FOREX - TECHNICAL ANALYSIS: PRICE PATTERNS (3.2)
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This document summarizes various technical analysis price patterns that provide insight into trader sentiment and expected currency pair movements. It describes continuation patterns like pennants, flags, wedges and triangles that signal a trend may continue, and reversal patterns like double tops/bottoms, triple tops/bottoms, and head-and-shoulders patterns that indicate a trend reversal. Each pattern is defined by characteristics like resistance and support levels, flag poles, breakout points and expected price targets. Recognizing these patterns can help traders identify entry points and projection targets.
FOREX - TECHNICAL ANALYSIS: PRICE PATTERNS (3.2)
- 1. Chapter 3.2 Technical Analysis: Price Patterns 0
- 2. Price patterns are divided into the following two categories: TECHNICAL ANALYSIS: PRICE PATTERNS Contents Traders vote with their pocketbooks. If they believe a currency pair is Continuation patterns going to move higher, they will buy the currency pair. If they believe a currency pair is going to move lower, they will sell the currency pair. Reversal patterns When their money is on the line, they will do whatever it takes to be profitable. Oftentimes the actions of these self-interested traders form price patterns on the chart. Price patterns are chart formations that provide insight into what forex traders are thinking and feeling at various price levels. Learning to recognize various price patterns gives you an advantage over traders who are only using fundamentals or technical indicators. Imagine having the ability to precisely identify trade entry points as a currency pair breaks out and the ability to accurately project how far a currency pair is going to move once it has broken out and starting moving. Price patterns give you this ability. 1
- 3. CONTINUATION PATTERNS Pennants Pennants are continuation patterns that form as the price of a currency Forex traders continually ask themselves the question, “Can this trend pair moves into a tighter and tighter consolidation range. Pennants can continue?”. Deciding whether to enter a new trade in the middle of a be either bullish or bearish, depending on what the trend was before trend or whether to exit the trade you are currently in and take your the pennant began to form. If a currency pair was in an up trend profits is difficult. You can never know if a currency pair is going to before the pennant began to form, it is a bullish continuation pattern. turn around and start moving in the opposite direction. Or can you If a currency pair was in a down trend before the pennant began to know? form, it is a bearish continuation pattern. Pennants usually form over Continuation patterns give you advanced warning when a currency pair shorter periods of time. is likely to resume its trend after a short consolidation period and how Pennants all have the following five characteristics: far the currency pair is likely to move in that direction. Of course, continuation patterns are not infallible, but they do put the odds of Resistance level (A)—down-trending level of resistance success in your favor. that is converging with the support level Take some time to become acquainted with the following price Support level (B)—up-trending level of support that is continuation patterns: converging with the resistance level - Pennants Flag pole (C)—the trend preceding the formation of the pennant. The flag pole spans the distance from the beginning of - Flags the trend to the highest point of the pennant (bullish pennant), or the flag pole spans the distance from the beginning of the trend to the lowest point of the pennant (bearish pennant). - Wedges - Triangles 2
- 4. Breakout point (D)—the point at which the currency pair breaks up above the down-trending level of resistance (bullish pennant), or the point at which the currency pair breaks down below the up-trending level of support (bearish pennant). Price projection (E)—the price to which the currency pair will most likely fall after it has broken out of the pennant formation (bearish pennant), or the price to which the currency pair will most likely rise after it has broken out of the pennant formation (bullish pennant). The distance the currency pair is projected to move is equal to the height of the flag pole. 3
- 5. Flags Flags are continuation patterns that form as the price of a currency pair Flag pole (C)—the trend preceding the formation of the flag. pulls back from the predominant trend in a parallel channel. Flags can The flag pole spans the distance from the beginning of the trend to the highest point of the flag (bullish flag), or the flag pole spans be either bullish or bearish, depending on what the trend was before the distance from the beginning of the trend to the lowest point of the flag began to form. If a currency pair was in an up trend before the the flag (bearish flag). flag began to form, it is a bullish continuation pattern. If a currency pair was in a down trend before the flag began to form, it is a bearish Breakout point (D)—the point at which the currency pair continuation pattern. Flags usually form over shorter periods of time. breaks up above the down-trending level of resistance (bullish flag), or the point at which the currency pair breaks down below the up-trending level of support (bearish flag). Flags all have the following five characteristics: Price projection (E)—the price to which the currency pair will most likely fall after it has broken out of the flag formation Resistance level (A)—down-trending level of resistance (bearish flag), or the price to which the currency pair will most that is parallel with the support level (bullish flag), or an up- likely rise after it has broken out of the flag formation (bullish flag). trending level of resistance that is parallel with the support level The distance the currency pair is projected to move is equal to the (bearish flag). height of the flag pole. Support level (B)—down-trending level of support that is parallel with the resistance level (bullish flag), or an up-trending level of support that is parallel with the resistance level (bearish flag). 4
- 6. Wedges Wedges are continuation patterns that form as the price of a currency pair pulls back from the predominant trend and moves into a tighter and tighter consolidation range. Wedges can be either bullish or bearish, depending on what the trend was before the wedge began to form. If a currency pair was in an up trend before the wedge began to form, it is a bullish continuation pattern. If a currency pair was in a down trend before the wedge began to form, it is a bearish continuation pattern. Wedges usually form over shorter periods of time. Wedges all have the following five characteristics: Resistance level (A)—down-trending level of resistance that is converging with the support level (bullish wedge), or an up- trending level of resistance that is converging with the support level (bearish wedge). Support level (B)—down-trending level of support that is converging with the resistance level (bullish wedge), or an up- trending level of support that is converging with the resistance level (bearish wedge). 5
- 7. Flag pole (C)—the trend preceding the formation of the wedge. The flag pole spans the distance from the beginning of the trend to the highest point of the wedge (bullish wedge), or the flag pole spans the distance from the beginning of the trend to the lowest point of the wedge (bearish wedge). Breakout point (D)—the point at which the currency pair breaks up above the down-trending level of resistance (bullish wedge), or the point at which the currency pair breaks down below the up-trending level of support (bearish wedge). Price projection (E)—the price to which the currency pair will most likely fall after it has broken out of the wedge formation (bearish wedge), or the price to which the currency pair will most likely rise after it has broken out of the wedge formation (bullish wedge). The distance the currency pair is projected to move is equal to the height of the flag pole. 6
- 8. Triangles Flag pole (C)—the trend preceding the formation of the Triangles are continuation patterns that form as the price of a currency triangle. The flag pole spans the distance from the beginning of pair hits a flat level of support or resistance and begins moving into a the trend to the highest point of the triangle (bullish, or ascending triangle), or the flag pole spans the distance from the beginning of tighter and tighter consolidation range. Triangles can be either bullish the trend to the lowest point of the triangle (bearish, or or bearish, depending on what the trend was before the wedge began descending triangle). to form. If a currency pair was in an up trend before the triangle began to form, it is a bullish continuation pattern. If a currency pair was in a Breakout point (D)—the point at which the currency pair down trend before the triangle began to form, it is a bearish breaks up above the horizontal level of resistance (bullish, or continuation pattern. Triangles usually form over longer periods of ascending triangle), or the point at which the currency pair breaks time. down below the horizontal level of support (bearish, or descending triangle). Triangles all have the following five characteristics: Price projection (E)—the price to which the currency pair Resistance level (A)—horizontal level of resistance (bullish, will most likely fall after it has broken out of the triangle formation or ascending triangle), or a down-trending level of resistance that is (bearish, or descending triangle), or the price to which the currency converging with the support level (bearish, or descending triangle). pair will most likely rise after it has broken out of the triangle formation (bullish, or ascending triangle). The distance the currency Support level (B)—up-trending level of support that is pair is projected to move is equal to the height of the flag pole. converging with the resistance level (bullish, or ascending triangle), or a horizontal level of support (bearish, or descending triangle). 7
- 9. Reversal Patterns As we know, Forex traders continually ask themselves the question, “Can the trend continue?”. Deciding whether a trend is over and if it is time to trade against the previous trend is difficult. You can never know if a currency pair is going to turn around and start moving in the opposite direction. Or can you know? Reversal patterns give you advanced warning when a currency pair is likely to turn around and begin a new trend and how far the currency pair is likely to move in the opposite direction. Of course, reversal patterns are not infallible, but they do put the odds of success in your favour. Take some time to become acquainted with the following price reversal patterns: - Double tops/bottoms - Triple tops/bottoms - Head-and-shoulders top/bottoms 8
