Forex Patterns

Figure, model, pattern - a visually distinguishable configuration (formation) on the price chart, which periodically repeats due to the typical, pattern behaviour of market participants in similar conditions.

Classical models are universal for various financial markets, instruments and timeframes and are widely used in technical analysis of the Forex market.

Graphical figures have two main functions: they show a possible direction of price movement and allow you to determine the value (calculate the target) of this movement.

Types of graphical figures.

Reversal patterns warn of a possible trend break.

The main reversal patterns:

• Head and shoulders
• Reverse Head and shoulders
• Double top
• Double bottom
• Triple top
• Triple bottom
• Diamond

Continuation patterns describe a market correction within a trend.

The main continuation patterns:

• Triangle
• Flag
• Pennant
• Wedge
• Rectangle.

Some types of Triangles and Rectangles are sometimes divided into a separate group - Undefined Patterns because they can show either continuation or change of a trend

Let's take a closer look at these patterns.

Pattern Head and shoulders

Head and shoulders is a pattern of technical analysis of financial markets, including the Forex market, which is formed after a long uptrend and indicates a possible trend reversal.
The model consists of three peaks: the middle one rises above the sideways ones.

On a rising trend, the price sets a new high, and after a pullback, another one is higher than the first. The next correction falls below the level of the first peak, almost to the level of the previous trough. The condition of an uptrend is broken, in which each top acts as a support level for subsequent declines. On the next rise, the price cannot exceed the last peak and falls, possibly with acceleration and gaps.

The highest peak is the figure's head, and on either side of it are the shoulders. The support line, the neckline, is drawn through the troughs.

In a perfect figure the shoulders are at the same level and symmetrical, but in reality, the right shoulder may be slightly higher or lower than the left, wider or narrower. A lower second shoulder increases the likelihood of trend reversal. There are also more complicated models with two heads or double shoulders.

The neckline usually has a slight upward slope but may be horizontal or with a downward slope. The latter case confirms market weakness, but breaking the support line and getting a sell signal will be delayed.

The model is considered complete only after the price breaks the neckline downwards.

The return of the price to the support line (which becomes the resistance line) and pushing away from it from below is possible, after which the downtrend develops.

The longer the figure has been formed the higher its reliability.

Signals to sell the figure Head and shoulders

Break through the support line (neckline);

rebound from the support line (new resistance line) from the bottom if the price comes back after the breakout.

Price and time truth criteria, volume indicators (but not the Forex market tick volume), and indicator divergence may be used to confirm the breakout.

Volume: large at the first peak, it decreases at the second and third maximums, it increases at the consequent fall and especially at the breakout of the figure.

Head and shoulders pattern movement targets

The distance from the level of the head to the neckline, is postponed downwards from the support line breakthrough.
 

Pattern Reverse Head and Shoulders

Reverse Head and shoulders is a pattern of technical analysis of financial markets, including the Forex market, which is formed after a long downtrend and indicates a possible trend reversal.

The model consists of three troughs: the middle one is lower than the sideways one.

On a downtrend, the price sets a new low and another one below the first after a pullback. The next correction rises above the level of the first trough, almost to the level of the previous top. The condition of a downtrend is broken, where each trough acts as a level of resistance for subsequent rises. On the next decline, the price cannot get past the last low and begins to rise, perhaps with acceleration and gaps.

The lowest trough is the figure's inverted head, with inverted shoulders on either side of it. Through the tops is the resistance line - the neckline.
 

In a perfect figure the shoulders are at the same level and symmetrical, but in reality, the right shoulder can be slightly higher or lower than the left, wider or narrower. A higher second shoulder increases the likelihood of breaking the trend. There are also more complicated models with two heads or double shoulders.

The neckline usually has a slight downward slope but may be horizontal or with an upward slope. The latter case confirms the strength of the market, but breaking the resistance line and getting a buy signal will be delayed.

The model is considered to be complete only after the price breaks the neckline upwards.

The price may move back to the resistance line (which becomes the support line) and push it back from above, after which an uptrend develops.

The longer the figure has been formed (a month or more) the higher its reliability.

Signals to buy an inverted head and shoulders pattern:

Breaking of the resistance line (neckline);

Rebound from the resistance line (new support line) from above at the return price movement after the breakout.

Price and time truth criteria, volume indicators, and indicator divergence may be used to confirm the breakout.

Volume: large at the first trough, decreases at the second and third lows, increases at the subsequent growth and especially at the breakout of the figure.

Targets of the inverted head and shoulders pattern

The distance from the level of the head to the neckline postponed upwards from the resistance line breakthrough.

Pattern Double top

A double top is a pattern of technical analysis of financial markets, including the Forex market, which is formed after a long uptrend and indicates a possible trend reversal.

The model consists of two consecutive peaks and resembles the letter M.

On a rising trend, the price makes a new maximum, but on the next rise after the correction, it cannot exceed the previous peak and falls, possibly with acceleration and gaps.

A horizontal resistance line is drawn through the tops, a parallel support line is drawn through the intermediate trough.

In a perfect figure the tops are on the same level, however, in reality, the second peak might be a little bit lower or higher than the first one, as a result, the support and resistance lines are not necessarily horizontal.
 

This pattern is considered complete only when the price breaks through the trough level.

The price can go back to the support line (which becomes a resistance line) and push it off from the bottom, after which a downtrend develops.

The longer the figure has been formed (a month or more) the higher its reliability.

Signals to sell the figure of double top

• Breakout of the trough level;
• Break of the support line;
• Rebound from the support line (new resistance line) from the bottom when the price rebounds after the breakout.

To confirm the breakout, price and time truth criteria, volume indicators (but not the Forex market tick volume), and indicator divergence can be applied.

