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The price in the Forex market never stands still. Under this condition, the trader’s task is to recognize market trends and make the right decision. To do this, they need to be able to identify chart patterns, which are the basis of tech analysis. Patterns help traders comprehend whether the trend will continue or not. And this understanding, in turn, will determine the tactics of work.
Forex, stock market trading – illustrative photo. Image credit: Adam Śmigielski via Unsplash, free license
Do not think that after learning 2-3 or a dozen patterns, you will be able to make certain decisions. In fact, there are dozens of such tips on the charts, each of which has its own level of accuracy. However, you can make them your friends and learn how to find opportunities in Forex.
Table of Contents
Understanding Chart Patterns
Graphic models are a reflection of price fluctuations in the Forex market. Many years ago, traders noticed that certain patterns could suggest how a trend would move in the future. Fortunately, today, you do not need to look at charts and try to figure out what forms are encrypted in them. This knowledge is freely available, and you need to learn to notice and understand it. Expert advisors can help you as well: https://forexstore.com/best-forex-robots. In general, all Forex trading chart patterns can be divided into three categories:
- Trend continuation patterns. These include “flags” and “pennants.” The presence of these figures gives a signal to play in the direction of the current trend.
- Reversal patterns. This group includes “head and shoulders,” “double bottom,” “triple tops,” and some others. They indicate that it is time to profit from existing positions.
- Neutral patterns. They show that the price can fluctuate in any direction depending on market factors. There are various “triangles” in this section.
Chart Pattern Confirmation and Trade Entry
Simply identifying a chart pattern is not enough to make a trade. It is also necessary to find its confirmation. Why is it important? Unfortunately, not all graphic signals are true — there are also false ones. Confirmation helps filter out these false signals and increase the likelihood of a profitable decision. It can be done with the help of such tools as volume indicator, moving average, and some others.
An increase in volume indicates growing interest among traders while a decrease suggests declining interest. A breakout that occurs on a raising volume is a true breakout, and vice versa. The moving average shows the average value of the price over a certain period. If the price breaks the moving average line in the same direction as the pattern, it confirms the pattern. Understanding Forex candlesticks patterns will also help to confirm a trend.
Risk Management and Trade Execution
Once you have determined a chart pattern and found its confirmation, you know when to trade. On the chart, you see breakout lines, and at the point where the line crosses them, you start selling or buying. However, each trade must be protected by setting a stop loss and taking profits. Any unexpected news or event can reverse the trend, and you will lose all funds without having time to react. You can set a stop loss based on the balance between your goals and your risk tolerance.
Practice and Experience
Experienced traders find new contours and publish their observations. However, not always someone else’s experience will be useful to you. For the number of profitable decisions to exceed the number of unsuccessful ones, you need to understand technical analysis yourself. And this understanding comes only with experience. Moreover, any strategy based on chart patterns needs to be tested. The market never stands still, and what was true for one pair a year ago may be completely wrong for another pair today. Study charts, pay attention to market conditions and constantly improve your skills.
Summary
Understanding chart patterns is not the key to success in the Forex market. However, not understanding them will definitely lead to failure. Chart patterns help answer the trader’s main question: “How will the trend behave?” Various confirmations will give strength to the forecast, and risk management will allow you to trade comfortably and get excellent Forex trading opportunities.
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