Top 10 Chart Patterns in Forex Trading

When it comes to trading, you can’t randomly pick a point and place your buy/sell order. As a forex trader, you must have a proper strategy to make informed trading decisions. That is why chart patterns in forex trading play a crucial role. 

In this article, we will get you through different types of chart patterns in forex trading so that you can be successful in trading. 

A chart pattern in forex trading is a price action, portrayed over time. It helps traders predict the probability of future price movement, although it does not guarantee outcomes. These chart patterns are not 100% accurate. Therefore, every trader should not depend on these and should follow risk management techniques. 

The chart patterns help you manage the trade by placing a take profit target, a stop loss, and a target exit point. Chart patterns were not instantly identified; they were gradually recognized through careful observation by early pioneers in stock and forex trading.  

Let’s understand these patterns with types and examples.

A double top chart pattern occurs when the price of an asset touches a top point twice, tries to break above, and then falls back to the support. It forms a neckline. The traders usually place short trades when the price breaks below the neckline. 

Here is an example:
We can clearly see that the price has touched the resistance two times and falls back. Once the price broke below the neckline, it started to decline more. It is also known as trend reversal patterns, where the trend of the price changes from bullish to bearish. 

The Double Bottom chart pattern is similar to the Double Top pattern, but in this pattern, the price touches the bottom point twice and tries to break below. It forms a neckline, and when the price breaks above this neckline, the traders place long positions.
This is also a reversal chart pattern, where the price trend changes from bearish to bullish. The trend changes when the price breaks above the neckline.

Head and shoulder is a technical chart pattern that has three peaks. The middle peak is the tallest, which is the head, and the other peaks are on each side, known as shoulders. The head and shoulder is a trend reversal chart pattern. It signals that the bulls are losing control and the bears are taking over. 

It has three main peaks: 

• Left Shoulder: The price takes a surge and falls back to the support zone, forming a peak. 

• Head: This is the middle peak, when the price surges above the left peak and falls back to the support zone. 

• Right Shoulder: The price again surges, but couldn’t hold and falls back the support zone. This peak could be similar to the left shoulder. 

Below these peaks, a neckline forms by connecting the lows between the shoulders and the head. Once the line breaks below this neckline, the momentum shifts and trend reversal is confirmed. 

The inverse head and shoulder pattern is similar to the head and shoulder. In this chart pattern, the price is shifted from bearish to bullish.
It consists of three troughs: the left shoulder forms when the price declines to a low and then rebounds; the head is created when the price falls even lower than the left shoulder before rising again; and the right shoulder develops when the price dips once more but stays above the head’s low, showing weakening selling pressure.
A neckline is formed above these peaks. When the price breaks above this neckline, the trend is shifted and traders enter in long positions.

An Ascending Triangle is a technical chart pattern in forex trading. It is one of the most common chart patterns and is also part of continuation chart patterns. An ascending triangle has two key components: an upward-sloping trend line and a horizontal resistance point. The horizontal line is the strong resistance, which the buyers try to break above.
Meanwhile, the rising trend line shows that each time sellers push the price down, buyers step in earlier than before, creating higher lows.

The descending pattern is a technical chart pattern which is the inverse of the ascending chart pattern. This is a bearish continuation chart pattern. It has two main components: a horizontal support zone and a bearish trend line. The bulls try to push the price above the trend line, but are pushed down by the selling pressure. 

Over time, the price action compresses between the falling resistance and flat support, forming a triangular shape. A breakout below the support line, especially with increased trading volume, confirms the descending triangle and signals the continuation of the bearish trend.

The symmetrical triangle is a technical and neutral chart pattern, that forms a converging trend line. It has higher highs and lower lows. The breakout tells the story about what trend will be continued. If the price breaks above the triangle with substantial volume, the traders opt to open long trades, plus vice versa.
The price target is usually projected by measuring the height of the widest part of the triangle and applying that distance in the direction of the breakout.

The flag is a technical forex trading chart pattern, also known as a short-term continuation pattern in trading. This chart pattern is observed when the market is in a consolidation phase. The pattern is formed when there is a sharp upward or downward movement, and the market enters into a consolidation phase or a brief sideways movement. 

• In bullish momentum, the price moves slightly downwards and breaks above resistance. 
• In bearish momentum, the price moves upwards and breaks below the support zone to continue the trend. 

The trading psychology behind it is that after a strong push (the pole), the market takes a “breather,” with buyers and sellers temporarily balancing out. But since the overall momentum remains strong, the breakout tends to continue in the same direction.

The wedge chart pattern is similar to the flagpole pattern, but in this, the volume weakens as the pattern progresses. The Wedge chart pattern is a popular formation in technical analysis that signals a potential trend reversal or continuation, depending on its context. 

Wedge pattern has two types: rising and falling. In a rising wedge pattern, the price creates higher highs and lower lows. But as the market proceeds, the price waves become smaller, forming a wedge. There can be a different number of waves. This showcases that the buyers are becoming weak and sellers are taking over. 

If the price breaks above the wedge, the trend continues, or if the trend breaks downward, it will form a bearish trend. 

Traders watch for the breakout from the wedge (up or down) to confirm the new move. The target price is often calculated by measuring the widest part of the wedge and projecting it from the breakout point. 

The wedge chart pattern is similar to the flagpole pattern, but in this, the volume weakens as the pattern progresses. The Wedge chart pattern is a popular formation in technical analysis that signals a potential trend reversal or continuation, depending on its context. 

Wedge pattern has two types: rising and falling. In a rising wedge pattern, the price creates higher highs and lower lows. But as the market proceeds, the price waves become smaller, forming a wedge. There can be a different number of waves. This showcases that the buyers are becoming weak and sellers are taking over. 

If the price breaks above the wedge, the trend continues, or if the trend breaks downward, it will form a bearish trend. 

Traders watch for the breakout from the wedge (up or down) to confirm the new move. The target price is often calculated by measuring the widest part of the wedge and projecting it from the breakout point. 

Trading chart patterns isn’t a piece of cake. It requires patience, proper planning, and risk management. Here are essential points on trading chart patterns on forex or any other financial market. 

• Identify the timeframe when trading any of these chart patterns. These patterns are more accurate on higher timeframes such as 1hr, 4hr, 1-day, and a week. 
• Note the volume at the time of the breakout of the price. If the volume is low at the time of breakout, it is not suitable to enter the trade. Look for substantial volume during the breakout, as it is more accurate. 
• For profitable trading decisions, look at higher and lower time frames to see what is happening in the market. If you notice a bearish trend in a higher time frame with substantial volume, it is not suitable to enter long trades in shorter time frames. You combine a 4-hour time frame with a 1-day and a 1-hour time frame with a 4-hour time frame. 
• Identify the neckline for chart patterns such as head and shoulder, cup & handle, inverse head & shoulder, and double-bottom to make profitable trading decisions. 
• Closely watch the false breakouts. The breakout must have strong volume and momentum; not every breakout leads to continuation. 
• Economic announcements or geopolitical news can invalidate technical patterns, so always check the news calendar before trading. 
• Never risk more than a small percentage of your capital (commonly 1–2%) on a single trade, even when patterns look strong.

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Forex trading chart patterns are a great way to predict the market’s next move and what positions you can enter. However, it is guaranteed that these patterns are not 100% accurate. Therefore, it is advisable to check economic events and rising tensions to make an informed trading decision.
We have mentioned the top trading chart patterns in forex trading, which are commonly used and the most accurate ones.