Chart Patterns – The Advanced Guide

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If you’re serious about Forex, you NEED to learn chart patterns.

Why?

Well, they’re work well.

Just like a hunter who follows a trail, a trader who can read these subtle signs starts from a more
advantageous position.

In today’s guide, you’re going to learn everything you need to know about chart patterns.

Before we get started, download a copy of our Forex chart patterns cheat sheet. It’s completely
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You can use the jump links below to quickly navigate to sections of interest in the post:

 Chart Patterns Explained

 Reversal Patterns vs. Continuation Patterns
 Advantages of Chart Patterns
 Disadvantages of Chart Patterns
 Are Chart Patterns Reliable?
 Forex Reversal Chart Patterns
 Forex Continuation Chart Patterns
 What Are the Best Chart Patterns for Day Trading?

Chart Patterns Explained

Chart patterns reflect the health of the market. They can help you decide when a trend is likely
to continue or to reverse.

Let’s break it down:

There are hundreds of thousands of market participants trading Forex on any given day.

That includes professionals, companies and retail traders.

According to Mark Douglas, the author of Trading in the Zone, individuals develop behavior
patterns, and a group of individuals, interacting with each other on a constant basis,
forms collective behavior patterns.

In other words, people tend to act and react in similar ways as they did in the past.

And if we’re talking about the past, let’s look at history for the sake of better illustration.
Have you heard that history repeats itself?

Life is ever-evolving and unpredictable. It involves boundless symbiotic relationships. It’s not
like a lab-controlled experiment that can be exactly replicated.

In other words, this statement is not true. However, of course, the vast majority of people don’t
think that history literally repeats itself.

Instead, they generally think of broad patterns.

The same thing happens on the price chart, where transitions between uptrends and downtrends
are often signaled by recognizable price movements that repeat themselves with statistical
reliability.

It’s because trading is an emotional game, and the driving emotions such as fear and greed don’t
change over time.

Now, here’s the cool thing:

As a graphic record of all buying and selling power, price charts provide a great environment to
observe these patterns.

Simply put:

Collective behavior patterns = Chart patterns.Later in this guide, you’ll learn how to identify
these patterns.
But for now, let’s see the two types.

Reversal Patterns vs. Continuation Patterns

Let’s start with reversal patterns.

Reversal patterns mark the possible turning points between an uptrend and a downtrend.

They can be broken down into top and bottom formations.

A top reversal pattern indicates the market sentiment shifts from optimism to fear and the
uptrend is about to end.

Ouch.

On the other hand, a bottom reversal pattern suggests traders are becoming more optimistic
and the current downtrend may turn around.

Cool.

In both cases, reversal patterns typically start by attempting to continue the current trend.

However, they can’t do so.

When the last effort collapses, the reversal pattern is officially active.

OK, what about continuation patterns?

Well, if you want to trade in the direction of the trend, then you’ll LOVE continuation patterns.

Continuation patterns signal a temporary pause in trend and indicate the previous direction will
eventually continue.

That is to say, they provide a great opportunity to join in the trend or to increase your existing
position size.

Say whaaaaat?

It gets better:

As the buying or selling pressure reappears, well-established trends often not only continue but
accelerate afterwards.

The big question is: What is a well-established trend?

Although, there isn’t a universal answer for that, according to Investopedia:

“Continuation patterns tend to be the most accurate when they occur within a trend that has
existed for around one to three months.”

Similar to reversal patterns, a continuation pattern can also be subdivided into two categories:

A bullish continuation pattern takes place in an uptrend and indicates even higher prices.

Conversely, a bearish continuation pattern takes place in a downtrend and suggests even lower

prices.

It’s as easy as that.

Now, keep in mind, there are some patterns that can signal both continuation or reversal
depending on the circumstances.

In this guide, we categorize chart patterns as to whether they TYPICALLY behave as

continuation or reversal patterns.

Advantages of Chart Patterns

First, they give you buy or sell signals.
That’s a pretty powerful feature, isn’t it?

Once the chart pattern is complete (the price has broken out of the pattern), it clearly indicates in
which direction you should trade.

Second, it gives you a profit target.

How?

You can simply use the height of each chart pattern as a measuring tool.

When the price breaks out from a pattern, project the height of the pattern to the breakout point
and set your TP order accordingly.
Finally, chart patterns do not suffer a price lag.

Now, it may sound like an essential thing rather than an advantage, but did you know that each
of the popular technical indicators are trailing behind price action?

Well, they do.

Disadvantages of Chart Patterns

Despite all the good things, chart patterns have their disadvantages too.

First, you have to find them.

Although, it’s not that complicated, it requires practice, and if you’re late finding a chart pattern,
its usefulness might deteriorate.

PRO TIP: Switch to a line-chart when looking for chart patterns.

