Chart patterns are one of the most popular and widely used technical tools for professional traders. Let’s describe chart patterns simply. When prices move they sometimes shape some figures on the chart, depending on their shape they can sometimes be used by traders to predict future prices. These figures are called chart patterns and they are really popular, especially in forex, stock, and crypto trading. Here I will discuss the most popular patterns and their meaning and how to spot them.
Chart Patterns As Predicting Tools
As we described above chart patterns are specific candle arrangements on the chart which remind us of various figures. Shooting stars, triangles, Head and Shoulders are among the most popular ones. They are used by professional traders very often. Chart patterns have a certain probability of predicting future price movements. So, if you have some fundamental market outlook and technical analysis, adding success probability by introducing chart patterns to your trading could turbocharge your trading profits. I will discuss some of the most popular chart patterns below. The main two types would be reversal and continuation chart patterns. Reversal patterns predict the market is about to reverse and continuation patterns indicate trend continuation in the same direction. Trading chart patterns are fun and spotting them on the chart can sometimes be challenging. This makes them somehow elusive as traders tend to see them where they are not. This makes chart patterns a bit more subjective than objective and different traders can see the same patterns in different places on the chart. Practice is key in this matter and traders should try to train their eyes and mind to spot them easily. Try to make chart patterns as general and as strictly defined as possible. Another challenge is that the patterns in real markets are sometimes hard to notice because they are not as perfect and beautiful as in trading handbooks.
Top Must-Know Chart Patterns
A shooting star pattern occurs at the top of a bullish trend. It has a long shadow or wick and a relatively small body. Thereby it reminds you of a shooting star with its shape. The shooting star indicates that the current bullish market can reverse soon and is a good tool to add chances of success to your forex trading strategy. You can learn how to spot the shooting star in this comprehensive guide.
Head and shoulders
The Head and shoulders pattern in technical analysis is a formation that consists of three price picks. Outside price picks are shorter and almost the same height while the middle head price is the highest. It occurs when the price starts rising and then falls to a base level, then rises above the first high but can not maintain it and falls to a baseline then rises again lower than the middle price impulse. So, three highs with outside prices being almost the same length and the middle price being the highest. It reminds us of the head and shoulders, hence its name. Generally, the H&D pattern is a reversal pattern because it predicts the current trend reversal from bullish to bearish. Used with other indicators and fundamentals, H & D is a powerful tool in experienced traders’ arsenal. When you see the Head and Shoulders figure on the chart it is a good sign that the bearish trend is closer. There is an inverse H&D pattern also which predicts the trend is likely to change from bearish to bullish. It is exactly the opposite of the Head and Shoulders pattern. More information about Head and Shoulders is available in this source.
Double top & bottom
Double tops and bottoms are frequently occurring on the forex pairs. They are reversal patterns and indicate that the trend can change direction. A double top is the two highest price points on the chart after which the price reverses in opposite direction. These two highest price points should be almost the same height and one must not be longer or shorter than the other. The double top is when the price moves higher, can not maintain the highs and falls, then rises again to test the previous high but fails again. In this case, we say that a double top is formed on the chart and it signals that bulls are losing their power to push prices higher. So watching for any other bearish sign to short-sell the pair is a good idea. The double bottom is the exact opposite of the double top and indicates a possible bullish rally.
How To Use Chart Patterns
We described some of the most popular and robust chart patterns but how can we use them?
Remember that no one pattern alone is enough to predict future price movements and chart patterns are powerful when used in conjunction with other technical indicators and fundamental analysis. You can use patterns like those described above to trade major macroeconomic events too.