Patterns

 

Recognizing and Assessing Chart Patterns

A chart pattern reflects the recurring behavior of human nature observed in global financial market trading.

What is a Chart Pattern? (simple definition)

A chart pattern is a recognizable formation in price data that appears during the analysis of a time series. Once random market noise is filtered out, the pattern can be used to assess the potential continuation or reversal of the prevailing price trend.

Patterns and Time Series

In a time series, a pattern is a data formation based on a trend, seasonality, or a combination of both. There are three general categories of recognizable patterns:

(i) Trend Patterns (following a specific trend)

(ii) Seasonality Patterns (repeating over time)

(iii) Multiplicative Seasonality Patterns (a combination of (i) and (ii))

Note that the chart patterns described below are based on price trends (i), not on seasonality (ii). However, certain financial patterns are based on seasonality, and these are referred to as financial cycles.

Introduction to Chart Patterns

The ability to recognize chart patterns is crucial, regardless of the timeframe in which you trade. Chart patterns can reveal the underlying dynamics of the market and help forecast the direction of upcoming price movements.

A chart pattern can appear on any timeframe, from 15 minutes to one month, and can signal either the continuation or the exhaustion of a trend.

Key Benefits of Identifying Chart Patterns

• Useful for analyzing market dynamics

• Able to identify both trend reversals and continuations

• Can clarify price action when indicators fall short

• Capable of generating reliable trade signals

• Compatible with any other technical analysis method

• Instantly visible across all timeframes

Read more: Identifying Chart Patterns

Forex Trading Styles

 

There are many ways to trade the Foreign Exchange market and various trading styles to choose from. The primary factor that differentiates these trading styles is the time frame used.

Five (5) Types of Retail Forex Traders

We can distinguish five different types of Forex traders based on the time frame they use:

1. Scalpers
2. Day traders
3. Swing Traders
4. Position Traders
5. Carry Traders

Arbitrageurs are not included because arbitrage is a highly complex strategy that requires technology beyond the reach of most retail traders.

Table: Summarizing the key characteristics of the five basic Forex trading styles:

Choosing the Right Time Frame to Trade Forex

In general, the shorter the time frame you use, the higher your trading costs will be, and the more time you’ll need to spend monitoring your positions. High capital leverage in day trading forces stop-loss and take-profit orders to be placed narrowly. Shorter time frames are more challenging to trade.

Conversely, longer time frames require lower capital leverage and wider stop-loss and take-profit orders. The time needed to monitor your positions is typically just a few hours per week.

Read more: Forex Time Frames and Trading Styles

The Japanese Candlesticks and Fibonacci Retracement

 

Candlestick formations were first identified in the 18th century by the Japanese rice trader Munehisa Homma. In the Western world, they were introduced in 1991 by Steve Nison (book: Japanese Candlestick Charting Techniques). Candlestick formations create an advanced communication bridge among global traders and can be seen as a complex trading language.

Trading with Candlestick Formations

Japanese Candlesticks and Fibonacci Retracement are frequently used together to enhance trading decisions. Candlestick patterns offer early clues about potential market reversals or trend continuations, while Fibonacci retracement levels highlight likely support and resistance areas during price pullbacks. Combining these tools helps traders identify more precise entry and exit points, confirm trend exhaustion, and improve the chances of successful trades.

Candlestick formations can be combined with other technical analysis tools to signal the ideal time to enter or exit a trade. For example, they can be used alongside the Fibonacci Retracement. A major advantage of using Japanese candlestick formations is that they provide an early sign of a market direction change. The most common reversal pattern traded is the U-turn.

Charting

A Japanese candlestick, like any other candlestick, is used to analyze price movements over time. The candlestick chart is a sophisticated tool that can be used as an alternative to a line chart or bar chart. There are many candlestick formations—more than a hundred—but fewer than ten are considered key. Japanese candlesticks can be identified on any timeframe (M5, M15, M30, H1, H4, D1, or longer).

Information Incorporated in Candlestick Formations

Candlestick formations consist of bodies and wicks and incorporate four types of information:

• Opening price

• Closing price

• High price

• Low price

The filled section of the candlestick is called the body, while the thin lines above and below the body are called shadows.

Read more: Japanese Candlesticks and Fibonacci Retracement

Trading Triangles and the Breakout Strategy

 

A triangle is an important formation, as it reflects changes in price volatility. Triangle patterns can offer high-momentum trading opportunities with limited downside risk.

What is a Triangle in Technical Analysis?

A triangle is a widely recognized chart pattern in technical analysis, formed by two converging trendlines that connect a series of progressively lower highs and higher lows (or vice versa), creating a triangle-like shape. This pattern typically reflects a phase of market consolidation or indecision before the price breaks out—either continuing the existing trend or initiating a new one.

A triangle pattern indicates a period of declining volatility as the price consolidates within the triangle. Once the formation is broken—either upward or downward—volatility and momentum surge.

Triangles Formation

Triangles are distinctive patterns. At the beginning of the formation, the triangle appears at its widest point. It then moves sideways, gradually narrowing its price range. Eventually, when the price breaks above or below the triangle, strong momentum is triggered.

Key Features

1. Converging Trendlines

• Upper Trendline: Drawn by connecting a series of descending highs.

• Lower Trendline: Drawn by connecting a series of ascending lows.

These trendlines gradually converge toward a point known as the apex, as price action tightens within the narrowing range.

2. Market Consolidation

Triangles often form after a strong price movement and indicate a pause in momentum. During this time, neither buyers nor sellers are in control, resulting in sideways movement as the market decides its next direction.

3. Declining Volume

As the triangle develops, trading volume typically diminishes. This reflects a reduction in trading activity and conviction, which is characteristic of the consolidation phase.

Read more: Trading Triangles