- 10. Double Tops/Bottoms Price projection (D)—the price to which the currency pair Double tops/bottoms are reversal patterns that form as the price of a will most likely fall after it has broken out of the double-top currency pair hits a support or resistance level two times before the formation, or the price to which the currency pair will most likely rise after it has broken out of the double-bottom formation. The currency pair turns around and moves in the opposite direction. Double distance the currency pair is projected to move is equal to the tops are bearish reversal patterns and double bottoms are bullish distance between the support and resistance levels. reversal patterns. If a currency pair is in an up trend, it will form a double top. If a currency pair is in a down trend, it will form a double bottom. Double tops/bottoms usually form over longer periods of time. Double tops/bottoms all have the following four characteristics: Resistance level (A)—horizontal, or slightly angled, level of resistance. Support level (B)—horizontal, or slightly angled, level of support. Breakout point (C)—the point at which the currency pair breaks up above the horizontal level of resistance (double bottom), or the point at which the currency pair breaks down below the horizontal level of support (double top). 9
- 11. Triple Tops/Bottoms Triple tops/bottoms are reversal patterns that form as the price of a currency pair hits a support or resistance level three times before the currency pair turns around and moves in the opposite direction. Triple tops are bearish reversal patterns and triple bottoms are bullish reversal patterns. If a currency pair is in an up trend, it will form a triple top. If a currency pair is in a down trend, it will form a triple bottom. Triple tops/bottoms usually form over longer periods of time. Triple tops/bottoms all have the following four characteristics: Resistance level (A)—horizontal, or slightly angled, level of resistance. Support level (B)—horizontal, or slightly angled, level of support. Breakout point (C)—the point at which the currency pair breaks up above the horizontal level of resistance (triple bottom), or the point at which the currency pair breaks down below the horizontal level of support (triple top). 10
- 12. Price projection (D)—the price to which the currency pair will most likely fall after it has broken out of the triple-top formation, or the price to which the currency pair will most likely rise after it has broken out of the triple-bottom formation. The distance the currency pair is projected to move is equal to the distance between the support and resistance levels. 11
- 13. Head-and-Shoulders Tops/Bottoms Head-and-shoulders tops/bottoms all have the following five Head-and-shoulders tops are reversal patterns that form as the price of characteristics: a currency pair hits a resistance level (forming the first shoulder), then breaks through the first resistance level and hits a higher resistance Left shoulder (A)—horizontal, or slightly angled, level of resistance (head-and-shoulders top), or a horizontal, or slightly level (forming the head) and then hits the first resistance level again angled, level of support (head-and-shoulders bottom). (forming the second shoulder). Head-and-shoulders bottoms are reversal patterns that form as the Head (B)—higher horizontal, or slightly angled, level of resistance (head-and-shoulders top), or a lower horizontal, or price of a currency pair hits a support level (forming the first shoulder), slightly angled, level of support (head-and-shoulders bottom). then breaks through the first support level and hits a lower support level (forming the head) and then hits the first support level again Right shoulder (C)—horizontal, or slightly angled, level of (forming the second shoulder). resistance that is in line with the left shoulder (head-and-shoulders top), or a horizontal, or slightly angled, level of support that is in Head-and-shoulders tops are bearish reversal patterns and head-and- line with the left shoulder (head-and-shoulders bottom). shoulders bottoms are bullish reversal patterns. If a currency pair is in an up trend, it will form a head-and-shoulders top. If a currency pair is Neckline (D)—horizontal, or slightly angled, level of support in a down trend, it will form a head-and-shoulders bottom. Head-and- (head-and-shoulders top), or a horizontal, or slightly angled, level shoulders tops/bottoms usually form over long periods of time. of resistance (head-and-shoulders bottom). Breakout point (E)—the point at which the currency pair breaks up above the neckline (head-and-shoulders bottom), or the point at which the currency pair breaks down below the neckline (head-and-shoulders top). 12
- 14. Price projection (F)—the price to which the currency pair will most likely fall after it has broken out of the head-and- shoulders top formation, or the price to which the currency pair will most likely rise after it has broken out of the head-and- shoulders bottom formation. The distance the currency pair is projected to move is equal to the distance between the head and the neckline. 13
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