Learning to Trade Forex
Using Classic Chart Patterns

Wouldn't it be nice to be psychic?

If we wanted to know where the GBP/USD pair will trade tomorrow morning, it would be as simple as peering into a little crystal ball!

Unfortunately, we are not psychic. So we must do things the hard way and analyze past performance in the hopes of predicting future performance.

Of course, even the most astute technical analysts cannot be right 100% of the time. It's all a matter of probabilities.

Still, learning about this important form of technical analysis is well worth it. It will provide you with a number of useful tools and might even allow you to make stunning predictions about the future direction of the forex market.

In essence, technical analysis is a key tool for anyone serious about learning to trade forex. Spotting and knowing what to do once you’ve identified a classic chart pattern can be quite profitable, as many forex professionals will attest.

What You Need to Identify Classic Chart Patterns

The first step in learning how to trade forex using classic chart patterns involves obtaining a price chart for the currency pair of interest to you.

Check out Figure 1, for example. It's a simple hourly bar chart for the GBP/USD currency pair.

The blue trend lines highlight a symmetrical triangle chart pattern. Notice how the triangle is converging to a single point?

Sooner or later, there's going to be a breakout from this triangle either to the upside or the downside.

As you're learning to trade forex, here's one effective trading strategy for this particular chart pattern...

Prepare for either breakout by placing a stop order to buy just above the descending top line and another stop order to sell just below the ascending bottom line. When one order is triggered, be sure to cancel the other order. Easy peasy!

Other types of chart patterns are covered in the sections below.

Continuation and Consolidation Patterns

In learning to trade forex using classic chart patterns, the continuation pattern is just that — a chart pattern that indicates the underlying trend is still dominant and the currency pair will likely continue to trade in the direction of that trend.

Some continuation patterns are also called consolidation patterns. After a large move, the market sometimes enters into a trading range, or a period of consolidation.

In some cases, the exchange rate of currencies pairs will often move considerably counter-trend before continuing in its long-term direction.

Here are the typical continuation/consolidation patterns:

• Flag Patterns – this pattern is usually preceded by an extreme move…so extreme that the move resembles a “flag pole” on the chart. The market then trades in a consolidation area between two parallel trend lines, which are usually slanted counter-trend. The market then usually breaks out and moves sharply in the same direction as the flag pole (i.e., the previous trend).


• Triangle Patterns – like the flag, this type of triangular chart pattern forms between two converging trend lines. At some point before the convergence point, the market breaks out to make a sharp move on increased volume. Triangles have several forms: symmetrical, ascending, or descending. See Figure 1 for an example of a symmetrical triangle.


• Pennant Pattern – like the flag, a pennant is preceded by a flag pole move, with the market subsequently consolidating between trend lines which converge. The pennant resembles a small, symmetrical triangle.


• Wedge Pattern – formed by two converging trend lines which resemble a wedge. A falling wedge temporarily disrupts an uptrend and is therefore bullish, while a rising wedge represents a break in a downtrend, and is a bearish pattern.


• Rectangle – this is formed by the market trading within a distinct range. With major highs on top and major lows on the bottom, the market trades between two horizontal parallel lines. A breach in either direction of one fifth the width of the rectangle would signal a breakout. Typically, the breakout target would be equal to the width of the rectangle (i.e., its average trading range).

In the process of learning to trade forex, you’ll surely encounter times when markets reverse and start heading in the opposite direction.

In general, a reversal pattern gives you a signal that the market is about to turn around and start moving in the opposite direction of the previous trend.

Common reversal chart patterns include:

• Head and Shoulders Formation – first a shoulder forms and then a major top is hit to form the head. This is followed by the right shoulder forming with a peak at almost the same level as the left shoulder. The neckline is where technicians generally wait for a breakout. The price target is usually a measured move equal to the distance from the top of the head to the neckline.


• Double or Triple Top or Bottom – forms when two (or three) similar levels are tested, with a subsequent rally or dip. These moves will define a neckline and a breakout would lead to a forex trend reversal, with a move equal to the distance from the neckline to the tops or bottoms of the pattern.

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