Market patterns are known as reversal patterns that can help you identify the forex market’s direction. In price action, there are many factors that can help you analyze and trade in a more reliable method, but the market patterns are the most used.
They can help you identify a potential shift in the trend or the continuation of the trend. Some of the most known and used market patterns are double top, double bottom, head and shoulder, inverse head and shoulder, ascending channel, descending channel, etc.
When these patterns occur in the forex market, trading chart patterns are a good opportunity in the financial market. The tops or the bottoms on market patterns act as resistance and support zones. And these zones are crucial in the direction of the foreign exchange market.
To help you with identifying market patterns, we have shown examples of the market chart patterns that we mentioned.
A double top chart pattern indicates the change of the momentum or the continuation of the trend. The tops are formed after the price hits a certain level and these tops act as resistance zones. Double Top has a neckline that acts as a support zone.
The image below shows a double top chart pattern. As you can see, the first top was created then the price moved down for some pips. After that, it tested the first top that was created and that first top is now a resistance zone.
Since the price zone could not break the resistance level, the market created another top by falling down and breaking the neckline too. When you trade double tops, the neckline can be set as the take profit of your trade.
The double bottom chart pattern is formed when bottoms and the neckline is formed. A double bottom on the foreign exchange market, it’s very important as it can give you a good chance to go long (buy) in the foreign currency market.
In the image below, we have two double bottom chart patterns. You can see that we have two bottoms created at the bottom of the chart pattern and these bottoms act as support zones. After the first bottom was created, the price moved bullish for some pips and couldn’t break the resistance at the top.
Then, the price moved down and it wasn’t able to break the first bottom (support). And after creating the second bottom (support), the price proceeded upside. This time the resistance was broken and if you would trade a similar example on the finaicnal market, the neckline could be set as the take profit.
Head and Shoulders
The head and shoulder pattern indicates the continuation of the trend or a reversal on the trend. The head is the middle pattern with the highest peak price and the shoulders are the left and right patterns.
When you spot a head and shoulders, you can get a confirmation that the market’s trend can continue bullish or bearish because of the support zones. The head-on the middle with the highest price creates the head pattern. Then on the left and right side, tops are created which are smaller than the head.
Some head and shoulders patterns may have the shoulders higher or lower than each other. But always remember, the head is the highest price, and the shoulders on the left and right are created beneath the head price.
Inverse Head and Shoulders
Inverse head and shoulders it’s an upside-down pattern. It’s like head and shoulders but this time a reversed pattern. Inversed head and shoulder patterns it gives you a hint that the financial market trend can start going up or down because of the resistance zones.
The head is always at the bottom and created at a lower price. Shoulders on the left and right are created at a higher price than the head price pattern.
Ascending Channel Pattern
Ascending channel pattern indicates that the bullish trend is strong. The ascending channel is similar to bullish flag channels too. Ascending channels are similar to trend lines and they can help you with identifying the trend.
By identifying an ascending channel pattern, you can use the opportunity to go long (buy) the forex market. The tops and the bottoms connected with trend lines can act as support and resistance zones.
Descending Channel Pattern
A descending channel can help you identify a bearish downtrend. This pattern is similar to trend lines and bearish flag patterns. If you identify a descending change pattern, then you can identify the trend too. It can give you a great opportunity to short (sell) the market, because of the downtrend.
The break of the trendlines could mean the end of the bearish downtrend. Because the tops and bottoms are decisive as they can act as support or resistance zones.
The examples we give on our blog are based on our technical analysis. But you as a trader should always trade according to your technical analysis.