Thursday, June 29, 2017

Profitable Forex Chart Patterns Part 1

forex chartSuccessful forex traders use a variety of methods in which to base their directional bias before placing a trade. Chart formations, or patterns, have been used as a foundational basis for many trading systems dating back to the ancient Japanese rice traders who would use hand drawn candlestick charts as a way of interpreting supply and demand.

Many chartists believe that the formations of specific patterns can reveal to the trained technician what will unfold in the future, providing them with an analytical edge over the rest of the uninformed crowd.         Although there may very well be some predictive qualities to these emerging patterns of price action, it should also be noted that a charted record of daily temperatures, or the results of a coin flip will yield similar patterns.

The anti-chartists will use this example as proof that patterns on a chart are nothing more then squiggles and squaggles of lines on a computer screen. They will shout from the roof tops that chart reading is a fools game not worthy of consideration by a professional. But in truth, they would be wrong, just as any glassy eyed chartist would be wrong to boldly claim a chart pattern’s infallibility.

Chart patterns are not the holy grail, but when interpreted correctly, they do have a story to tell. When used in conjunction with price action from buyers and sellers, predictable patterns do begin to emerge that are logical and make sense. These patterns can provide the astute trader with a better understanding of who is winning the battle of supply and demand. Chart patterns provide the technician with price points that can identify reversals, break-outs, or continuations of trends, and much more.

Statistically, these predictions of future price are not always right. Percentages of accuracy will vary from pattern to pattern. However, they provide an edge of probability as well as boundaries that are defined and  mandatory for any profitable trading system. Once you understand the logic behind a pattern and why it is occurring, you can the take this information and place an order with a reasonable anticipation of where prices will go… and even more importantly, you will know when you are wrong and when to get out.

Price patterns can vary in the length of time they take to unfold. Some patterns can take months to develop, others can print in one day. Of course, this is assuming that we are looking at a daily or weekly chart. When traders use charts with lower time frames, such as a 2 minute or 15 minute intra-day chart then these patterns will adjust in length accordingly.

These patterns are also used by forex traders to help define the possibilities of certain market characteristics as well. Most chart patterns fall into the following categories… reversals, continuations, and consolidations. Let’s take a look at all three of these for a better understanding.

Reversals

Reversal patterns indicate the possibility of an extreme change in directional trend rather then a short term pullback or consolidation in price. True reversal patterns, also known as tops and bottoms, are very reliable when forecasting trend change.

Continuations

Continuation patterns help traders identify temporary pullbacks or consolidations in price. These minor sell-offs or sideways movements represent that the currency pair may be experiencing some normal profit taking before resuming it’s current trend once again.

Consolidations

These patterns show the trader that a deliberate, well defined side ways movement in price may be reaching an end and that a break out in price with a new trend may be about to happen. Often times these patterns are non-directional, meaning that price could break in either direction.

What Chart Patterns Are The Most Reliable

Despite the talk from the random market theorists, chart patterns work. There are hundreds of formations that have been catalogued, with new ones popping up almost every day. But when it comes to reliability in so much as the historical probability can allow, there are a handful that are widely used and will always provide a good picture of what may unfold as supply and demand go back and forth.

In Part 2 of this report we’ll take a close look at the more popular and reliable patterns within each category described above. I encourage you to research these and other chart patterns on your own so that you can begin to see the correlation between buying and selling and what it means to you as a speculator in the currency markets.

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