A vast majority of forex traders depend on technical analysis for making their day-to-day trading decisions. Forex trading is about making profits from price changes, and price charts are pivotal in trade planning and execution. There is a theory in technical analysis that price movements are never random, and they always form some kind of pattern that is often repetitive. Recognising and following these patterns allows traders to find the best trading opportunities based on their strategy. So, we can say that a newbie trader should master the art of chart reading before stepping into the dynamic forex market. 

To keep your capital safe, you can identify and trade according to these patterns in a demo account. You can create a demo account on MT4, which is easier to use and navigate when compared to other platforms. 

Today, you will get to know all the relevant information about various chart patterns and their interpretation through this comprehensive beginner’s guide to chart reading in forex trading. 

Top 4 Chart Patterns for Forex Traders

Before learning about chart patterns, you need to know that too many patterns can be seen on the price charts. These patterns can also be classified into 3 categories based on their use for analysis: traditional chart patterns, candlestick chart patterns and harmonic chart patterns. Traditional chart patterns and candlestick chart patterns are almost the same, but harmonic chart patterns are closely connected to the strategies followed by traders. 

The Japanese candlestick charts are the most commonly used chart type among forex traders as they are more detail-oriented and precise than any other chart type. When you get more details from a chart, you will be able to understand the market situation more with an in-depth analysis. This also allows you to plan your trades in a better way and make sound trading decisions based on accurate calculations. The candlestick chart patterns can be further classified into 3 groups based on their nature: reversal, continuation, and bilateral patterns. 

However, learning about each and every pattern can be time-consuming and confusing for an average beginner. Also, many of these patterns are not spotted frequently, and hence, you can just learn about the most relevant and commonly seen chart patterns to save you time. Based on this, we have made a sought-after list of the top 4 chart patterns, which are the most essential in forex trading as they provide crucial information about the market scenario. 

  • Head and Shoulders Pattern 

The first forex chart pattern that you need to learn about is the popular head and shoulders pattern. This pattern falls into the category of reversal patterns as it signals a trend reversal at a peak price. This pattern mostly tells us about a bullish trend coming to an end. As the name suggests, the pattern has a head and 2 shoulders when formed on the charts with 3 peak points. The highest peak point, which is seen in the middle, is referred to as the head, and the other 2 peak points, which are lower, are referred to as shoulders falling on each side of the head. 

There is also a neckline which connects the head with the shoulders. The neckline can be identified as the support level in the charts, and traders looking for short opportunities can go for it after confirming a break below the neckline. The distance between the head and neckline while going down is set as the target for trading this pattern. You should only be entering a trade after the pattern is completely formed. The bullish to bearish shift in market sentiment can be an ideal trade setup for sellers. 

Now, another thing that you should know about the head and shoulders pattern is that an inverse head and shoulder pattern can be formed, which suggests a bearish-to-bullish price reversal. This type of pattern suggests that the downtrend is coming to an end, and you can expect the prices to rise, resulting in an uptrend. So, the head and shoulder pattern is crucial for traders who are interested in trading reversals.   

  • Double Top/Bottom Pattern

The double top/bottom pattern is another popular pattern for identifying trend reversals after a prolonged bullish or bearish trend. The double top pattern looks like an ‘M’, suggesting that the uptrend is ending with a bearish reversal. The 2 peaks are in the double-top pattern, and a temporary retracement separates them. To find a trade setup with a double-top pattern, you simply need to look for a break below the support level. But you need to wait until the 2nd peak is formed, completing the ‘M’ shape, as the retirement is crucial for this pattern. The target for this pattern is the distance between the double top and the support level.   

The double bottom pattern appears in the shape of the letter ‘W’, which is also an upside down ‘M’ as the double top pattern turns into a double bottom. It also has 2 peaks, but here, it projects a bearish-to-bullish price reversal where the prices are about to move up after a downtrend. For trading a double bottom, you need to look for a break above the resistance level once the pattern is fully formed. Your target would be the distance between the double bottom and the resistance level. The double top/bottom patterns are easier to read; hence, they are one of the most preferred patterns by traders.  

  • Cup and Handle Pattern

The third pattern we will learn about is not a reversal pattern but a continuation pattern. Continuation patterns are useful when the market is already trending, and you are keen to follow the trend but want to confirm if the trend is likely to continue or not. The cup and handle pattern is a commonly seen bullish continuation pattern. As the name implies, it looks like a ‘U’ shaped cup with a downward drifted handle. It tells us that the ongoing uptrend we spotted will be going on for an extended duration, making it a perfect opportunity to go long on your chosen currency pair. 

The cup and handle pattern usually appears when there is a brief pause in the uptrend, which is seen as an ideal entry point for opening a long position with a bullish view. Hence, if you see a cup and handle being formed on your chart, you can mostly conclude that the uptrend is still solid, and you can enter a trade by confirming a breakout above the resistance level formed by the handle of the cup. 

You can calculate the target by adding the depth of the cup to the breakout level. The entry point in a cup and handle pattern is the upper part of the handle, with the lower part acting as a stop loss. The target is usually as big as the base of the cup but in the opposite direction. If you are a scalper, then you can quickly capture the fast movement and calculate the pips earned in your own currency with the help of a pip calculator to know exactly how much you have made in that trade. 

  • Triangle Pattern

The 4rth and last pattern on our list is a triangle pattern, which also tells us about the continuation of a trend. The triangle pattern can be formed during an uptrend or downtrend, and it can signal both bullish and bearish continuation based on the recent trend that was moving the market earlier to the formation of the triangle. The triangle pattern is typically seen during consolidation when the price keeps moving within the converging range. You can also see 3 types of triangle patterns based on the type of trend that happened before its formation. 

The first one is an ascending triangle pattern, which tells us about the continuation of an uptrend, making it a bullish continuation pattern. It is also referred to as a rising triangle as it allows us to draw a rising trend line along the swing lows while drawing a horizontal line along the swing highs, and the 2 meet at a point, giving it a triangle-like shape without a 3rd line. For trading the ascending triangle, you need to wait for a breakout above the upper trendline.

The 2nd one is a descending triangle pattern, which tells the opposite case scenario where the market is bearish, and the pattern suggests that the downtrend will continue. This pattern can be identified if you see a descending trend line on the top, connected to a horizontal line at the bottom, formed by comparable lows. When you see a descending triangle pattern, you need to look for a breakout below the lower trendline to spot trading opportunities.

One thing you should remember about triangle patterns is that they can also be reversal patterns if you see a breakout happening in the opposite direction. The symmetrical triangle pattern is a consolidation pattern in typical situations, which tells us about the possibility of more sideway movements. 

Summing Up

Finally, the top 4 patterns mentioned above can tell us a lot about the market situation, allowing us to confirm bullish and bearish reversals and continuation. The ability to properly read and interpret various chart patterns allows you to analyse the market situation in the best possible way, making it easier for you to identify ideal trade setups.