Market patterns are the most effective method of analysis in the forex market. They indicate that the trend most likely will change the direction or continue the same trend. Technical analysis is based on various tools of analysis to detect trading opportunities in the financial market.
And trading chart patterns are some of the most powerful methods in forex trading. They’re known as trend reversal patterns and continuation patterns.
If you combine the market patterns resistance, support, trendline, etc, then you will have more technical analysis confirmations and more possibilities to reach your predicted target.
Some of the most common and used patterns are double top, double bottom, head and shoulders, inverse head and shoulders, bullish flag, bearish flag, rising wedge, falling wedge, etc.
These market patterns help you analyze the charts more in-depth by giving you indications on the change of the trend.
Market Pattern Examples
Below we will show you some examples with market patterns and demonstrate how to trade them. We will also combine market patters with other factors such as trendlines, support, resistance in this example.
How to trade the Double Bottom market pattern
The chart on the image below shows the EUR/JPY forex currency pair on the 1-hour timeframe. On the chart, we have a double bottom pattern formed with support and resistance levels.
The white horizontal lines on the image below show the support and resistance zones. At 119.249 we have a strong horizontal line (resistance) and the double bottom pattern created its first bottom. Moreover, the pattern created a strong support zone at 116.546. Then the foreign exchange market started a bullish trend of 270 pips and created a resistance zone. The price retested that resistance zone 3 times and couldn’t break it.
Price continued down and reached the first support (bottom) at 116.546. After support wasn’t broken, the price started a bullish trend again and reached the resistance zone at 119.249. The price tried to break that strong resistance zone, but failed and went down about 70-75 pips. But the foreign exchange market retested the resistance zone at 119.249 again and this time broke the resistance zone with a bullish engulfing pattern.
Combining other price action factors with market patterns
Trading market patterns with support, resistance, trendlines, etc. is more effective and gives you more confirmation. But what if we combine both, by analyzing the charts with other price action factors and market patterns? Well, we’ll show you an example with an image of how to trade price action with a forex chart pattern, resistance, and trendline.
The USD/CAD 4-hour timeframe shows a downtrend that has started. And we have a trendline that connects on the wicks of 3 forex candlestick patterns. These connections make our analysis more valid as we have a confirmation that the downtrend has started to become more powerful.
On the last wick where the trendline is connected with the bullish candlestick pattern, we have a resistance zone. The resistance zone could become a major reversal point that could continue the bullish trend or start a bearish trend. We have also the trendline that could make our analysis more valid that a downtrend could start.
But most importantly we also have a double top market chart pattern that could start to form. If the resistance doesn’t break and bearish candles (red candles) start to form, then the double top chart pattern could become more valid and start to form.
What do you think will happen in this scenario?
Well, here’s what resulted when price tested the major resistance zone. The price moved above the resistance but couldn’t break as the Doji candlestick closed directly on the resistance zone.
Then, the price started to go down and the bearish candlestick chart started to form which made our analysis of double top pattern valid. In this scenario, a sell order placed below the bearish engulfing pattern would get us a profit of 100 or 200 pips.
The article explained a detailed view of how to trade forex chart patterns. Combining market patterns with price action (trendline, resistance) resulted in a more effective technical analysis result.
There’s nothing wrong if you trade the financial market with only a confirmation, for example with only a price pattern. As you can be effective on your trades with that, but by combining price action such as market patterns, trendlines, support, and resistance, etc, you will have more confirmations on entering your trades.
The examples we give on our blog are based on our analysis. But you as a trader should always trade according to your analysis.