Section I: Introduction
In this lesson, we will review the most important major candlestick reversal patterns and chart patterns used to trade the Forex market.
In each one of them you will learn the psychology behind each pattern, what’s the balance between the demand and supply.
It is important that you study and practice with them, as soon as you learn or review one pattern try to find the same pattern in your charting package. This way you will learn them faster and will recognize them much more easily. At first it might seem a little difficult to find those patterns but as you get more experienced you will find them more often and will know how to deal with each one of them.
Later in the course, we will see how to combine them with other technical tools to generate high probability trades. In this lesson just focus on learning each pattern and its probable outcome so that in future lessons it will be easier to digest when combining them with other technical tools.
In this lesson we will cover the following topics:
Section II: Major Candlestick Reversal Patterns - In this section, we will review the most important candlestick patterns used to trade the Forex market.
Section III: Important Candlestick Considerations - We must not forget about these considerations, they will help us generate better results.
Section IV: Chart Patterns - Some traders use pure chart patterns to trade the Forex market consistently.
Section V: Reversal Chart Patterns – We will review three patterns that are amongst the most reliable when used with price action.
Section VI: Continuation Patterns - We will review some of the most popular continuation patterns.
Section VII: Important Chart Patterns Considerations - We must not forget about these important considerations as they could help us generate better results.
Section II: Major Candlestick Reversal Patterns
Hammer
In the image below, the hammer pattern is represented only by the last candlestick of the illustration.
[Image 1]
Formation
Hammers have small bodies and long lower shadows (or wicks). It must have little or no upper shadow. The size of the lower shadow should be at least twice as big as the size of the body. The color of the body is not important, however a hammer with a white body (hollow) is considered slightly more bullish than a hammer with a black body (filled). Hammers are formed in downtrends or downside movements.
Psychology behind the Hammer and Example
In a downtrend or a downside movement (where bears have control over prices), a hammer indicates that at certain point buyers took command of the market attracted by lower prices. Bull aggressive buying plus bears taking profits in their short positions reduce the bearish sentiment, signaling a possible trend reversal or correction. Following candlesticks should be used as a confirmation.
Hammers are signals to go long!
Hammer in Action
[Chart 1]
In this chart (USDCHF 1 hour chart) the hammer bulls start opening long positions aggressively creating enough pressure to make the market head up (yellow box).
Hanging Man
In the image below, the hanging man pattern is represented only by the last candlestick of the illustration.
[Image 2]
Formation
Hanging Mans (as well as hammers) have small bodies and long lower shadows and the size of it should be at least twice as big as the size of the body in order to be a valid signal. It must have little or no upper shadow. The color of the body is not relevant, however a hanging man with a black body is slightly more bearish than a hanging man with a white body. Hanging Mans are formed during uptrends or upside movements.
Psychology behind the Hanging Man and Example
In an uptrend or upside movement (where bulls have control over the market), a hanging man indicates that as the prices go up bears are feeling more and more comfortable taking short positions that high. Although bulls finally take command of the market, it is known that bears feel optimistic at those levels and might signal a trend reversal, correction or consolidation periods.
Hanging mans are signals to go short!
Hanging Man in Action
[Chart 2]
In this daily EURUSD chart, the hanging man appears at the top indicating bears are felt comfortable taking short positions that high. It has a small upper shadow and a long lower shadow falling inside hanging man criteria. Although the market has not moved much from (yet) from the signal, it now has a slightly bearish sentiment and this can produce a trend reversal, or a possible correction or consolidation period.
Brain Feeder 1 - Wait a minute (you should ask) so what you are saying is that hammers and hanging mans are exactly the same pattern? Yes, that’s right, by now you should know the difference between those two but there are other conclusions you can take based on this. Give it some thought and try to arrive at your own conclusions.
Inverted Hammer
In the image below, the inverted hammer pattern is represented only by the last candlestick of the illustration.
[Image 3]
Formation
Inverted hammers usually have small bodies, long upper shadow (at least twice as big as the size of the body) and a small or no lower shadow at all. The color of the body is not relevant, however an inverted hammer with a white body is considered slightly more bullish than inverted hammers with black bodies. Inverted hammers are formed during downtrends or downside movements.
