Cup and Handle

Cup and Handle pattern (another name is Cup and Saucer) is a long term pattern which sometimes can take 2-4 month to form. However, it may occur during one day period and can be also found on the hourly charts.

Cup and Handle chart pattern occurs during the trend reversal. First, the price is trying to recover — making a rounding bottom. Later the price finds resistance at the previous resistance level. This makes it turn and slope down a bit.before it gains enough strength to test that resistance level again. This forms a handle of the cup.

It is rather a visualization trick to draw that cup and a handle, because when the pattern and in particular the lip of the cup (resistance level) can be clearly seen traders can prepare to enter the market on the break of the lip. After such break the price tends to rocket up quite quickly.

Once the price breaks above the lip — traders open Long positions usually after the first price bar had successfully closed above the lip.

Profitable trades!

Sourcing:
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Head-and-shoulders or a Crown

Head-and-shoulders pattern is a very popular pattern to watch for. Many traders like this pattern because it is easy to spot, it has very high rate of success and offers significant profit opportunities.

Head-and-shoulders pattern is also called a Crown Pattern. A crown is easier to imagine... 

Head-and-shoulders can be almost always found on daily charts. This pattern tends to give more accurate results on larger time frames (weekly, daily or hourly).

Pattern indicates a potential reversal in the market.

Let's take a look at the chart below:

Crown formation becomes clearly visible when the price fails to make a new High (point 6 on the picture above) and instead stops and reverts at earlier High (point 2) level.

The chart at that particular moment looks next way:

This chart formation signals that Buyers cannot push the price any further to hold the uptrend and now it seems that sellers are behind the steering wheel. 
When price is unable to make a new High it is a signal for a possible trend reversal.

The picture on the chart starts to look like a Crown.
When traders first spot the pattern they try to find a neckline. Neckline is found from previous support levels: these are point 3 and 5 on the chart. But, there is also point 5a, which is a support level too — found a little bit later as the pattern unfolds.
Traders may use either point to draw a neckline and get ready for action.
Further actions are simple: once the neckline is broken everybody jumps in for a nice ride. 


However, there is another group of traders who seems to know some secret, because they were able to get in that particular trade long before everybody else even started thinking of trading that day; they were already gaining pips and, in fact, their money management is going to be much better when it's time to compare with those who is still waiting to get on board at the break of the Crown's neckline.

These "other" traders simply use a trend line to guide them through market price changes.
The beauty of a trend line is that it sensors a trend reversal much earlier than it can be actually spotted by a trader who does not use this tool.

This is what traders who use the trend line saw on the same chart that day:

Thier trend line is broken and when market again resumes its uptrend, not only does it find resistance at the earlier swing High it also hits against the trend line, which now acts as resistance.

There are two rules about trend lines that must be mentioned here: 
1. Once trend line is broken it is a signal for a possible trend reversal. 
2. In the bearish market an uptrend line acts as support, but once it has been broken, it is no longer a support but a new resistance line. (An opposite is true for bullish market where trend line represents a resistance level, but once broken it becomes a new support).


Returning to the Crown Pattern we can now understand the advantage of a trend line signal as it gives traders much earlier start/entry.

Regarding money management mentioned earlier: an entry at the re-test of the trend line also gains an advantage over the regular entry at the neckline.
According to the trend reversal rules, protective stops should be placed above the previous Swing High; in our case it is point 4 — a tip of the Head of the Head-and-shoulders pattern.
When entering at the neckline's breakpoint this Head and its Swing High will be much further (comparing to the trend line entry) and thus protective stop will be much wider.

Exit methods for the Head-and-Shoulders Pattern are:

1. Using a trailing stop. Since the price most of the time drops like a rock once the pattern has been spotted and everybody "has jumped in for a ride", traders can easily follow price moves and adjust their stops with each new progress made.
2. Using calculations based on the theory that the price after breaking a neckline is going to travel the amount of pips equal to the distance between the head's highest point and the neckline.

An upside-down Crown Pattern quick review:

Note: there may not always be a chance to enter at the re-test of the trend line — sometimes market just has no "strength" to reach there; then use a neckline for a regular entry.
Just remember: do not make up a pattern when it is not there. Trade what you see, not what you would like to see.


Sourcing:
http://www.forex-charts-book.com

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Trend reversal patterns

These patterns signal that current trend is about to end and the opposite trend is coming.

Double top pattern

Double top and double bottom are well known and commonly used chart patterns. They are also easy to spot. Double top pattern appears similar to letter "M", while double bottom pattern can be compared to letter "W".

