Pricing Patterns

The Importance of Price Patterns

Whilst an awareness of trends is vital for forecasting subsequent movement of a currency pair, technical indicators are often employed by foreign exchange traders to successfully identify specific trade entry levels. Global decisions to buy or sell; driven in the main by subtle insights derived from a range of technical indicators; produce patterns in the charts which can offer their own insights into future market movements. These price patterns can in turn enable traders to more successfully identify trade entry opportunities, earning them an important position in the Forex trader’s toolkit.

Price patterns can either be Continuation Price Patterns or Reversal Price Patterns.

Continuation Price Patterns

Continuation Price Patterns enable traders to forecast the extent to which price movement in a given direction is likely to continue. Offering traders a chance to make an educated assessment of the sustainability of movement in a given direction following a period of consolidation, Continuation Price Patterns can also provide an insight into the extent to which any such movement is likely to occur. With this information in mind, traders may look to establish trade entry or exit signals, safe in the knowledge that; if their forecasts are correct; the currency pair should see further movement in the earlier direction.

As per many of the other tools available to the foreign exchange trader, Continuation Price Patterns are not infallible. They can however offer valuable insights into whether subsequent market movements are likely to continue along their earlier trajectory. Continuation Price Patterns include Pennants; Flags; Wedges; and Triangles.

Pennant Patterns

Pennant Patterns are the product of a consolidation as the pair’s price ranges tightens. Evident in both Bull and Bear markets, such patterns typically unfurl on timeframes which are shorter in nature.

Pennant Formations are evident under the following circumstances:

• The Resistance level; which is downward trending; is converging with Support, or;
• The Support level; which is upward trending; is converging with Resistance.

Further, Pennants are characterised by the following:

• A Flag Pole, which spans the distance from the beginning of the trend to the highest point in the pattern in a Bull market, or;
• A Flag Pole, which spans the distance from the beginning of the trend to the lowest point in the pattern in a Bear market.
• A Breakout Point; the level at which the pair’s price breaks up above the down trending level of Resistance in a Bull market, or;
• A Breakout Point; the level at which the pair’s price breaks down below the upward trending level of Support in a Bear market.

Where the above is evident, Pennants enable traders to develop price projections; levels to which a given currency pair should rise or fall depending upon whether the market is Bullish or Bearish respectively. Price projections will typically by equal in height to the flag pole preceding the pattern.

Flag Patterns

Flags Patterns form as the price of a given currency pair pulls back from the predominant trend in a parallel channel. As per Pennant Patterns, Flags are evident in both Bull and Bear markets, and typically occur across shorter timeframes.

Flag Formations are evident under the following circumstances:

• A Resistance level; which is downward trending; and which is running in parallel with the Support level, or;
• A Resistance level; which is upward trending; and which is running in parallel with the Support level, and;
• A Support level; which is downward trending; and which is running in parallel with the Resistance level, or;
• A Support level; which is upward trending; and which is running in parallel with the Resistance level.

Further, Flags are characterised by the following:

• A Flag Pole, which spans the distance from the beginning of the trend to the highest point in the pattern in a Bull market, or;
• A Flag Pole, which spans the distance from the beginning of the trend to the lowest point in the pattern in a Bear market.
• A Breakout Point; the level at which the pair’s price breaks up above the downward trending level of Resistance in a Bull market, or;
• A Breakout Point; the level at which the pair’s price breaks down below the upward trending level of Support in a Bear market.

Where the above is evident, Flags enable traders to develop price projections; levels to which a given currency pair should rise or fall depending upon whether the market is Bullish or Bearish respectively. Price projections will typically by equal in height to the flag pole preceding the pattern.

Wedge Patterns

Wedge Patterns form as the price of a currency pair pulls back from the predominant trend into a tighter consolidation range. As per previous Continuation Price Patterns, Wedges typically unfurl over shorter timeframes.

Wedge Formations are evident under the following circumstances:

• The Resistance level; which is downward trending; is converging with Support, or;
• The Resistance level; which is upward trending; is converging with Support, and;
• A Support level; which is downward trending; and which is converging with the Resistance level, or;
• A Support level; which is upward trending; and which is converging with the Resistance level.

Further, Wedges are characterised by the following:

• A Flag Pole, which spans the distance from the beginning of the trend to the highest point in the pattern in a Bull market, or;
• A Flag Pole, which spans the distance from the beginning of the trend to the lowest point in the pattern in a Bear market.
• A Breakout Point; the level at which the pair’s price breaks up above the down trending level of Resistance in a Bull market, or;
• A Breakout Point; the level at which the pair’s price breaks down below the upward trending level of Support in a Bear market.

Where the above is evident, Wedges enable traders to develop price projections; levels to which a given currency pair should rise or fall depending upon whether the market is Bullish or Bearish respectively. Price projections will typically by equal in height to the flag pole preceding the pattern.

Triangle Patterns

Triangle Patterns are the product of a currency pair hitting a flat level of either Support or Resistance before moving into a tighter consolidation range. Where market conditions are Bullish, a Triangle is typically referred to as an Ascending Triangle. Conversely, where market conditions are Bearish, a Triangle is typically referred to as a Descending Triangle.

Triangle Formations are evident under the following circumstances:

• The Resistance level; which is horizontal; is converging with Support, or;
• The Resistance level; which is downward trending; is converging with Support, and;
• A Support level; which is upward trending; and which is converging with the Resistance level, or;
• A Support level; which is horizontal; and which is converging with the Resistance level.