Psychology behind the Inverted Hammer and Example
In a downtrend or downside movement (where bears have control over the market), an inverted hammer indicates that as the prices go down bulls are feeling more and more comfortable taking long positions that low (trying to buy low and sell high afterwards). Although bears finally take command of the market, it is known that bulls feel optimistic at those levels and might signal a trend reversal, correction or consolidation periods.
Inverted Hammers are signals to go long!
Inverted Hammer in Action
[Chart 3]
In the USDCHF chart above, the inverted hammer is identified in the yellow box. It has long upper shadow and no lower shadow and it was formed in a downside move. In this pattern, bears notice bulls are feeling more and more comfortable buying at current levels.
Shooting Star
In the Image below, the shooting star is represented by the last candlestick of the illustration.
[Image 4]
Formation
Shooting Stars have small bodies and long upper shadows (or wicks). It must have little or no lower shadow. The size of the upper shadow must be at least twice as big as the size of the body. The color of the body is not important, however a shooting star with a black body (filled) is considered slightly more bearish than a shooting star with a white body (hollow). Shooting stars are formed in uptrends or upside movements.
Psychology behind the Shooting Star and Example
In an uptrend or an upside movement (where bulls have control over prices), a shooting star indicates that at certain point sellers took command of the market attracted by higher prices. Bear aggressive selling plus bulls taking profits in their long positions reduce the bullish sentiment, signaling a possible trend reversal or correction. Following candlesticks should be used as confirmation.
Shooting Stars are signals to go short!
Shooting Star in Action
[Chart 4]
In this chart we see the shooting star after an upside movement, at that point bears are feeling comfortable taking short positions making the price quickly fall back down. This creates a “bearish” environment scaring longs and making them take profits.
Engulfing Reversal Pattern
In the image below, engulfing patterns are represented by the last two candlesticks of the illustration.
Formation
Engulfing patterns consist of two candlesticks. The first one is usually a small candle, and must be in direction of the prevailing trend (in an uptrend the short candlestick must be white and in a downtrend the candlestick must be black) while the second candlestick must be against the prevailing trend and is usually a long candlestick. Candles should have little or no shadows at all. The body of the second candlestick must cover or embrace the body of the first candle (shadows are not taken into consideration).
Psychology behind the Shooting Star and Examples
In a downtrend or downside movement where bulls have control over the markets, a bullish engulfing pattern indicates that bulls finally took total control over prices, they were attracted by the lower prices (and intend to sell back at higher prices) and pushed the market up above the open price. This could signal a trend reversal, a correction or a consolidation period.
In an uptrend or upside movement where bulls have control over prices, a bearish engulfing pattern indicates that bears finally took total control over the market; they were attracted by the higher prices and pushed the market down below the open price. This might signal a short-term reversal pattern as clearly bears or sellers have taken control of the market. .
Bullish Engulfing Patterns are signals to go long!
Bearish Engulfing Patterns are signals to go short!
Bullish Engulfing in Action
[Chart 5]
In the 5 min EURJPY chart a bullish engulfing pattern appears at the bottom of the range signaling a possible change in direction. The market goes up because of the bullish sentiment at lower prices. Bears notice bulls are really confident at those levels.
Bearish Engulfing in Action
[Chart 6]
In the AUDUSD 5 min chart, an engulfing pattern appears at the top of the range signaling a “change in direction”. Remember that reversal pattern not always forecast trend reversals, correction or consolidation periods are always a possibility.
Piercing Reversal Patterns
In the image below, piercing patterns are represented by the last two candlesticks of the illustration.
[Image 4]
* The bearish piercing pattern is also called “Dark Cloud Cover”. For the sake of simplicity, in this course we will always refer to this pattern as bearish piercing pattern.
Formation
Piercing patterns, as engulfing patterns, are also made from two candlesticks. Both candlesticks should have long bodies and small or no shadows. The first candlestick must be in direction of the prevailing trend and the second against it. The further the second candle goes against the trend the more significant the pattern is. Candlesticks could have small or no shadows at all.
