A recognizable shape formed by price movements on a chart, such as head and shoulders, double tops, triangles, and flags, used to forecast future price direction.
What Are Chart Patterns?
Chart patterns are geometric formations that appear on price charts when traders collectively behave in predictable ways. They fall into two main categories: reversal patterns (signaling a trend change) and continuation patterns (signaling a brief pause before the trend resumes). Pattern recognition is a core component of Technical Analysis.
Common Forex Chart Patterns
Reversal patterns include head and shoulders, double tops, double bottoms, and triple tops. Continuation patterns include flags, pennants, wedges, and rectangles. For example, a head and shoulders pattern on EUR/USD at the top of an uptrend signals a potential reversal to the downside. The measured move (distance from head to neckline) projects the expected decline after the neckline breaks.
Triangles (ascending, descending, symmetrical) can be either continuation or reversal patterns depending on the preceding trend and breakout direction. They form when price consolidates into a tighter range, building energy for the next move.
Trading Chart Patterns
Traders typically enter when price breaks the pattern boundary (neckline, trendline, or support/resistance level) with confirming volume or momentum. Stop losses go beyond the opposite side of the pattern. Combine pattern signals with Fibonacci Retracement levels and Divergence for higher-probability setups. Patterns on higher time frames (daily, weekly) tend to be more reliable than those on intraday charts.
Related Terms
Head and Shoulders
A bearish reversal chart pattern with three peaks where the middle peak (head) is the highest and the two outer peaks (shoulders) are roughly equal. The neckline break confirms the reversal.
Double Top
A bearish reversal pattern where the price reaches the same high twice with a pullback in between, forming an "M" shape. The break below the middle trough confirms the reversal.
Ascending Triangle
A bullish continuation pattern with a flat resistance line and a rising trendline connecting higher lows. Price typically breaks upward through the flat resistance.
Technical Analysis
The study of past price action, volume, and chart patterns to forecast future market movements, based on the premise that price reflects all available information.
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