How to Learn Forex Chart Patterns|Chart Pattern Trading Strategy Step-by-Step Guide –Forex Trading Strategy|Wedge|Head and Shoulders|Double Tops/Bottoms
Trend reversal patterns:
1. Wedge
2. Head and Shoulders
3. Double Tops/Bottoms
Reversal Patterns
Of course the market can’t move in one direction all the time. It must change direction from time to time. Many small changes in direction are simply pullbacks, but there are also complete reversals. The trick is knowing the difference between the two. A pullback is difficult and usually unprofitable to trade, but there is good money in trading reversals. Knowing a couple of high probability chart patterns will help you decide when you would trade a reversal instead of leaving it alone as a minor correction.
Wedge
This is my favorite reversal pattern. It happens almost every time a decent reversal is about to happen, I watch for it with eagle eyes!
In a bullish reversal Wedge, price must be trending lower. At the bottom of the trend, the last couple of lows are very shallow, almost a kind of bottoming out. The first low is followed by a slightly lower low. The highs however are not as shallow, they keep falling more dramatically than the lows. The opposite is true of the bearish wedge. A topping out of price as price narrows, then the reversal happens.
Head and Shoulders
The Head and Shoulders formation might be the single most popular chart pattern out there. It’s fun to say and fun to trade. There are traders that look for this formation almost exclusively, and they do very well trading it.
The Head and Shoulders is what it sounds like. A bearish Head and Shoulders consists of a high being the left shoulder, followed by a higher high making the head. Finally there is another high that is lower than the head. This is the head and shoulders. The two lows formed by price on either side of the head is called the neckline. A trendline is drawn connecting them and when price breaks below, you have a short trade.
The theory behind the Head and Shoulders pattern follows the rule of a trend.
In an up-trend, you will find the market makes a series of higher highs and higher lows. In a down-trend, the market makes lower highs and lower lows, a kind of staircase looking pattern.
Head and Shoulders is a bearish pattern and it starts out with a higher high and a higher low. What follows is a lower high, this interrupts the pattern of an uptrend and is the beginning of a downtrend. The Head and Shoulders pattern assumes that the beginning of a new trend direction will have some follow-through.
The bullish version of the pattern is called the Inverted Head and Shoulders.
Double Tops / Bottoms
Double Tops and Double Bottoms are very common chart patterns, they carry a lot of weight with traders because of their frequency.
A Double Top resembles the letter M.
A Double Bottom resembles the letter W.
With a Double Top, price finds a high, or a level of resistance, and after it's rejected from there, it comes back to test it again. A second rejection from that level will often send price on a larger downward ride.
A Double Bottom is the exact opposite. Price will find level of support that is quickly tested a second time. Once price is rejected again off support, it will take off and move much farther upward the second time.
Trend reversal patterns:
1. Wedge
2. Head and Shoulders
3. Double Tops/Bottoms
Reversal Patterns
Of course the market can’t move in one direction all the time. It must change direction from time to time. Many small changes in direction are simply pullbacks, but there are also complete reversals. The trick is knowing the difference between the two. A pullback is difficult and usually unprofitable to trade, but there is good money in trading reversals. Knowing a couple of high probability chart patterns will help you decide when you would trade a reversal instead of leaving it alone as a minor correction.
Wedge
This is my favorite reversal pattern. It happens almost every time a decent reversal is about to happen, I watch for it with eagle eyes!
In a bullish reversal Wedge, price must be trending lower. At the bottom of the trend, the last couple of lows are very shallow, almost a kind of bottoming out. The first low is followed by a slightly lower low. The highs however are not as shallow, they keep falling more dramatically than the lows. The opposite is true of the bearish wedge. A topping out of price as price narrows, then the reversal happens.
The Head and Shoulders formation might be the single most popular chart pattern out there. It’s fun to say and fun to trade. There are traders that look for this formation almost exclusively, and they do very well trading it.
The Head and Shoulders is what it sounds like. A bearish Head and Shoulders consists of a high being the left shoulder, followed by a higher high making the head. Finally there is another high that is lower than the head. This is the head and shoulders. The two lows formed by price on either side of the head is called the neckline. A trendline is drawn connecting them and when price breaks below, you have a short trade.
The theory behind the Head and Shoulders pattern follows the rule of a trend.
In an up-trend, you will find the market makes a series of higher highs and higher lows. In a down-trend, the market makes lower highs and lower lows, a kind of staircase looking pattern.
Head and Shoulders is a bearish pattern and it starts out with a higher high and a higher low. What follows is a lower high, this interrupts the pattern of an uptrend and is the beginning of a downtrend. The Head and Shoulders pattern assumes that the beginning of a new trend direction will have some follow-through.
The bullish version of the pattern is called the Inverted Head and Shoulders.
Double Tops / Bottoms
Double Tops and Double Bottoms are very common chart patterns, they carry a lot of weight with traders because of their frequency.
A Double Top resembles the letter M.
A Double Bottom resembles the letter W.
With a Double Top, price finds a high, or a level of resistance, and after it's rejected from there, it comes back to test it again. A second rejection from that level will often send price on a larger downward ride.
A Double Bottom is the exact opposite. Price will find level of support that is quickly tested a second time. Once price is rejected again off support, it will take off and move much farther upward the second time.
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