Psychology behind Piercing Patterns and Examples
In a downtrend or downside movement where buyers have control over the markets, a bullish piercing pattern indicates that buyers finally took total control over prices, they were attracted by the lower prices and pushed the market up near the highs of the day. This could signal a trend reversal, a correction or a consolidation period.
A bearish piercing pattern, or most commonly called dark cloud cover indicates that bears liked to sell on those higher prices, gaining temporary control. If the move is strong enough, bulls will close their longs making the price sell off. The close price of the second candle must be below the midpoint of the first candle body.
Bullish Piercing Patterns are signals to go long!
Bearish Piercing Patterns are signals to go short!
Bullish Piercing in Action
[Chart 7]
Hey, forget about the red box! We will get to that a few lines below. The bullish piercing pattern at the yellow box illustrates what the balance of supply and demand in this scenario: bears make a final push down, but bulls take command of the market pushing them up again.
What’s the red box?
It was the result of the Interest rate announcement from Canada. Consensus was no change but the Bank of Canada decided to cut .25%, it’s a 100 pip 5 min candlestick.
Bearish Piercing in Action
[Chart 8]
This is a valid bearish piercing pattern at the GBPUSD 30 min chart. Small shadows, first candle in direction of the movement and second candles against it. This pattern marks the end of the retracement.
Morning Star & Evening Star
In the image below, morning and evening stars are represented by the last three candlesticks of each illustration.
[Image 5]
Formation
Morning and evening stars are made from three candlesticks. The first candlestick is always in the direction of the trend or current direction, the second candlestick could be a black or white one while the third must be against the prevailing trend or direction. Usually candlesticks in these formations have small or no shadows at all.
Psychology behind Evening and Morning Stars and Examples
The morning star pattern begins with a long bearish candlestick or big sell off (in direction of the prevailing trend). At the second candle, the bears are not sure anymore about the downtrend continuing its path. At this point, the buyers feel a little stronger than before. Buyers take total control of prices on the next candle making the market rally. The closer the candlestick closes from the first candlestick open price, the stronger the pattern.
Evening stars begin with a long white candlestick in direction of the prevailing trend. At this point, the bulls are still confident about the uptrend. At the next candle though, the bears start selling attracted by the higher prices. This candle represents a short period of indecision or a fierce battle between bulls and bears. On the third candlestick, bears take total control of the situation making the price sell off. The larger the third candle is, the stronger the reversal.
Morning Stars are long signals.
Evening Stars are short signals.
Morning Star in Action
[Chart 9]
In this USDCHF 1 min chart we see two morning stars patters that finally capped the downside movements. The trend wasn’t reversed, at least there some support is found around those levels.
Evening Star in Action
[Chart 10]
GBPJPY 1 min chart, the evening star at the beginning of the chart makes the market head down to reach lower levels. Bearish pressure is self evident: bears start selling and bulls take profits (sell back), this makes the market drop like a rock.
Harami Reversal Patterns
In the image below, Harami patters are represented by the last two candlesticks of each illustration.
[Image 3]
Formation
Both, bearish and bullish harami are made from two candlesticks. The first one is always a large candlestick in direction of the trend or current move and the second one against the direction of the trend or current move. Candlesticks could have small or no shadow at all. The body of the second candlestick must be inside the body of the first one.
Although the size of the body of the second candlestick is smaller than the size of the first one, it should be “larger” than usual.
Psychology behind Bearish and Bullish Harami and Examples
In the bullish harami, bulls stop bear dominance and take temporary control over the market. The first candlestick of the bullish harami is the final push of bears while the second one means bears are feeling more confident about further upside movements.
In the bearish harami, bears step in after a high volume bull push. Prices are high enough to start opening their short positions. The closer the second candlestick closes to the open of the first one, the stronger the short sentiment.
Bullish Harami are long signals
Bearish Harami are short signals
Bullish Harami in Action
[Chart 5]
As we have mentioned before, reversal patterns not only signal trend reversals, they also signal possible retracements and consolidation periods. In this case, the harami pattern signals a correction period. Now, take in consideration this is a weekly chart, from the top of the pattern to the bottom of the retracement there are around 500 pips.