Volume: large at the first top, decreases at the second maximum, increases at the consequent fall and especially at the breakout of the figure.

Objectives of the double top model movement

is the distance from the resistance line to the trough level, postponed downward from the place of the breakout of the trough level;

if the tops are not on the same level - the distance from the resistance line to the trough level is postponed downward from the support line breakthrough.

Pattern Double base

Double bottom is a pattern of technical analysis of financial markets, including the Forex market, which is formed after a long downtrend and indicates a possible trend reversal.

The model consists of two consecutive troughs and resembles the letter W.

On a falling trend, the price sets a new low, and on the next decline after the correction, it cannot overcome the previous trough and starts rising, possibly with acceleration and gaps.

A horizontal support line is drawn through the base, a parallel resistance line is drawn through the intermediate top.

In an ideal figure, the troughs are at the same level, but in reality, the second minimum may be a little lower or higher than the first, as a result, the support and resistance lines are not necessarily horizontal.
 

The pattern is considered complete only when the price breaks through to the top level.

It is possible for the price to go back to the resistance line (which becomes the support line) and push it back from above, after which an uptrend develops.

The longer the figure has been formed the higher its reliability.

Signals to buy a Double Base pattern

break through the level of the top;

breaking of the resistance line;

a rebound from the resistance line (new support line) from above at a return price movement after the breakout.

Price and time truth criteria, volume indicators, and indicator divergence can be used to confirm the breakout.

Volume: large at the first trough, decreases at the second low, increases at the subsequent growth and especially at the breakout of the figure.

The objective of the double base model movement is the distance from the support line to the level of the top, postponed upward from the place of the breakthrough of the level of the top.

If the bases are not on the same level - the distance from the support line to the level of the top is postponed upwards from the resistance line breakthrough.
 

Pattern Triple Top

In a perfect figure, both tops and troughs are on the same levels, but in reality, there can be some small deviations, as a result, the support and resistance lines are not necessarily horizontal and parallel.

The model is considered complete only after the price breaks down the troughs (support line) level.

It is possible that the price moves back to the support line (which becomes the resistance line) and pushes away from it from below, after which a downtrend develops.

The longer the figure has been formed (a month or more) the higher its reliability.

Signals to sell the pattern of the Triple Top

• Breakout of any trough level;
• Break off any support line;
• Rebound from the support line (new resistance line) from the bottom at the return price movement after the breakout.

To confirm the breakout, price and time truth criteria, volume indicators (but not the Forex market tick volume), and indicator divergence can be applied.

Volume: large at the first peak, decreases at the second and third highs, increases at the subsequent fall and especially at the breakout of the figure.

The target of the Triple Top pattern is the distance from the resistance line to the support line, deposited down from the trough level breakthrough. If the troughs are not at the same level - the distance from the resistance line to the support line is postponed downwards from the place of the support line breakthrough.

Pattern Triple bottom

The triple bottom is a pattern of technical analysis of financial markets, including the Forex market, which is formed after a long downtrend and indicates a possible trend reversal.

The model consists of three consecutive troughs and is often considered a kind of figure inverted head and shoulders.

On a falling trend the price sets a new minimum and after two more attempts to decrease it cannot overcome the support level and begins to grow, probably with acceleration and gaps.

A horizontal support line is drawn through the bases and a parallel resistance line is drawn through the tops.
 

In a perfect figure, both tops and troughs are at the same levels, but in reality, there might be slight deviations, and as a result, the support and resistance lines are not necessarily horizontal and parallel.

The model is considered to be complete only after the price breaks through to the top level (resistance line).

It is possible for the price to go back to the resistance line (which becomes the support line) and push it back from above, after which an uptrend develops.

The longer the figure has been formed (a month or more) the higher its reliability.

Signals to buy the Triple Base pattern

• breaking of any vertex level;
• Breakout of any resistance line;
•  A rebound from the resistance line (new support line) from above at a return price movement after the breakout.

To confirm the breakout, price and time truth criteria, volume indicators, and indicator divergence can be applied.

Volume: large at the first trough, decreases at the second and third lows, increases at the subsequent growth and especially at the breakout of the figure.

Triple Base pattern movement targets

is the distance from the support line to the resistance line, postponed upwards from the place of a vertex level breakthrough;

if the tops are not on the same level - the distance from the support line to the resistance line is postponed upward from the place of resistance line breakthrough.

Pattern Diamond

Diamond is a pattern of technical analysis of financial markets, including the Forex market, which is formed after a long uptrend and indicates a possible trend reversal.

The model is formed by the diverging and then converging support and resistance lines and looks like a rhombus.

Some technical analysts refer Diamond as a kind of Triangle, as this pattern can be considered as a combination of two triangles: the widening one on the left and the symmetric one on the right.

The model is considered to be complete only after the price breaks the support line or the level of the last trough downwards.

The return of the price to the support line (which becomes a resistance line) and pushing away from it from below is possible, after which a downtrend develops.

The longer the figure has been formed (a month or more) the higher its reliability.

Signals to sell the pattern Diamond 

• Break through the support line;
• Breakout of the last trough level;
• Breakout of the level of the minimum trough
• Rebound from the support line (new resistance line) from below at a return price movement after the breakout.

To confirm the breakout, price and time truth criteria, volume indicators, and indicator divergence can be applied.

The volume repeats the price dynamics: increases and decreases together with the price range widening and narrowing, considerably increasing at figure breakout.

Target values of the Diamond model movement

Distance, equal to the height of the pattern, postponed downward from the support line breakthrough; distance from the level of maximal top to the level of the minimal trough postponed downward from the support line breakthrough.