Further, Triangles are characterised by the following:

• A Flag Pole, which spans the distance from the beginning of the trend to the highest point in the pattern in a Bull market, or;
• A Flag Pole, which spans the distance from the beginning of the trend to the lowest point in the pattern in a Bear market.
• A Breakout Point; the level at which the pair’s price breaks up above the down trending level of Resistance in a Bull market, or;
• A Breakout Point; the level at which the pair’s price breaks down below the upward trending level of Support in a Bear market.

Where the above is evident, Triangles enable traders to develop price projections; levels to which a given currency pair should rise or fall depending upon whether the market is Bullish or Bearish respectively. Price projections will typically by equal in height to the flag pole preceding the pattern.

Reversal Price Patterns

Whereas Continuation Price Patterns provide an indication of the sustainability of a trend in a given direction, Reversal Patterns enable traders to forecast the extent to which price movement in a given direction is likely to reverse. Offering traders a chance to make an educated assessment of the likelihood of a price reversal, Reversal Patterns can also provide an insight into the extent to which any such movement is likely to occur. With this information in mind, traders may look to establish trade entry or exit signals, safe in the knowledge that; if their forecasts are correct; the currency pair should see subsequent movement in the anticipated direction.

As per many of the other tools available to the foreign exchange trader, Reversal Patterns are not infallible. They can however offer valuable insights into whether subsequent market movements are likely to involve a price reversal. Reversal Patterns include Double Tops and Double Bottoms; Triple Tops and Triple Bottoms; Head and Shoulders Tops; and Head and Shoulders Bottoms.

Double Top and Double Bottom Patterns

Double Top and Double Bottom Patterns form as a currency pair’s price hits either a Support or Resistance level twice before reversing in the opposite direction. These patterns are typically evident over longer timeframes.

Double Top and Double Bottom Patterns are evident under the following circumstances:

• A Resistance level; which is horizontal, or;
• A Resistance level; which is slightly angled, and;
• A Support level; which is horizontal, or;
• A Support level; which is slightly angled.

Further, Double Top and Double Bottom Patterns are characterised by the following:

• A Breakout Point; the level at which the pair’s price breaks up above the down trending level of Resistance in a Bull market, or;
• A Breakout Point; the level at which the pair’s price breaks down below the upward trending level of Support in a Bear market.

Where the above is evident, Double Top and Double Bottom Patterns enable traders to develop price projections; levels to which a given currency pair should rise or fall depending upon whether the market is Bullish or Bearish respectively. Price projections will typically by equal in height to the distance between Support and Resistance levels.

Triple Tops and Triple Bottoms Patterns

Triple Tops and Triple Bottoms Patterns form as a currency pair’s price hits either a Support or Resistance level three times before reversing in the opposite direction. These patterns are typically evident over longer timeframes.

Triple Tops and Triple Bottoms Patterns are evident under the following circumstances:

• A Resistance level; which is horizontal, or;
• A Resistance level; which is slightly angled, and;
• A Support level; which is horizontal, or;
• A Support level; which is slightly angled.

Further, Triple Tops and Triple Bottoms Patterns are characterised by the following:

• A Breakout Point; the level at which the pair’s price breaks up above the down trending level of Resistance in a Bull market, or;
• A Breakout Point; the level at which the pair’s price breaks down below the upward trending level of Support in a Bear market.

Where the above is evident, Triple Tops and Triple Bottoms Patterns enable traders to develop price projections; levels to which a given currency pair should rise or fall depending upon whether the market is Bullish or Bearish respectively. Price projections will typically by equal in height to the distance between Support and Resistance levels.

Head and Shoulders Top and Head and Shoulders Bottom Patterns

Head and Shoulders Tops and Head and Shoulders Bottoms Patterns form as a currency pair’s price records movements back and forth. Creating the appearance of a head and shoulders, both Head and Shoulders Tops and Head and Shoulders Bottoms Patterns are typically evident over longer timeframes.

Head and Shoulders Top and Head and Shoulders Bottom Patterns are evident under the following circumstances:

• Currency prices hit Resistance before eventually breaking through, or;
• Currency prices hit Support before eventually breaking through, and;
• The currency pair rises to a higher Resistance level before returning to the initial Resistance level, or;
• The currency pair falls to a lower Support level before returning to the initial Support level.

Further, Head and Shoulders Top and Head and Shoulders Bottom Patterns are characterised by the following:

• A Resistance level; which is horizontal, or;
• A Resistance level; which is slightly angled, and;
• A Support level; which is horizontal, or;
• A Support level; which is slightly angled.

Note that these levels are the basis for the formation of the right and left shoulders. These patterns also feature:

• A higher Resistance level; which is horizontal, or;
• A higher Resistance level; which is slightly angled, and;
• A lower Support level; which is horizontal, or;
• A lower Support level; which is slightly angled.
• A Breakout Point; the level at which the pair’s price breaks up above the neckline, or;
• A Breakout Point; the level at which the pair’s price breaks down below the neckline.

Where the above is evident, Head and Shoulders Top and Head and Shoulders Bottom Patterns enable traders to develop price projections; levels to which a given currency pair should rise or fall depending upon whether the market is Bullish or Bearish respectively. Price projections will typically by equal in height to the distance between the head and the neckline.