Common Chart Patterns Found on The Spot Forex

Introduction

This article shows examples of common consolidation and retracement patterns that occur frequently on the spot forex. When currency pairs are not moving they are consolidating.  When they consolidate they exhibit behavior patterns that occur frequently and are easily recognizable. Typically, currency pairs move in the London and US trading session then they consolidate after the first few hours of the US session. This pattern is repeated day after day. Currency pairs move, then they consolidate, then they move, then they consolidate and the pattern keeps repeating. The consolidation and retracement chart patterns will be discussed and illustrated in this article.

Conventional Chart Patterns

Some conventional chart patterns occur frequently on the spot forex. Forex traders need to focus on recognizing pennants, flags, double tops, double bottoms, ascending and descending wedges, and oscillations. These chart patterns are easy to recognize and occur frequently on the spot forex, they can also help to confirm your trend direction or in some cases a potential reversal.

This article is not filled with a lot of general information about charts or general chart patterns from all markets. The examples and illustrations in this article really do occur weekly on the spot forex week after week. If you look at various time frames across a lot of pairs  you will see all of them clearly over time.

As a starting point and to get any  forex trader familiar with some generalized chart patterns please check out Chartpatterns.com.  This website will get you started and give a forex trader a general feel about chart patterns and some generalized picture and sketches. 

Our objective, however, is to give you specific chart patterns that occur frequently on the spot forex, not some generalized chart course. Reviewing  Chartpatterns.com is only meant to get you oriented to  to the subject matter, specific forex chart patters that occur regularly are below.

Please Note …..!!

There is a difference between a chart pattern and a technical indicator.  A chart pattern is something you can see on a bare bar chart with no indicators added. A bare bar chart is an open high low close chart, without any indicators added at all. Examples are below.

As a matter of fact most technical indicators mask the bare chart patterns because most forex traders attach so many layers technical indicators to their charts you cannot see any basic chart pattern behind them.

Forex traders may have a double top right in front of them but cant see it because of all of the interference from the layers of technical indicators masking the bare chart pattern.

In the charts below with the black background there are some simple moving averages attached to the charts but the basic bar chart patterns are still very obvious.

Illustrations

This following illustrations have two kinds of  examples. Some of the illustrations and pictures and generalized examples or hand sketches of typical forex consolidations and chart patterns. Some of the pictures and illustrations with the black background are actual forex charts. 

CLICK ON ANY OF THE ILLUSTRATIONS

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Bull Flag Without A Retracement

This is a very straightforward bull flag. Put the price alarm above the highs (1-2) and intercept the next move up. In this case the pair consolidates between points 1 and 2 but it does not retrace. This consolidation generally occurs in a trending market in both directions. Most often it occurs on intraday time frames line M5 and M15, although they can occur on any timeframe. This is a bull flag but there are also bear flags for downtrends.

Bull Flag With A Retracement

This is one form of a bull flag but the area from point 1 to 2 is a retracement.  Occurs on the intra-day time frames like M5 and M15 in a trending market but can occur on any time frame. The trend on this pair is up.

Increasing Tops and Bottoms

Increasing tops and bottoms in an uptrend. The down cycles are consolidations and at the bottom of each down cycle a relative low is formed. Each relative low is the trough of the cycle and are all entry points when they turn back up. When you see this on a H1 time frame or larger, trade it!!!
Please remember that this can happen in reverse within a downtrend, decreasing tops and bottoms.

Choppy Market

The  illustration is a currency pair in a tight choppy range, the bottom illustration is a currency pair in a wider choppy range or support/resistance cluster. When a currency pair is choppy in a tight range or wide range essentially this is essentially a consolidation.

You are better off placing a straddle price alarm on this pair outside of the range of the choppiness than messing around trading the choppiness, just move onto another pair or wait one or two days. Why does the choppiness occur ??  Because, for example, if this is the AUD/USD either all of the AUD pairs or USD pairs are choppy or in support or resistance clusters.

