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

Video- Multiple Time Frame Analysis

Maximize Profitable Trades Using Multiple Time Frames

James Chen - Multiple Time Frame Trading in the Forex Market

Summary : Multiple Time Frame Analysis

Here are a few tips you should remember:

You have to decide what the correct time frame is for YOU. This comes from trying different time frames out through different market environments, recording your results, and analyzing those results to find what works for you.

Once you've found your preferred time frame, go up to the next higher time frame. Then make a strategic decision to go long or short based on the direction of the trend. You would then return to your preferred time frame (or lower) to make tactical decisions about where to enter and exit (place stop and profit target).

Adding the dimension of time to your analysis gives you an edge over the other tunnel vision traders who only trade off on only one time frame.

Make it a habit to look at multiple time frames when trading.

Make sure you practice! You don't wanna get caught up in the heat of trading not knowing where the time frame button is! Make sure you know how to shift quickly between them. Heck, you should even practice having chart containing multiple time frames up at the same time!

Choose a set of time frames that you are going to watch, and only concentrate on those time frames. Learn all you can about how the market works during those time frames.

Don't look at too many time frames, you'll be overloaded with too much information and your brain will explode. And you'll end up with a messy desk since there will be blood splattered everywhere. Stick to two or three time frames. Any more than that is overkill.

We can't repeat this enough: Get a bird's eye view. Using multiple time frames resolves contradictions between indicators and time frames. Always begin your market analysis by stepping back from the markets and looking at the big picture.

Don’t Use Multiple Time Frame Analysis without Proper Chart Time Frame Alignment

Most traders find themselves analyzing a currency pair for trading purposes on a single time frame. While that is all well and good, a much more in depth analysis can be accomplished by consulting several time frames on the same pair. Think of it as trying to “size up” a person based on meeting them on one occasion versus meeting them several times. You will have more insight regarding both the person and the trade if you view them from more than one vantage point.

Since a currency pair is moving through multiple time frames at the same time, it is beneficial for a trader to examine several of those time frames to determine where the pair is in it “trading cycle” on each time frame. Ideally a trader will want to postpone their entry until momentum in each time frame is aligned…all bullish for an uptrend or all bearish for a downtrend.

The entire process regarding trading in general and Multiple Timeframe Analysis (MTFA) specifically begins by identifying the trend…the direction in which the market has been moving the currency pair in question over time. 

Many traders will employ some aspect of Multiple Time Frame Analysis in their trading.

A question that comes up quite frequently regarding MTFA is how far apart the time frames should be from one another. Here is an example of a question on this topic from a recent webinar: “If I use the Daily, 4 hour and 1 hour charts, could I then move down to the 5 minute chart for a scalp?”

While Multiple Time Frame Analysis can be used in a wide variety of trading strategies from shorter term to longer term, it is important to be sure that the “spacing” of the chart time frames relate to each other.

For example, while using the Daily chart to determine the trend on a pair and then executing the trade from the 4 hour or the 1 hour chart, makes sense, throwing a 5 minute chart into that mix is simply too much of a disconnect from the other time frames.

The Daily and the 4 hour frames of reference are simply too far removed from a 5 minute frame of reference. For example, there are 288 individual 5 minute time periods in a 24 hour period. So we would be looking at a day’s worth of trading data and trying to carve out 1/288th of that time period to determine our entry. The 1 hour is closer to our objective but even then some might argue that it still is a bit removed for our purposes.

Ideally you want to achieve a balance so that the time frames of the charts are neither too close nor too far apart from one another. We want them to be close enough so that one time frame does have an impact on the others being used, yet not so close that each time frame is a virtual clone of the others.

For example, a Monthly, 6 hour, 5 minute chart array would simply have too much separation and none of those time frames really have any direct impact on the other. At the opposite extreme, a 30 minute, 29 minute, 28 minute chart array would not be of any value either since each of the charts is a virtual duplicate of the other. Consequently, the whole purpose of MTFA would be lost.

What we teach is to space the time frames using roughly a 4:1 or 6:1 ratio. Notice how this Daily, 4 hour, 1 hour scenario breaks down: a 4 hour chart is 1/6th of a Daily chart and 1 hour chart is 1/4th of a 4 hour chart.

You can use any time frame you like as long as there is enough time difference between them to see a difference in their movement.

You might use:

Base            Minor                      Major

1-minute     5-minute               30-minute

5-minute     30-minute              4-hour

15-minute   1-hour                   4-hour

1-hour         4-hour                  daily

4-hour         daily                    weekly

and so on.

Multiple Time Frames Can Multiply Returns

In order to consistently make money in the markets, traders need to learn how to identify an underlying trend and trade around it accordingly. Common clichés include: "trade with the trend", "don't fight the tape" and "the trend is your friend".

Trends can be classified as primary, intermediate and short term. However, markets exist in several time frames simultaneously. As such, there can be conflicting trends within a particular currency pair depending on the time frame being considered. It is not out of the ordinary for a currency pair to be in a primary uptrend while being mired in intermediate and short-term downtrends.

Typically, beginning or novice traders lock in on a specific time frame, ignoring the more powerful primary trend. Alternately, traders may be trading the primary trend but underestimating the importance of refining their entries in an ideal short-term time frame

In the table below  we've highlighted some of the basic time frames and the differences between each.

You also have to consider the amount of capital you have to trade.

Shorter time frames allow you to make better use of margin and have tighter stop losses.

Larger time frames require bigger stops, thus a bigger account, so you can handle the market swings without facing a margin call.

The most important thing to remember is that whatever time frame you choose to trade, it should naturally fit your personality.

If you feel a little uptight like you're undies are loose or your pants are little too short, then maybe it's just not the right fit.

This is why we suggest demo trading on several time frames for a while to find your comfort zone. This will help you determine the best fit for you to make the best trading decisions you can.

When you finally decide on your preferred time frame, that's when the fun begins. This is when you start looking at multiple time frames to help you analyze the market.

Trading using multiple time frames has probably kept us out of more losing trades than any other one thing alone. It will allow you to stay in a trade longer because you're able to identify where you are relative to the big picture.

Most beginners look at only one time frame. They grab a single time frame, apply their indicators and ignore other time frames.

The problem is that a new trend, coming from another time frame, often hurts traders who don't look at the big picture.