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Forex Education | Forex Guide

 

CHART PATTERNS AND TRENDS

 

What can you look for in terms of patterns?

 

As the points that go up and down in representing the price of a currency pair are plotted on a graph, patterns in the form of triangles often become apparent. One example is when the different high points in the chart get lower and lower moving from left to right, while the different low points get higher and higher. It looks like the currency exchange rate is being directed into a triangle that will converge at a point somewhere on the right-hand side.

 

When this happens, it looks like buyers and sellers of the currency are both exerting pressure in such a way that the price is stabilizing at a level midway between the two. What in fact is likely to happen is that the price will not stay within the limits of the triangle as it tapers from left to right, but that it will break out either up or down. The difficulty is in knowing which way the price will “jump”, although you can handle this by making a “buy” order conditional on the price moving above the lowest high, together with a “sell” order conditional on the price moving below the highest of the lows.

What other triangle patterns exist?

 

There are two other possible tapering triangles. One has a relatively flat bottom line and it is the top line that moves downwards from left to right to make the triangle taper. In this case sellers are more active than buyers and are pushing the price and the successive highs down. In the other case, the triangle has a relatively flat top and a bottom line that moves upwards from left to right. In this case the buyers are more active and consequently they are pushing the price and the successive lows up.

 

In the first case, a price that breaks out will continue on the same downward trend. Likewise, in the second it will continue on the same upward trend after breaking out. However, because this is still a matter of probability rather than certainty, you can use the same tactic of simultaneous buy and sell orders as in the section above.

 

How do Japanese candlestick patterns compare?


Besides the more generic triangle shapes above, candlestick charts also exhibit several other types of patterns that are easy to recognize. Within each candlestick the size of the candle shows how far the price moved, while the vertical lines above and below show to what extent buyers and sellers were active during the time interval concerned. As an example, a short, black candle with a long vertical line above and a short vertical line below suggests that although buyer activity acted to push the price upwards, the final result was in fact a slight, overall decrease in price.