Exactly what do you look for when you look at forex charts? It might look nonsensical to those who do not trade in the foreign exchange market but the lines and bars in these charts actually form patterns that have been studied over time by financial market experts. Years of studies and actual trading experience have gone into identifying specific patterns that are considered indicative of price movements that are expected to be profitable. The fact remains that there is nothing certain in forex trading. But, with these forex charts, experts have been able to closely predict price movements given certain conditions.
On candlestick forex charts, you can see currency prices plotted over your choice of period. The basic pieces of currency information that are plotted by each candlestick are opening, closing, high, and low prices during the time frame chosen. A series of these candlesticks are laid out for each time increment for a specific duration, for example, a one minute quotes for a 4-hour chart. Making sense out of these candlesticks takes a keen eye in spotting patterns and discerning if economic and market conditions are ripe for a profitable trade. Several basic patterns can indicate a reversal or a breakout to catch on a trade, or a generally bearish or bullish market to keep holding on to a specific currency pair for more profits in later trades.
Some of the interesting patterns that are revealed by candlestick forex charts include:
- The descending triangle pattern indicates a bearish reversal wherein prices will drop into a downtrend to breach the lower horizontal line of the pattern. The inclined side of the pattern represents the falling highs of currency prices that eventually converge with the horizontal line in the breakout where prices drop lower than the candlestick lows during the period. Spotting this pattern should prompt a stop loss just before the breakout or a preparation to go on a buying spree just before an impending reversal as the breakout reaches its bottom.
- The head and shoulders pattern is formed by an uptrend on the highs that then plunges into a low, only to spike up higher than the previous high and then drop again to the same plunging lows, and finally come back up again to almost the same level as the first high before it plunges again in the same way. The pattern becomes obvious in forex charts when you connect the highs to form the shoulders and the head and then trace the lows to form the neckline. This presents several entry and exit points to potentially trade with profits. The target profitability goal should be the pips between the head and the base of the second shoulder. After the second shoulder is a predicted bearish reversal.
- The channels pattern in forex charts is a relatively conservative way of trading in the forex market. It basically traces the highs and the lows of the currency prices and allows the forex trader to only trade with price quotes in between. Trading profits by using this pattern are made by selling at the highs or at the resistance levels and buying at the lows or at the support levels.