and retests the initial resistance level. The forex pair can either consolidate for a while or retreat slightly.

In most cases, it then resumes the bullish trend and moves above the resistance level. The next target is estimated by measuring the distance between the upper and lower sides of the cup.

Rectangle pattern

A rectangle pattern is also popular in forex trading. It is formed when a forex pair finds support and resistance and forms at specific levels. When these levels are joined, it has a close resemblance to a rectangle pattern.

Unlike the cup and handle and a double top, the outcome of a rectangle can be in either direction. In most cases, the breakout is usually in the original direction. However, a commonly used approach to trading the rectangle pattern is to use a buy stop and a sell stop pending orders.

Bullish flag

A bullish flag is a continuation pattern that has a close resemblance to a real hoisted flag. It is one of the most popular forex chart patterns. The pattern forms when a forex pair rises sharply and then starts to consolidate. This consolidation ultimately leads to a bullish breakout over time.

A bullish flag has a close resemblance to a bullish pennant. The difference is that a flag has a rectangle appearance while a pennant has a triangle appearance.

Summary

Chart patterns are an essential part of price action analysis. They refer to unique formations that can help you determine whether to buy or sell a forex pair.