Identifying chart patterns is just a method for trying to forecast market trends. Patterns are used in forex as either reversal or continuation signals and are formed by support & resistance levels and by more complex versions of trend lines.
Chart pattern analysis help forex traders to determine possible future trend developments and can be used to make short-term or long-term forecasts. Chart patterns are commonly used in the foreign exchange market.
Before you start studying chart patterns, it is very important to understand how support & resistance and trendlines work. If you forgotten already, please read our articles on Support and Resistance as well as Trend Lines again!
Chart patterns can be arranged in two main categories:
Continuation Patterns
Reversal Patterns
Chart Patterns - Continuation Patterns
Continuation patterns are chart patterns which set up a currency pair for a follow through move in the direction of the prior trend and include Triangle and Rectangle patterns.
Example: Ascending Triangle continuation pattern
Chart Patterns - Reversal Patterns
Reversal patterns are chart patterns which indicate that a reversal in trend is taking place, reversal patterns include Double Top & Double Bottom and Head & Shoulders patterns.
Two important things to know about reversal chart patterns:
1) The existence of a prior trend - if a reversal price pattern has not been preceded by an existing trend, than there is nothing to reverse.
2) Reversal patterns formed on bigger timeframe's gain greater significance.
