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12. Chart Patterns Trading Strategy
12.1 The Most Profitable Forex Chart Patterns
For many reasons, Forex charts usually form some repeated
patterns. If you work with them and your eyes are trained by
looking at them, these patterns are very powerful tools to
guide you during your trades. There are many patterns and
each of them has its name but to be simple and short I
explain here only the most profitable patterns which always
work and you can rely on.
12.1.1 M and W (Bat) Patterns
These are the most frequent chart patterns and more or
less have M or W shape. Sometimes, one leg extends or
another leg gets short.
Figure 184.108.40.206 A W (bat) pattern
These are not very accurate signals but they help you to get
a rough estimation of a currency move.
12.1.2 Triangle (Weakening M and Strengthening W) Patterns
Contrary to M and W patterns, triangle (or weakening M and
strengthening W patterns) are very accurate signals (0.8 or
more probable). A weakening M is formed when an upward
(bullish) move is completed, then a weaker downward move
(one third or half of the first move) happens and then a very
weak bullish (usually one candle) comes after it. After
completion of the third move you can say with a high
confidence that the currency price will sharply drop. This is
the place you should sell the currency and make a nice
profit. Strengthening W pattern has just the same story but
in a reverse order.
Figure 220.127.116.11 A triangle pattern
These patterns are tradable in two ways. The first is at the
time when only the first few bullish or bearish candles have
formed and the move is in its half way to get matured (reach
a support or resistance level). At this time we can buy or sell
and wait until the move ends (or begins to reverse), then
close the trade with profit. However, these are short or
medium time moves and we cannot expect so many pips.
The second better use is to enter a trade when a move has
been matured and a reversal is expected. I also like
weakening and strengthening cascade patterns because they
are very reliable, stable and frequent signals and with
trained eyes they are quite predictable.
12.1.4 Head and Shoulders Pattern
Head and shoulders pattern as its name say is a price
pattern that more or less forms a portrait of a man with
head and shoulders. These are more than 80% probable
patterns and when the left shoulder and the head were
formed, the right shoulder would be a tradable opportunity.
Notice that a right shoulder to be tradable must overlap
more than 80% with the left shoulder, otherwise it will not
be a valid pattern.
Note that charting time frame is essential in detecting
patterns. For example, you may not see a triangle pattern on
a 1-hour chart but when you zoom out the same chart to 4hour time frame the pattern appears. So, to detect perfect
patterns you have to toggle between various time frames.
Figure 18.104.22.168 A head and shoulders pattern
Figure 22.214.171.124 A reverse head and shoulders pattern
12.1.5 Solid Wall (or Sandwich) Pattern
This pattern normally consists of 4-8 alternate bullish/
bearish bars and the price consolidates in a very tight range
in very straight line as if it has bumped into a solid
impenetrable barrier. Solid wall or sandwich patterns are
excellent patterns to trade because they are highly probable
and easy to trade.
Figure 126.96.36.199 A solid wall (sandwich) pattern
Figure 188.8.131.52 A solid wall (sandwich) pattern
Fractals in general are regular or symmetric, self-repeating
shapes in various time scales. Fractals occur on Forex charts
and are very various in shape and size. If a fractal is
detected in the early stages (when the first or second fractal
has shaped), a trader can benefit from it. Trading fractals
needs much experience and usually only Forex professionals
can exploit them.
Figure 184.108.40.206 A fractal
12.1.7 Double and Triple Top/Bottom Patterns
At support or resistance levels, prices are normally tested
two or three times before a bounce back or reversal take
place. This test and retest form double or triple bottom
patterns at support and double or triple top patterns at
resistance levels. You can use them in your trading.
Figure 220.127.116.11 A triple top pattern
Figure 18.104.22.168 A double top pattern