Financial markets, including Forex, involves plenty of chart formations, while not all of them are effective. There are many pricing patterns available and some of them give an excellent profit while a few of them doesn’t work good. First and the foremost, the chart patterns must focus on double top pattern and it is the common criteria used to grab the best accuracy. With a possibility to grasp 78% result, trading becomes simple and effective.
What are chart patterns?
Chart patterns or price figures obey one of the premises of Technical Analysis: "The market has memory and history repeats itself."
There are a number of patterns that recur throughout history and can be seen through price charts (in different time periodos and markets and assets). Through these patterns the trader can determine with some reliability, the possible evolution of the market price. Of course, none of these patterns has 100% reliability, as they simply provide a clue about what the market may do in the future.
Furthermore, there are some chart patterns which have greater or lesser degree of reliability in comparison with the others, so the trader should use these formations with caution. Also, these formations should be combined with other analysis tools as technical indicators among which we can mention the oscillators, trend indicators, volume, etc.. The point is that we should not base our decisions solely on a chart pattern which we use it primarily as a sign that something may happen in the market.
These patterns are produced because the financial markets do not change direction suddenly. The change of sentiment usually takes time to occur. In this way, these formations can be used to confirm trend changes and set and determine price levels to open new positions and to place stop loss orders and take profits.
There are two main categories of formations used in chart patterns analysis:
Trend Change Patterns
The reversal formations are those patterns that appear in the finals of both bull and bear trends. Usually these formations involve a reversal or at least a strong correction against the main market trend. Within this group, the most common are:
- Double Top.
- Double Bottom.
- Cup with handle.
- Triple Top.
- Triple Bottom.
- Head and Shoulders
- Head and Shoulders Inverted.
- Reversal Day.
- Island Reversal.
- Rounding Bottom or Saucer Bottom
Trend Continuation Patterns
These are consolidation trend formations which usually appears during bullish or bearish trends and represent temporary detention or stagnation in prices that produce lateral market trends for a period of time. These patterns end with the resumption of the trend prior to the pattern formation. Within this group the most common are:
- Triangle Formations
Other chart patterns
- Channels: Bullish channels, bearish channels and channels without trend (horizontal)
To identify a trend change formation or a trend continuation formation the current main trend must be determined with certainty. Usually the first sign that we are seing a reversal figure is the rupture of a major trendline for example. The greater the trend change pattern in terms of price range and and time duration, the greater its importance and level of reliability
The volume is another aspect which can help the trader to confirm the order and importance of the patters.