Decoding Forex Signals
Forex signals usually come in pairs. This means information based on price and time; in that the proper price at the right time can signal the appropriate point to enter, stay put, exit, etc. There are lots of providers out there offering signals or alerts via SMS, RSS, website access, tweets, etc. However, every expert trader will tell you that the best providers are useless to someone who cannot effectively and efficiently decode the patterns of Forex signals. This article will discuss basic signal decoding as a primer to more detailed information and more advanced trade strategies.
Forex Signals: Double Bottom Buy Signal
A double bottom pattern forms a “W” shape, when price returns to a recent low and rises from the same point. This rise and fall pattern creates the telltale “W” shaped pattern on a graph. This usually occurs prior to the price of a Forex pair reversal from a downtrend and then an uptrend.
Forex Signals: Rectangle Bottom
If you are looking for a trend change then you need to watch out for a rectangular bottom. This is because the former usually precedes the latter. This pattern occurs when the following conditions are present:
- A price that is falling;
- Then stops and bounces back in a trading range that forms a small rectangular shape;
- This often lasts several trading days and can look like several “w” shapes one after another.
- Your point of entry starts when the price rises over and above the usual upper range of the rectangle.
Forex Signals: Cup and Handle
Aptly named because the graph shows a cup like dip and reversal then a handle like line is formed upon a price drop. This pattern occurs when the following conditions are present:
- A wide price dip is carved out which is shaped like a tea cup;
- Price drops back but this time lower after it has reached the point that looks like the rim on the right side of the cup.
- The time to buy starts when the price rises over and above the rim of the cup and the top handle.
Forex Signals: Failed Patterns
Failed signals or fake indicators often occur when all indication point to a specific pattern and then does not follow up to completion. This is the bane of pattern traders, especially those who have improperly timed their entry and exit or have speculated early on in the game. A good way to avoid fake signals is to cross-reference one pattern with other relevant patterns, signals and indicators. This is also where experience and the trading network comes into play, in that the right directive, a previous pattern resurfacing or just plain old trader’s intuition honed through proper education, training and experience is at its best.
In Closing
Pattern trading has its advantages and disadvantages. In order to increase the likelihood of an advantageous situation traders must constantly hone their skills with basic patterns and then gradually move on to more complex patterns of a trade. Always bearing in mind that the same do not always complete itself, thus a stop loss order as an exit strategy must always be present.
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