However, the last year of trading has produced a new winner in my book. The head and shoulders is the least common of the three formations we will discuss today. Put simply, it works. But more than that, it can be quite easy to spot and extremely profitable when you know what to look for and how to trade it.
The pattern can offer a precise entry given the fact that the neckline is generally based on several highs or lows. This fact alone takes a lot of the guesswork out of determining when the pattern has confirmed. Another huge benefit, like the other two technical formations below, is that we have a measured objective from which to identify a possible target. In order to be considered valid, the two shoulders of the pattern must overlap at some point. While a break of the trend line if one exists may trigger a change in trend, it does not fit the criteria to be called, or traded as, a head and shoulders pattern.
Notice how no part of the first shoulder in the illustration above overlaps the second shoulder. This disqualifies the price structure from being traded as a head and shoulders pattern. In other words, they simply measure out the distance in pips and then set a pending order to book profits at that level.
While that may occasionally work out in your favor, a much better approach is to determine whether or not that objective lines up with a pre-existing key level. If it does, perfect, however a more common scenario is one where the market will come in contact with a key level prior to reaching the objective. Last but not least, the head and shoulders is best traded on the 4-hour chart or higher.
However, I have found that the best price structures tend to form on the daily time frame. A formation on the 1-hour chart or lower should always be ignored, regardless of how well-defined the structure may be. As the name implies, the wedge is a technical pattern in which price moves into a narrowing formation , also called a triangle. Unlike the head and shoulders we just discussed, the wedge is most often viewed as a continuation pattern.
This means that once broken, price tends to move in the direction of the preceding trend. Only once support or resistance is broken should you begin to identify possible targets. The wedge was one of the first Forex chart patterns I began trading shortly after I entered the market in By , I had not only become proficient in trading them, but I had also developed the intuition necessary to identify the most profitable formations — something that can only be had after years of practice.
While you can trade these on the 4-hour time frame, in my experience the most lucrative trade setups form on the daily time frame. Wedges tend to play out relatively quickly compared to something like the head and shoulders pattern. However, they also allow for an advantageous risk to reward ratio , especially the larger structures that form on the daily chart.
This combination allows you to secure a nice profit in a relatively short period of time. The first and perhaps most prevalent is trying to force support and resistance levels to fit. In fact, this is a common issue I see across all of trading, not just wedges. As I always say, if a level is not extremely obvious, it should be ignored. The second mistake I see among traders is attempting to trade a wedge on a lower time frame. Last but not least is the issue of timing.
As you may well know, timing is a key factor if you wish to succeed in the world of Forex. And when it comes to wedge patterns, timing is everything. More often than not, when this pattern breaks, the market will retest the broken level as new support or resistance.
This retest offers the perfect opportunity for an entry, however it does take patience to achieve. Be careful of entering on the first closed candle outside of the pattern as you will likely get a retrace of some sort. This will not only give you a more favorable entry, but it will also help you avoid making an emotional decision about exiting the position in the event you entered prematurely.
The bull or bear flag is another name for a channel. So as you might expect, it is most often traded as a continuation pattern. Like the head and shoulders, flags often form after an extended move up or down and represent a period of consolidation. I feel confident in saying that you could literally trade nothing but bull and bear flags and make very good money in the Forex market. This, of course, assumes that you have become a proficient price action trader.
There are a few reasons, but mostly due to the fact that these formations occur quite often. This is true even if you are trading the higher time frames. That said, you only need one profitable trade each month to make good money as a Forex trader. If that one good trade comes in the form of a bullish or bearish flag pattern, it is likely to have an extremely favorable risk to reward ratio attached to it. This is another reason why I love having this price structure included in my trading plan.
The measured objective in this case often allows for several hundred pips on most currency pairs. Combine that with a precise entry and a well-placed stop loss that is 50 to pips away, and you have a recipe for a profit potential of 3R or better just about every time.
