Price analysis is a natural process for anyone involved in a trade. To simplify it, graphs were created. And their clarity made it possible to notice that some areas are similar to others. That is, price fluctuations are similar at different time intervals.
The drawing of charts on paper was able to reveal the first price patterns, so named for their similarity to figures in geometry. The ability to display charts on monitors allowed us to raise the analysis in trading to a new level. Including, due to the display of large time intervals.
A pattern is a certain template (literally translated from English), according to which the Forex price is repeated. In other words, such similar segments on the charts are called technical analysis figures.
There are over a hundred patterns in existence today. A graphical analysis of Forex is a separate section of technical analysis.
TYPES OF PATTERNS
Patterns are divided into 2 types:
- reversal patterns
- trend continuation patterns
In the first case, the trend that existed in the market before the formation of the pattern is reversed after the formation. For example, the price was growing, and after certain fluctuations it moved to a decline. In the second case, the general direction of price movement before and after is the same.
Let's consider the main patterns in Forex technical analysis.
Triangle. It looks like a lateral canal gradually tapering. Fluctuations between local lows and highs are reduced until the completion of the pattern. And then there is a breakout towards the breakdown. It is a trend continuation pattern, but only in most cases, there are alternative options.
Flag. This is a period of price correction against its strong directional movement in one of the directions - the flagpole. That is, the flag is opposite to the main trend and is usually followed by a continuation of the movement in the original direction.
Pennant. The same flag, but not quadrangular, but triangular.
Double or triple top. This is a consistent achievement by the price on the chart of the highs located at approximately the same level. In classical analysis, it speaks of a trend change.
Double or triple bottom. Mirror shapes with vertices. Consistent price achievement on the chart of minimums located at approximately the same level. It also indicates a trend change.
Head and shoulders. A modified triple top in which the central high is above the first and third peaks in price.
PRACTICAL IMPORTANCE
For traders, pattern analysis is of practical importance. Their knowledge allows us to predict price movements in the future. Accordingly, the successful opening of orders depends on this.
Many brokers actively provide auxiliary tools that are able to recognize patterns at the stage of formation. This is possible thanks to modern programs that work in automatic mode. And the sooner the forming pattern is recognized, the more profitable the deals made in trading can become.