Bearish Harami in Action
[Chart 6]
In the USDCHF 4H chart above, a bearish harami pattern appears after the retracement. It could signal the end of the retracement; traders could resume their short positions.
Brain Feeder 2 - What’s the difference between Harami and Engulfing Patterns?
Section IV: Chart Patterns
The same psychology used with candlesticks applies to chart patterns.
Investors and traders make transactions for a wide variety of reasons; most trading decisions are emotionally driven: closing a position because of fear of losing more, adding more positions in hope of greater gains and many more. All these result in an imbalance of supply and demand and they are all uncovered by price movements.
These movements tend to repeat themselves, as traders open, close or add positions for the same reasons.
We must remember that the important questions to answer are where is the price? And what it is more likely to do? The reasons behind why is the pattern formed are not important.
There are two types of chart patterns: reversal and continuation chart patterns.
Continuation Chart Patterns – Set up the market for a follow through in direction of the prevailing trend. Among the most important continuation patterns are:
- Wedges – Rising and falling wedges
- Triangles – symmetrical, ascending and descending triangles.
- Rectangles – periods of consolidation*
* When rectangles have a slope they are called rising and falling channels.
Reversal Chart Patterns – These types of patterns set up the market for a trend reversal once the pattern is confirmed. Reversal patterns are:
- Double Top and Bottom
- Triple Top and Bottom
- Head and Shoulders Top and Bottom
Rising and Falling Wedges – Falling wedges can be bullish and reversal patterns. Read this section to discover why.
Next, we will review some of the most important patterns.
Section V: Reversal Chart Patterns
Double Top
The double top is made up by two extreme peaks like the illustration below:
[Image 3]
After the first peak, there must be a decline of no more than 25% of the uptrend. (This decline makes up a support that must be broken for the pattern to be complete). Then the price rallies again to the resistance made by the first peak. Highs should be roughly equal. Then the price falls back down from resistance to support, and finally breaks the support (yellow box).
This type of patterns can be used during trending markets signaling a possible reversal or during trendless markets, to signal a possible change in the direction of the market.
Double Top in Action
[Chart 1]
See top #1 and top #2 have similar highs. The pattern is not valid until the market breaks the main support which happens in the yellow box. Notice also how the support zone becomes a resistance and stopped the market from reaching higher levels.
Double top commonly used target
Measure the amount of pips from the first peak to the support line (where it bounced back up to the second peak). Subtract the same amount of pips from the support line. This last quote will give us the target price.
Double Bottom
The double bottom pattern is made up by two extreme lows like the illustration below:
[Image 3]
After the first low, there must be a rally of no more than 25% of the downtrend. (This rally makes up the main resistance that must be broken for the pattern to be complete). Then the price drops again to the resistance made by the first low. Lows should be roughly equal. Then the price rallies again from the second low to the main resistance, and finally breaks the main resistance zone (yellow box).
This type of pattern can be used during trending markets signaling a possible reversal or during trendless markets, to signal a possible change in the direction of the market.
Double Bottom in Action
[Chart 2]
Lows #1 and #2 have similar levels. The pattern not considered valid until the market breaks the main resistance zone. Notice how the resistance zone becomes a support zone preventing prices from falling below those levels.
Double bottom commonly used target
Measure the amount of pips from the first low to the resistance line. Add the same amount to the resistance line; this last quote will give us the target price.
Both patterns reflect changes in supply and demand. In a double top, it reflects the inability of buyers to take the prices to new highs and trade above them. In a double bottom, the inability of sellers to break the lows and pull the prices further down.
Remember: The resistance/support made after the first peak/sell off could act as a support/resistance after the price breaks the zone.
Triple Top
The triple top is similar to double tops, but has three peaks (instead of two):
Triple Top
[Image 6]
Same mechanics are followed here. A prior trend has to be reversed, three peaks reasonably equivalent to each other, and an important support to be broken in order to complete the pattern. In this pattern the changes in supply and demand take a little longer to change the perspective of traders about the markets.