What is common for these reversal patterns is that on both the attempt to achieve a new higher high (for uptrend) or lower low (for down trend) fails once reaching levels of strong opposite force. When approaching these levels price is  pushed back and if there is not enough power to continue the move, the market will prepare to reverse.

Double tops occur when price reaches the new high, retraces back from it, comes up again to re-test that new high, but instead of making next higher point it fails and comes down again. Spotting such case, traders start watching price actions closely. What do they want to see?

Traders want to see the price going through the base of the double top pattern.

If price drops below that base, a double top pattern is confirmed, and it is a signal to sell.

Also traders watch whether the price fails to break the highest point for the third time — if so, it will become a triple bottom pattern — even more emphasizing that current trend is about to change.

Trend line helps to track those actions even more effectively. If price breaks through the trend line and then follows through in the same direction, this is a strong signal of possible trend reversal.

The same picture. 
Green arrows show the moment where we start watching the price closely. Our trend line is broken, so when the price goes through the base we know that it is time to place a sell order.

Double bottom pattern works according to the same principles.

Price forms W-shape by reaching a new low, retracing up for a while, then it drops back to re-test that low and finding a strong support moves back higher, breaking the base of the pattern and establishing a new uptrend.

The picture of double bottom pattern. Almost identical parts form a W-shape: two red circled bottoms where price met strong support and reversed; later we see our trend line gets broken. The base for W-shape is determined and we wait for break-out through this base to occur.

The pattern is confirmed, and the market is providing a signal to buy.


Sourcing:
http://www.forex-charts-book.com

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Continuation patterns: the price 85% of the time will continue moving in its previous direction

Flag pattern

This pattern looks like a small flag with a flagpole. It is a continuation pattern, which means that the price will usually assume its previous direction after breaking out of flag.

When the flag is upside down (the flagpole is above the flag) — the price will continue moving down.

When the flag is in upright position — which means we were in the previous uptrend, the price will continue moving up.

However, there are exceptions from this rule. For example, when we trade in a downtrend and happen to spot a flag in "upright" position, a decision for us to go long from that point would be wrong.Why? Our aim is to trade with a trend (downtrend in this case), therefore only breakouts downwards which are going along with our dominant trend would count as a considered points to open new trades.

Pennant pattern

A pennant or a symmetrical triangle occurs when price action range is slowly narrowing down. Consistent lower highs and higher lows eventually brings price to an apex of a triangle. After being squeezed at the top of a triangle, the price most of the time will breakout from a pennant in the direction of the most recent dominant trend.

Trading strategy for all flags, triangles and pennants: wait for the price to break through the flag (or triangle, or pennant). Place the order after the first bar has been closed outside the pattern.

For more aggressive traders: the order can be placed ahead and right at the anticipated exit from the flag (or pennant, or triangle) pattern.


Ascending triangle

An ascending triangle is a continuation pattern. In our case it is an uptrend and we can see the moment where sellers were trying to resist keeping the same price level (top line) from being passed, and at the same time we also note that buyers were able to push the price up and close each trade with higher results. Eventually sellers could not hold the price at the resistance level and the breakout occurs.

A trading strategy would be again to wait until the price breaks out of a triangle.
Can you locate the next ascending triangle on the picture?

During the downtrend, however, ascending triangles are expected to break down and out, rather than up.

Now let's see what we can learn from the next picture. How we would trade relying only on the knowledge gathered so far.

Sourcing:
http://www.forex-charts-book.com

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How to recognize and trade different Forex chart patterns

The very first look at a newly opened chart usually gives traders a little or no clue what the market is currently doing.

It usually appears like that wavy indefinite graph you see below.

A trader must «reorganize» it into a very clear picture to be able to trade.

Analysis usually starts with defining the trend.

It may be needed to switch to a bigger time frame (hourly, daily) to see where exactly the market price is heading: up or down.

Having done that a trader can plot a trend line.
Note the rule of placing trend lines for uptrend and downtrend.


For uptrend a trend line is plotted below the price action to indicate a support level.

For downtrend — above the price action to mark the level where resistance occurs.

For more information about trend lines visit here


«Always trade with the trend»... or at least try to — the gold rule in trading. That's why we want to find a direction of the trend.

Price can form channels. A channel is a corridor with parallel lines in between which the price moves.
The longer the price stays in a channel the stronger the channel becomes.

Trading strategy: watch for the price attempting to trade out of a channel. Once the first bar is closed outside the channel it is time to execute a trade in the direction where this break-through has occurred.


Sourcing:
http://www.forex-charts-book.com

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