Oscillations

An oscillation is a really a consolidation because there is no net movement. Another way to view it is that the tops and bottoms of the oscillation cycles are also consolidations. Oscillations can occur on any time frame but for a potential trade you would look for the  H4 time frame charts or larger to be oscillating so there is more pip potential. This occurs frequently when market is not trending or after very large moves over weeks and weeks. If a currency pair is not trending it is likely oscillating in some fashion.

Pennant/Ascending Triangle

This is an ascending triangle or pennant, each down cycle is a consolidation and retracement. Buyers keep coming in until the top resistance is broken. Eventually the pair breaks out to the upside. Can occur on small or large time frames. Pennants occur frequently and signal a trend continuation to the upside. Downward descending triangles also occur.

Head and Shoulders

The right half of the chart is also two decreasing tops, which is bearish. You can also have inverted head and shoulders, which is bullish.  Head and shoulders occur very rarely on the spot forex. Do not look at the charts to try to manufacture one or force one into your thinking.

Flags

The hand drawings of flags at the top of the illustrations are a more accurate depiction of what actually occurs on the spot forex. You will occasionally see flags that occur that look more like this but the two flags at the top of the illustrations are much easier to trade.

Ascending Triangle

Increasing bottoms and steady resistance tops. Trend direction is up indicated by the the red arrow. Breakout point and price alarm above resistance.

Descending Triangle

Decreasing tops  and steady resistance bottoms. Trend direction is down indicated by the the red arrow. Breakout point and price alarm below support.

Descending Wedge

The general profile of a descending wedge is three downward cycles  with contracting ranges. The first sell off is the largest followed by two more sell offs with smaller down cycles. Big sell off,  medium sell off,  small sell off, in order. One likely scenario is a reversal at the end of the third down cycle. The trader who sees this would take action by setting a straddle alarm above and below the possible inflection point (black dot) at the bottom right.

You can also have an ascending wedge. Ascending and descending wedges can occur on a fairly strong trending pair but we do not see these very frequently.

Ideal Double Top

This is a hand sketch of an ideal double top on a currency pair. There is a long upward move, sometimes for a few weeks, followed by a double top and reversal back down. Most pronounced double tops are on H4 time frames or larger. The larger the time frame the larger the reversal. Double bottoms also occur. 

Double tops and bottoms can occur on any pair. Double tops and bottoms occur frequently, more frequently on exotic pairs and quite frequently on the JPY exotics. Double tops and bottoms signal reversals after a long move and are fairly reliable reversal indicators.

Bull Flag 

Actual bull flag example of the USD/CAD within the context of an uptrend. The price alarm and breakout point in the direction of the trend should be placed just above the top of the flag for the trend continuation on this high probability trade and bullish chart pattern.

Double Bottom

Actual chart of a double bottom on the CHF/JPY W1 time frame. This is a major time frame and represents a very large reversal.  Double bottoms indicate reversals back to the upside and a new major trend to the upside has started on this pair with no resistance.  A very valuable chart pattern.

Double Top

This is an actual forex chart of the CHF/JPY on the H4 time frame. The double top occurs after along move of hundreds of pips  to the upside and indicates a reversal back down. As you can see the reversal is already starting.

Pennant/Ascending Triangle

This is an actual forex price chart of a pennant/ascending triangle, a near textbook case.  We would expect a continuation of the trend, which is up. This pattern can occur on almost any time frames but in this case the illustration is for an M30 (30 minute) time frame on the EUR/GBP. This represents about a two day consolidation to build the pattern. Set a price alarm above the short term highs.

How to Find These Forex Chart Patterns 

Simple, just use multiple time frame analysis every day to “drill down” the charts. Educating yourself about multiple time frame analysis of the spot forex is easy, just start by reading. When looking at the various time frames across many pairs and you will start to spot these chart patterns weekly.

Conclusions

If you check the charts on the forex daily you can spot theses common chart patterns. Chart patterns do not provide you with a thorough analysis or entry points into trades, but can play a role in an overall forex market analysis. They can assist you with locating trend continuations as well as reversals when combined with simple trend indicators and multiple time frame analysis