Triple top in Action
[Chart 3]
Three peaks form the triple top, the pattern becomes valid when the market breaks the main support area. Notice how the market retraces back to the resistance zone (previously a support zone) to test it.
The mechanics to get the target price for these patterns are the same as the double top and bottom.
Triple Bottom
The triple bottom is similar to double bottoms, but has three troughs (instead of two):
Triple Bottom
[Image 8]
Same mechanics are followed here, a prior trend has to be reversed, three troughs reasonably equivalent to each other, and an important resistance to be broken in order for the pattern to be complete. In this pattern the balance in supply and demand take a little longer to change the perspective of traders and investors about the markets.
Triple Bottom in Action
[Chart 4]
This triple bottom becomes valid when the market breaks through the main resistance area (yellow box).
The mechanics to get the target price for these patterns are the same as the double top and bottoms.
Head & Shoulders Top
The pattern is formed by three successive peaks:
[Image 4]
The second peak or the “head” must be the highest peak. The two other peaks or “shoulders” should be roughly equal. A support is made by the first and second bounces from the first and second peaks; this is commonly named as a neckline. The pattern is completed after the neckline is broken through and the price trades below it. The neckline becomes an important resistance once it has been broken.
Head and Shoulders in Action
[Chart 5]
This is a head & shoulders pattern under development, the market has not been able to break the neckline, thus it isn’t a valid head and shoulders pattern yet. Why did we use this one? Because it is important to track them when they are forming (not after the fact, when we know what happened) and see how they look like. This is the GBPJPY weekly chart, so if this pattern proves to be valid, it has a potential of more than 2,000 pips.
Head and shoulders top commonly used target
Measure the amount of pips from the highest peak (head) to the neckline. Subtract the same amount from the neckline; this final price will give you the target price.
Head & Shoulders Bottom
This pattern is made off three consecutive lows.
[Image 4]
The second low is the deepest low (head), while the other two lows are roughly equal (shoulders). The pattern is considered complete when the neckline is broken.
Head and Shoulders in Action
[Chart 6]
Notice here the neckline is similar to a trendline (instead of a resistance).
Head and shoulders bottom commonly used target
Measure the amount of pips from the lowest low reached (head) to the neckline, and add this amount to the neckline to get the target price.
Section VI: Continuation Chart Patterns
All chart patterns reviewed until now were reversal patterns. But, there are also patterns that signal the continuation of the prevailing trend. These patterns are important to understand since they generate trades in direction of the prevailing trend thus generating low risk trading opportunities.
Symmetrical Triangles
These types of patters are formed by two converging trendlines:
Symmetrical Triangles
[Image 6]
Symmetrical triangles indicate consensus, new highs or lows are reached, the price makes a series of lower highs and higher lows, these points connected make two converging trendlines. As the price approaches the apex, supply and demand reaches a temporary equilibrium. The pattern is completed when either the support or resistance trendline is broken.
Bullish Symmetrical Triangle in Action
[Chart 3]
In this 4H EURUSD chart a symmetrical triangle is formed during an uptrend. The market eventually breaks the resistance-trendline and the target price is reached. (Please see below rules for placing target for all triangles).
Bearish Symmetrical Triangle in Action
[Chart 4]
This bearish triangle in the EURUSD 5 min chart is completed when the market breaks the support-trendline.
Commonly target used for symmetrical triangles
Measure the height of the triangle in terms of pips and add/subtract the same amount of pips from the eventual breakout level.
Ascending Triangles
Ascending triangles are formed in an uptrend, after the prices rallied to new highs:
[Image 5]
At this point the bears come in play attracted by the higher prices and start selling at such highs making the price pull back to a support level where the bulls take control again of the market making the prices rally to test previous highs. A second decline is followed to the support-trendline (higher lows). At this point, the bears realize there is not enough supply to take the prices lower, as they close out their short positions; bulls take again the command of prices making them rally to new highs. The pattern is completed when the trendline-resistance line is broken.
