With so many ways to trade currencies, picking common methods can save time, money and effort. By fine tuning common and simple methods a trader can develop a complete trading plan using patterns that regularly occur, and can be easy spotted with a bit of practice. Chart, candlestick and Ichimoku patterns all provide visual clues on when to trade.
While these methods could be complex, there are simple methods that take advantage of the most commonly traded elements of these respective patterns.
While there are a number of chart patterns of varying complexity, there are two common chart patterns which occur regularly and provide a relatively simple method for trading. These two patterns are the head and shoulders and the triangle.
A topping pattern is a price high, followed by retracement , a higher price high, retracement and then a lower low. The bottoming pattern is a low, a retracement followed by a lower low head and a retracement then a higher low second shoulder see Figure 1. The pattern is complete when the trendline "neckline" , which connects the two highs bottoming pattern or two lows topping pattern of the formation, is broken. This pattern is tradable because it provides an entry level, a stop level and a profit target.
The entry is provided at 1. The stop can be placed below the right shoulder at 1. The profit target is determined by taking the height of the formation and then adding it to the breakout point. In this case the profit target is 1. The profit target is marked by the square at the far right, where the market went after breaking out.
Triangles Triangles are very common, especially on short-term time frames and can be symmetric , ascending or descending. While the patterns appear slightly different for trading purposes there is minimal difference.
Triangles occur when prices converge with the highs and lows narrowing into a tighter and tighter price area. Figure 2 shows a symmetric triangle. It is tradable because the pattern provides an entry, stop and profit target. The entry is when the perimeter of the triangle is penetrated — in this case to the upside making the entry 1.
The stop is the low of the pattern at 1. The profit target is determined by adding the height of the pattern to the entry price 1. The height of the pattern is 25 pips, thus making the profit target 1. For more on triangles, read Triangles: For this reason, candlestick patterns are a useful tool for gauging price movements on all time frames. While there are many candlestick patterns, there is one which is particularly useful in forex trading.
An engulfing pattern is an excellent trading opportunity because it can be easily spotted and the price action indicates a strong and immediate change in direction. In a downtrend an up candle real body will completely engulf the prior down candle real body bullish engulfing.
In an uptrend a down candle real body will completely engulf the prior up candle real body bearish engulfing. The pattern is highly tradable because the price action indicates a strong reversal since the prior candle has already been completely reversed. The trader can participate in the start of a potential trend while implementing a stop. In Figure 3 we can see a bullish engulfing pattern that results in the emergence of an upward trend. The entry is the open of the first bar after the pattern is formed, in this case 1.
The stop is placed below the low of the pattern at 1. There is no distinct profit target for this pattern. Ichimoku Cloud Bounce Ichimoku is a technical indicator that overlays the price data on the chart. While patterns are not as easy to pick out in the actual Ichimoku drawing, when we combine the Ichimoku cloud with price action we see a pattern of common occurrences.
The Ichimoku cloud is former support and resistance levels combined to create a dynamic support and resistance area. Simply put, if price action is above the cloud it is bullish and the cloud acts as support. If price action is below the cloud, it is bearish and cloud acts as resistance. By using the Ichimoku cloud in trending environments, a trader is often able to capture much of the trend. In an upward or downward trend, such as can be seen in Figure 4, there are several possibilities for multiple entries pyramid trading or trailing stop levels.
In a decline that began in September, , there were eight potential entries where the rate moved up into the cloud but could not break through the opposite side. Entries could be taken when the price moves back below out of the cloud confirming the downtrend is still in play and the retracement has completed. The cloud can also be used a trailing stop, with the outer bound always acting as the stop. In this case, as the rate falls, so does the cloud — the outer band upper in downtrend, lower in uptrend of the cloud is where the trailing stop can be placed.
This pattern is best used in trend based pairs , which generally include the USD. Bottom Line There are multiple trading methods all using patterns in price to find entries and stop levels. Chart patterns, which include the head and shoulders as well as triangles, provide entries, stops and profit targets in a pattern that can be easily seen.
The engulfing candlestick pattern provides insight into trend reversal and potential participation in that trend with a defined entry and stop level. The Ichimoku cloud bounce provides for participation in long trends by using multiple entries and a progressive stop. As a trader progresses they may wish combine patterns and methods to create a unique and customizable personal trading system. Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. Analyzing Chart Patterns While there are a number of chart patterns of varying complexity, there are two common chart patterns which occur regularly and provide a relatively simple method for trading.
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