Forex Chart Pattern

An Introduction

Chart Pattern theory has been around since the early 1930’s and deals with forecasting market movements through analysis of market psychology. In chart pattern theory, market psychology is defined as the movement of a price graph between support and resistance levels.

 Theory has is that support and resistance lines define levels at which the market believes the price of a financial instrument is undervalued or overvalued. It is  widely believed that a price movement through either the support or resistance level is indicative of a trend that is top follow. Although Chart Pattern theory does not provide strict entry and exit levels, it does provide an indicationof the level to which a financial instrument is headed

Even if you are not a technical analyst it is important to learn how to read forex charts. The fact of the matter is that it is virtually impossible to get a proper assessment of the value of the forex market without knowledge of chart patterns.

There are numerous chart types used in forex market analysis, but in a lot of them the following patterns often emerge. As a trader, it is to your advantage to learn their meaning and relation to price movement and market direction.

Technical analysis assumes that:

a) prices discount everything, 

b) prices moves in trends and 

c) history repeats itself.

Assuming the above tenets are true, charts can be used to formulate trading signals and can even be the only tool a trader utilizes. There are two types of patterns in this area of technical analysis:

1. Reversal: A reversal pattern signals that a prior trend will reverse on completion of the pattern.
2. Continuation: a continuation pattern indicates that the prior trend will continue onward upon the pattern's completion.

The difficulty in identifying chart patterns and their subsequent signals is that chart use is not an exact science. In fact, it's often viewed as more of an art than a science. While there is a general idea and components to every chart pattern, the price movement does not necessarily correspond to the pattern suggested by the chart. This should not discourage potential users of charts - once the basics of charting are understood, the quality of chart patterns can be enhanced by looking at volume (In my opinion, i believe we cannot use volume in forex market because there is no central market like others financial instrument) and secondary indicators.

Here are several concepts that need to be understood before reading about specific chart patterns. The first is a trendline, which is a line drawn on a chart to signal a level of support or resistance for the price of the security. Support trendlines are the levels at which prices have difficulty falling below. Conversely, a resistance trendline illustrates the level at which prices have a hard time going above. These trendlines can be constant price levels, or rise or fall in the direction of the trend as time goes on.

Here's the different patterns used by chartists that we're going to cover:

1. Ascending Triangle
2. Descending Triangle
3. Channel Down
4. Channel Up
5. Double Bottom
6. Double Top
7. Falling Wedge
8. Rising Wedge
9. Head and Shoulders
10. Inverse Head and Shoulders
11. Flag
12. Pennant
13. Rectangle
14. Triangle
15. Triple Bottom
16. Triple Top