Continuation & Reversal FX Patterns
It's natural for traders to want to know when a trend has changed. A trend change is often associated with a new opportunity and a chance to be on the ground floor of a big move. However, the answer is one of the more elusive ones in the world of FX trading because the trend change is often noticed only after the fact. Today, we will look at different patterns that can help you see when a trend is continuing so that you know when your best bet is to stay in the direction of the larger trend or if a trend is reversing.
Remember, a reversal type pattern is a statistically rare event and should not be your base scenario when analyzing charts.
Popular Patterns to Be Covered
When looking at price patterns, you can often find patterns that begin with only a handful of candles. On the other of the continuum, you can find patterns that span out over days, weeks, or months. The shorter-term patterns that only involve a few candles are most commonly associated with price action analysis or Japanese candlesticks. For a definitive guide on Japanese candlesticks, check out Steve Neeson's Japanese candlestick charting method.
Continuation patterns are the bread and butter of many discretionary trend traders. The necessary ingredients for recognizing and treating these patterns is a mix of knowledge and patience.
Japanese candlesticks can be used alone but their effectiveness enhances greatly when you combine them with a tool like a moving average or a trend line. We will show you what methodologies you can add to Japanese candlesticks to increase their effectiveness in continuation patterns.
Triangle patterns are frustrating in the act but very hopeful for traders after they've already occurred. We'll discuss what types of triangles you may run into as well as how to trade them and the common pitfalls many traders fall into when coming upon triangles.
A sideways consolidation sounds simple and clean but that's not always the case. There are often times where a new high or the prior price range extreme is exceeded only to see a new relative low develop a few short days after. For this reason, these should be combined with the prior articles on price range extremes to find when they have expired and when a trading opportunity is present.
Flag patterns are very popular and very easy to recognize in trade. We will discuss wherein a trend a flight pattern often develops and what the pattern often indicates about crowd psychology in the markets.
it would be difficult to mention enough times that reversal patterns are statistically rare and should not be the base case scenario when you see one developing on the charts.
Head and Shoulders
A head and shoulders pattern is one of the first chart patterns that many traders learn. You'll learn not only their namesakes but what the pattern implies. In my experience, the reversal is rarely as significant as many traders expect or hope.
Similar to continuation Japanese candlestick patterns, the reversal candlestick patterns can be very helpful in their effectiveness can be increased with the use of other tools. You will be introduced to the tools and the reversal patterns worth trading.
Similar to the head and shoulders pattern, a double top is one of the first patterns introduced many traders. There are times when I double top will lead to a more extensive reversal but those events are rare and we will discuss what you should look out for after you believe a double top is taking place.
Confirming the Trend Change
Whenever a reversal pattern is believed to be in play, you should have ways to confirm the trend change. We will use three tools to help us identify and confirm a trend change so that you know when a higher probability reversal is playing out presenting you with an opportunity to trade.