When you are trading using forex charts, it is important to know the different signals that you can get from them so that you can make the appropriate trading decisions. There are three main classifications of signals:
1. Reversals: When you see these forex charts patterns, you know that the currency price is about to change direction. For example, if the price is trending in an upward direction, when you see a reversal pattern, it signals that the price is set to move downward soon. The six chart patterns that are associated with reversals are the double top, the head and shoulders, the double bottom, the inverse head and shoulders, the rising wedge and the falling wedge.
In order to trade a reversal pattern, start by entering a trade just above the level of the neckline in the direction of the trend. The neckline is a line drawn connecting the valleys or peaks formed by the troughs. Aim for a target that is almost as high or low as the highest or lowest point of the formation. And don’t forget to protect yourself by placing a stop loss in the middle of the formation.
One way of determining where to set your stop is to measure the height of a trough and then divide by two, using this figure as your stop loss. Hence, if the height of a trough is ten pips, you should set your stop loss at 5 pips from your entry point.
2. Continuations: Also known as consolidation signals, these patterns signal that the ongoing trend, whether upwards or downwards, will continue. These are called consolidation signals because you can sense the pauses in the patterns during which the trend may continue or reverse.
Forex charts patterns that signal continuations include falling wedges, bullish rectangles, bullish pennants, rising wedges, bearish rectangles and bearish pennants. Note that the prices are moving within a range, with support and resistance levels. To trade a continuation, open a trade on top of or below the formation in the direction of the trend. Aim for a profit target the height of the chart pattern, i.e. 10 pips above or below the entry point. For pennant charts, you can set your profit target using the height of the pattern’s ‘mast’.
3. Bilateral patterns: These forex charts can be a little difficult to trade since the price movement can go either way. Patterns that signal bilateral patterns include ascending, descending and symmetrical triangles. To trade these patterns, you place orders on either side of the formation and then cancel the order that does not get triggered. And, of course, don’t forget to set your stop loss once you’ve detected in which direction the price trend is moving.
Familiarize yourself with the different chart patterns and whether they form during uptrends and downtrends so you can trade them profitably. Finally, one of the most important things to remember when trading these forex charts patterns is not to be greedy and to chase profits until the trend turns against you.