Every chart that you read and analyze as a forex trader has a hidden pattern to it. Is this pattern hidden? Or is it waiting to be discovered? We would say that these patterns are quite evident if you understand the indicators that lead toward their formation and their future outcome.
There are three main groups of chart patterns that you need to have a sound grip on to understand the core functioning of forex trading.
Reversal Chart Patterns
A reverse chart pattern, as the name indicates, are those patterns that show the current pattern being followed is about to get reversed.
This means that if an uptrend is currently taking place in the market, the market will hit a downtrend soon. And if a downtrend has been prevailing in the market, certain hints point towards the market reversing and move in an upward trajectory.
In such a situation, simply place an order that is beyond the neckline and is in the direction of the new forming trend. Furthermore, go for a target that is approximately of the same height as the formation.
One thing to make sure is that you always remember to place stop-loss orders around the middle of the reverse pattern formation to avoid any loss if the market does not respond the way you have analyzed.
Continuation Chart Patterns
Continuation chart patterns indicate that the pattern that a chart follows will continue. These patterns are also known as consolidation chart patterns.
This is because they show how market participants, which means your buyers and sellers, take a small and quick break before continuing with the current trend or entering into a new phase in the market and making a new pattern.
When such patterns are formed in the market, you need to place an order either above or below the pattern formation, keeping in mind the direction of the current trend. Stop orders, in this pattern, are usually placed above or below the current formation of the chart.
Bilateral Chart Patterns
Out of the three main groups of chart patterns, these bilateral chart patterns are the most complex ones since they signify that the price can move in either direction.
To tackle this trickiness, you should consider both scenarios. Either the market could show an uptrend or a downtrend from now on, so place orders accordingly.
If the market starts moving in one direction, then cancel the other one. But don’t forget to place your stops in case you place an order too close to the formation, which could lead you towards a false understanding of the market.