Second, a lot of patience is required to wait for the signals.

Yep, this probably does not come as a surprise.

The necessity of being patient is nothing new in trading.

In fact, its importance cannot be overemphasized, especially not when trading chart patterns.
Finally, they are somewhat subjective.

This is not necessarily a bad thing.

However, it’s definitely something you need to be aware of.

Don’t bring your personal bias into your chart analysis, and always use other techniques such as
candlestick charting techniques to confirm your trade ideas.

Are Chart Patterns Reliable?

Chart patterns are not 100% reliable by any means.

Unfortunately, given their subjective nature, it’s hard to tell exactly how reliable certain patterns
are. What you accept as a flag pattern might not be one for somebody else. Therefore, outcomes
vary from trader to trader.

The most important is to understand the market structure, price action, and the psychological
dynamics that create these patterns.

It’s because what is sure is that chart patterns do give false signals. However, when they’re
combined with other elements of technical analysis, the number of false signals can be
significantly reduced.

In general, chart patterns on longer timeframes tend to be more reliable simply because more
people recognize them and act accordingly.

Forex Reversal Chart Patterns

In this part, we’re going to cover a handful of reversal chart patterns you can use when trading
Forex.

(The black lines just for illustration.)

Double Top and Double Bottom

This is one of the easiest but most effective patterns.

A Double Top pattern is a frequent formation that takes place at the end of an uptrend.
Let’s see how it forms:

1. The price reaches a new high but bumps into a resistance.

2. It pulls back for a short time because many timid traders close their long positions.

3. Buyers give it another shot, but the price fails to break above the resistance and falls
below the pullback low.

Once the price closes below this level, the pattern is completed and signals the end of an uptrend.

The Double Top has its opposite, namely the Double Bottom.

The Double Bottom pattern is found at the bottom of a downtrend and indicates the likely
reversal to the upside.

Let’s look at the key points in the formation:

1. The price reaches a new low but bumps into a support zone.

2. Some traders fear that the trend is over so they close their short positions, which prompts
a price increase.

3. Those who didn’t give up that easily make a desperate effort to continue the downtrend.
However, buyers are stronger and, instead of breaking below the support zone, the price
rallies above the pullback high

Once the price closes above this level, the pattern is completed and signals the end of a
downtrend.

Head and Shoulders & Inverse Head and Shoulders

No, we’re not talking about the popular brand that recently sent a box packed with anti-dandruff
shampoo to the French President Emmanuel Macron.

Instead, we’re talking about the chart pattern that can be found at the top of an uptrend, and its
completion predicts a bullish-to-bearish trend reversal.

Hey, that’s the Head and Shoulders chart pattern.

Exactly!

It looks like this:

And here’s the explanation:

1. Following a rising market, the price hits a peak and afterward, it falls to form
the left shoulder.

2. From the low of the left shoulder, a bullish advance begins that significantly surpasses
the previous high to form the head of the pattern but then the price starts to decline again.

3. A final advance from the low of the head starts to form the right shoulder. This peak is
lower than the head and roughly equal with the top of the left shoulder.

4. From the peak of the right shoulder, the price starts to fall again and once it breaks below
the neckline, the pattern is complete.

You may be wondering what the neckline is.

It’s the support line connecting the bottom of the two shoulders.

Okay, what about the Inverse Head and Shoulders pattern?

It has a pretty descriptive name, doesn’t it?

The Inverse Head and Shoulders pattern is the bearish equivalent of the Head and Shoulders. It
can be found at the top of an uptrend and indicates a bearish-to-bullish trend reversal.

Here’s what it looks like:

Now let’s break down the formation of the pattern:

1. Following a falling market, the price bumps into a bottom and then rises to form the left
shoulder.

2. From the high of the left shoulder, a bearish decline starts. It progresses significantly
below the previous low to form the head of the pattern. Then the price begins to rise
again.

3. A final decline from the high of the head starts to form the right shoulder. This trough is
higher than the head and about equal to the bottom of the left shoulder.

4. From the bottom of the right shoulder, the price starts to rise again. Once it breaks above
the connected high points of the pullbacks (neckline), the pattern is complete.

Rising Wedge and Falling Wedge

Here are our last reversal patterns for today.

The Rising Wedge pattern forms when the market makes higher highs and higher lows within a
shrinking range that slopes upward.

Just look at the picture below:

It’s important for all the highs and lows to be in-line so they can be connected by a trendline.

As you can see, the lower trendline rises at a steeper angle.

Because of this, the price will eventually break through to the downside.

And when it happens, that’s a great indication of an upcoming downtrend.

Good.

Let’s see the Falling Wedge pattern.

The Falling Wedge pattern forms when the market makes lower highs and lower lows within a
shrinking range that slants downward.
Not surprisingly, it’s the exact mirror image of the Rising Wedge.

