Forex chart patterns are price action patterns appearing on the charts, which have a higher than average probability of follow-through in a particular direction. These trading patterns offer significant clues to price action traders that use technical chart analysis in their Forex trading decision process.
Each chart pattern has the potential to push the price toward a new move. Thus, Forex traders tend to identify chart patterns in order to take advantage of upcoming price swings.
Chart formations can help us spot conditions where the market is ready to break out. Traders react to prices and price-levels as they oscillate between overbought and oversold conditions and bounce between support (demand) and resistance (supply) levels.
In doing so, recognizable and repeatable structures called price patterns or chart patterns are formed. Technical analysts and traders look for these patterns for their repeatable nature and forecasting value in the charts. Patterns are provided with easily recognizable names such as: Double Top, Double Bottom, Flag, Head-and-Shoulder…
Forex trading patterns are divided into groups based on the potential price direction of the pattern. There are three main types of chart patterns classified in Forex technical charting, continuation, reversal, and neutral patterns, but just focusing on the continuation and the reversal ones is sufficient.
Chart patterns truly represent traders’ psychology. They are reliable and repeatable structures, but they can also fail.
Patterns form, fail, and reform, and they often reshape from one structure to another. The important thing to always remember is that patterns must be clearly visible, and you should never “force” them.
As a trader, you need to really understand pattern nuances and workarounds to find success. Patterns must only be traded with underlying and supporting market context, rather than trading chart patterns by themselves.
So study and understand the market context surrounded by chart patterns first, and then, analyze the patterns. While it is good to be aware of various patterns formation, as well as their failure, there is truly no need to know all the patterns, mastering just a handful of them is more than enough.