Ascending Triangle in Action
[Chart 4]
Commonly used target for ascending triangles
Measure the height of the triangle in terms of pips and add/subtract the same amount of pips from the eventual breakout level.
Descending Triangles
Descending triangles are formed in a downtrend after new lows have been reached:
[Image 6]
At this point the bulls come in play attracted by the lower prices and start buying at such lows making the price rally to the resistance level where the bears take control again of the market making the prices reach lower levels to test previous lows. A second rally is followed to the resistance-trendline (lower highs). At this point, bulls realize there is not enough demand to take the prices higher, as they close out their long positions; bears take again the command of the market making it rally to new lows. The pattern is completed when the trendline-support line is broken.
Descending Triangle in Action
[Chart 5]
Triangles are among the most reliable chart patterns of technical analysis, as changes in supply and demand are very well defined.
Commonly used target for descending triangles
Measure the height of the triangle in terms of pips and add/subtract the same amount of pips from the eventual breakout level.
Bullish Rectangles
Bullish rectangles are periods of consolidation that appear after a sharp move:
[Image 2]
These types of rectangles or channels are periods of consolidation (after a sharp rally) where supply and demand meet. At this period of indecision, investors and traders try to digest the recent sharp move. In a bullish rectangle, bulls prefer to take partial profits, and wait for further pull backs so they can make their move again. This pattern is completed when the resistance is broken.
Bullish Rectangles in Action
[Image 9]
Bearish Rectangles
Bearish rectangles are periods of consolidation that appear after a sharp decline:
[Image 10]
In a bearish rectangle, bears close most of their short positions and wait for further rallies so they can sell again at higher prices. Although the sentiment is still strong in favor of the prevailing trend, traders and investors prefer to take a rest. The support must be broken in order for the pattern to be complete.
Bearish rectangle in Action
[Chart 6]
Bears take a little rest after the sharp decline. When the market breaks the support zone the pattern is completed.
Remember again, once the price breaks an important support/resistance zone, it becomes an important resistance/support zone. As in the chart above, the resistance became an important support line where the price bounced off to reach new highs.
Rectangles commonly used target levels
Measure the height of the triangle and add/subtract it to the point of the eventual break out.
Section V: Falling & Rising Wedge
You may wonder why is it that we have the falling and rising wedge in a separate section. The reason is simple, these patterns can be either reversal or continuation patterns. Depending on where the pattern was formed and its slope it could signal a continuation of the trend or a trend reversal.
Let’s see each one of them.
Continuation Rising Wedge
As all wedges, this one begins wide and contracts as the market reaches new highs:
[Image 3]
Continuation rising wedges are a bearish continuation pattern. It starts out wide, but narrows as prices keep going up. The highs and the lows of the pattern form a falling wedge. Two or more touched points are required to form the converging trendlines. This pattern is completed when the price breaks through the support trendline.
What makes this wedge a continuation pattern?
The slope of the wedge is against the previous trend.
Continuation Rising Wedge in Action
[Chart 6]
This rising wedge is a continuation pattern because the slope (upward) of the wedge is against the trend (downtrend). When the pattern got completed (support trendline got broken), led to further downside movements.
Continuation Falling Wedge
[Image 9]
Continuation falling wedges are a bullish continuation pattern. It starts out wide, but narrows as prices keep going down. The highs and the lows of the pattern form a falling wedge. Two or more touched points are required to form the converging trendlines. This pattern is completed when the price breaks through the resistance trendline.
What makes this wedge a continuation pattern?
The slope of the wedge is against the previous trend.
Continuation Falling Wedge in Action
[Chart 6]
This falling wedge is a continuation pattern because the slope (downward) of the wedge is against the direction of the trend (uptrend). When the market broke the support trendline and the pattern got completed, it led to further gains.
Reversal Rising Wedge
This pattern begins wide and contracts as the market keeps rising:
[Image 7]
Reversal rising wedges are a bearish reversal pattern found at the end of the uptrend. Starts out wide, and narrows as the market reaches new highs forming a rising wedge when two or more points are connected. The pattern is completed when the price breaks the support trendline.
What makes this wedge a reversal pattern?