As the price moves to the downside, the two trendlines that connect the highs and the lows will
eventually converge.

At the end of the falling wedge pattern, you’ll see that the price fails to make a new low and
breaks through to the upside. This suggests that the downtrend is over and you can look for
buying opportunities.

Forex Continuation Chart Patterns

Without further ado, let’s dive right into some of the best Forex continuation patterns.

Bullish Flag and Bearish Flag

Flag patterns are extremely POWERFUL.

Why?

They can provide explosive moves.

In addition, they are fairly simple patterns.

Here you can see how a Bullish Flag looks:

Let’s break it down:

1. The flagpole is a huge advance that breaks through a previous resistance level.

2. Following this advance, the price goes through a consolidation phase that becomes
the flag  in the pattern. It consists of two parallel trendlines that point slightly down and
retraces a small portion of the trend.

3. When the price breaks out from the flag to the upside, the pattern is finished.

A Bearish Flag pattern has the same components as its bullish counterpart. However, everything
points in the opposite direction:
 1. The flagpole is a huge drop that breaks through a previous support level.

2. Following this decline, the price goes through a consolidation phase that looks like a flag
– hence, the name of the pattern. It consists of two parallel trendlines that point slightly
upward and retraces a small portion of the trend.

3. When the price breaks out from the flag to the downside, the pattern is finished.

PRO TIP: Flags often emerge after an important news release such as the NFP report. (See,
our Forex Market Analysis Guide.)

Bullish Pennant and Bearish Pennant

Pennants are pretty similar to flags in their structure.

In fact, they’re so similar that some Forex sites don’t even make a difference between the two.

Which is a BIG mistake.

Before we tell you why, take a glimpse at the Bullish Pennant pattern:

Now, you can see the similarities.

However, do you see the KEY difference?

If not, here it is:

The consolidation phase shows a less intensive effort to reverse the trend.

In other words, the Bullish Pennant pattern not only tells you that buyers are stronger than
sellers; it tells you they are WAY stronger.

Money is in the details, so don’t overlook the importance of this.

How about the Bearish Pennant?

After a sharp decrease, the price moves sideways in a narrowing price range that resembles a
triangular flag.

However, this is just a brief consolidation period before the price breaks out to the downside,
indicating the continuation of the trend.

Ascending & Descending Triangle

The Ascending Triangle is a bullish formation that is usually found among a period of

consolidation during an uptrend.
As you can see, the price is making higher lows but it is unable to break through a price barrier.

You may think, “Well, the uptrend is over.”

However, it’s probably not true.

In fact, it can be seen how buyers gain more and more control as the price runs up to the
resistance level.

Eventually, a breakout occurs that is usually followed by a significant increase in price.

Amazing!

The Descending Triangle is just the bearish equivalent of the Ascending Triangle, which
indicates the downtrend is likely to continue or strengthen.
As you can see, this pattern is characterized by a horizontal bottom and a down-sloping top.

This structure is created when strong sellers are pushing down the price while weaker buyers are
trying to reverse the trend. They get increasingly exhausted until the support level fails to hold.

Bullish Rectangle and Bearish Rectangle

Are rectangles easy to recognize? Definitely.

Are they useful? Absolutely.

Let’s see the Bullish Rectangle first:

It’s simply a temporary sideways movement in an uptrend that usually appears at or near an
existing resistance level that the price can’t surpass immediately.

For a while, the power of sellers and buyers becomes nearly equal.

As a result, the price moves in a tight trading range, bounded by a resistance level at the top and
a support level at the bottom.

In general, buyers tend to take control after some time and the pattern completes with an upside
breakout.

Super.

The Bearish Rectangle looks the same but takes place in a downtrend and has opposite
implications.
Now, a quick word of warning:

Rectangles are typical examples of price patterns that can serve as either a reversal or a
continuation pattern.

Fortunately for us, there are a lot of brief stops in a trend, but just one reversal.

So, they will more often be continuation patterns.

What Are the Best Chart Patterns for Day Trading?

It depends who you ask.

Here’s our take on it:

If you’re a day trader, you’ll probably need fast action, right?

You need something with EXPLOSIVE moves to be able to grab your pips quickly.
So, you might want to use the Flag Chart Pattern or the Pennant Chart Pattern.

Sure, almost each pattern can provide dramatic movements from time to time.

However, these two patterns are very powerful in this sense.

Just think about how they form:

First, there’s a sharp price increase (the pole).

Then, many lucky traders who cached the move close their positions for profit, which results in a
little retracement (the flag or pennant).

And then guess what?

All the traders who feel utter regret because they just missed a huge opportunity recognize that a
well-known chart pattern emerged.

And everybody starts to buy.

BOOM.

In addition, because these patterns often emerge after a news release, chances are that even more
traders will be active than otherwise.
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