The slope of the wedge is in direction of the trend. In this case the market was trending up and the slope of the wedge is upward.
Reversal Rising Wedge in Action
[Chart 6]
This rising wedge is a reversal pattern because the slope (upward) of the wedge is in the same direction of the trend (uptrend). The pattern is completed when the market breaks the support-trendline. Notice the reversal rising wedge here forecasts a retracement, not a trend reversal. The market movement after a wedge or any reversal pattern could produce: a trend reversal, the beginning of a retracement or a consolidation period.
Reversal Falling Wedge
[Image 7]
Reversal falling wedges are a bullish reversal pattern. It starts out wide, but narrows as prices keep going down. The highs and the lows of the pattern form a falling wedge. Two or more touched points are required to form the converging trendlines. This pattern is completed when the price breaks through the resistance trendline.
What makes this wedge a reversal pattern?
The slope of the wedge is in direction of the trend. In this case the market was trending up and the slope of the wedge is upward.
Reversal Falling Wedge in Action
[Chart 6]
This falling wedge is a reversal pattern because the slope (downward) of the wedge is in the same direction of the trend (downtrend). The pattern is not complete until the market breaks the resistance trendline.
Commonly used target for all wedges
Measure the height of the pattern (in its widest side) in terms of pips, and then subtract/sum the same amount of pips from the eventual break out level.
Brain Feeder – What’s the main difference between Wedge patterns and symmetrical triangles?
This one was easy...
Section VII: Important Chart Patterns Considerations
Please take into consideration the following:
1. Most technical chart patterns require confirmation in order to complete the pattern.
2. Chart patterns are present in all timeframes, from the monthly chart to the minute chart. But remember, the greater the time frame the more significant the pattern is. For instance, a rectangle can be formed in the 5-minute chart and at the same time a rectangle can also be formed in the 1-hour chart, in this case, the latter rectangle is more significant. But it doesn't mean that a pattern in a 5 minute chart is not significant, it means that if there are two patterns on different timeframes, the pattern with the longer time frame is more significant. All patterns represent the same supply and demand interaction in different time frames.
3. It is advised to use other techniques in combination with chart patterns, such as candlestick patterns, technical indicators, etc. this way we will increase the significance of every signal.
Summary Report
Ok, now that you have read the lesson material and taken the quiz, please make sure you completely understand and/or do the following:
This is a very important lesson, in this lesson we reviewed the basics of price behavior and market patterns. For both, advanced and novice students please give this lesson the importance it deserves and give it another read (specially sections 2 and 3).
Be sure to understand the following:
- What each candlestick pattern suggests
- Combination of candlesticks and their limitations (very important)
- What each chart patterns suggests and their considerations
- Ask yourself, which of the technical tools reviewed at this lesson seems more powerful to you?
Play around with these tools during live market conditions and see which ones fit you better. This will help you have a good idea of the type of system you will be using to trade the forex market.
Again, this lesson is very important so make sure to give it a second read.
Brain Feeder 1 - Wait a minute (you should ask) so what you are saying is that hammers and hanging mans are exactly the same pattern? Yes, that’s right, by now you should know the difference between those two but there are other conclusions you can take based on this. Give it some thought and try to arrive to your own conclusions.
Yes, hammers and hanging mans are exactly the same pattern, the only difference is where the pattern is formed. Hammers are formed in a downtrend or downside movement while hanging mans are formed in an uptrend or upside movement. What’s the conclusion here? Well I am going to let you think some more on this and we will get to that in future chapters. By the way, the same happens with shooting stars and inverted hammers.
Brain Feeder 2 - What’s the difference between Harami and Engulfing Patterns?
The main difference is that the second candlestick (the one in direction of the suggested direction) is shorter in the harami pattern than in the engulfing pattern. This can give you very important information about the future direction and what pattern is more reliable than the other.
Brain Feeder 3 - What’s the main difference between Wedge patterns and symmetrical triangles?
You got this one, the main difference is that symmetrical triangles does not have slope while wedges have a clear slope, upward for rising wedges and downward for falling wedges.
Good luck!