Like the other patterns above, there are a few things you should watch out for when trading this formation. The first is perhaps the most obvious — never cut off the highs or lows in order to make the channel fit. Calculating the measured objective also tends to give traders fits. Just remember that the measurement should include the consolidating price action. However, if you enjoy using raw price action to identify opportunities, the three formations above would make a great addition to your trading plan.
Doing so will only slow the learning process and also send you chasing trades in every which direction. Becoming a successful trader is about finding an approach to the markets that fits your style, defining your trading plan and then refining those rules as you gain experience. So if you enjoy trading technical patterns, as I do, be sure to give some consideration to the three we just covered; they truly are all you need to become consistently profitable. As the name implies, Forex chart patterns are formations that occur on a price chart.
They develop due to psychological triggers as other traders tend to focus on similar patterns in the market. The head and shoulders, channels bull and bear flags , and wedges rising and falling are three of my favorite patterns. In my experience, the higher time frames such as the daily and weekly are the best to identify and trade chart patterns. The 4-hour can be advantageous as well, but the daily and weekly should come first, in my opinion.
It contains all three price structures you studied above and includes the characteristics I look for as well as entry rules and stop loss strategies. Save my name, email, and website in this browser for the next time I comment. These three patterns are easy to spot, simple to trade and highly effective. Hi Justin, thank you for your great and consistent work. Can this flag be valid? Awesome post Justin. What I like about these patterns is that once they form on the charts they are for the most part consistent and predictable.
It is traded once the neckline is broken and the stop are placed at the lowest low of the curve, while take profits can be placed at a reasonable risk and reward ratio. The ascending triangle is a bullish continuation pattern formed by connecting two trend lines. The first is a flat trend line or a horizontal trend line, while the second one is an ascending trend line or a rising trend line.
The intersection of both these trend lines forms a rising triangle. The pattern is completed once the price breaks above the triangle. The stop loss can be placed at the previous swing low within the triangle and take profit levels can be set with 1: 2 risk and reward ratio.
Descending Triangle pattern is a bearish continuation pattern. Traders expect the prices to continue the trend after a brief pause in the movement. These patterns provide the best prices to book partial profits and to add more positions in an existing trade. A falling wedge pattern is a bullish reversal pattern. The pattern consists of 2 falling trend lines, with prices moving within the trend lines. The trend lines converge each other but do not join to form a triangle at the current market price scenario.
A break above the upper falling trend line A completes the pattern, and the trend is validated by a close of the candle above the falling trend line A. Stops can be placed below the previous low with profit targets with a risk and reward ratio. A rising wedge pattern is a bearish reversal pattern. The pattern is formed by two rising trendlines, converging in the end but not forming a triangle. Entry is confirmed once the prices break below the rising trend line B, with stops above the previous high, the profits can be booked with a good risk and reward ratio.
Pennants are continuation patterns; depending on the formation within a trend, they can be classified as bullish or bearish. The above picture M shows a rising pennant pattern. The consolidation phase is marked by the price staying within the trend lines, forming a triangle. The pattern is validated once prices break above the pattern with a candle close above the trend line. Prices tend to continue in the direction of the previous trend after completion of the pattern.
A falling pennant is a bearish continuation pattern formed during a downtrend. The prices should be in a downtrend, and the pattern has to be formed within the downtrend. The consolidation phase, once broken, will lead to the continuation of the current trend.
Pennants are mostly formed during a trend and could be traded by new and experienced traders. The pattern tends to form frequently and provide good additional entry points. Many traders add multiple positions to ride the trend more profitably. Double tops, double bottoms, head and shoulders, rounded top, Rounded Bottom, triangles, and Pennants are a few profitable patterns to name. However, most patterns can be traded profitably and would provide a higher risk and reward ratio.
A comprehensive pdf of forex patterns can be downloaded here. Additional confirmation is necessary after the completion of the chart patterns. Candlestick patterns and chart patterns can go hand in hand and can be used for additional confirmation of price action.
Candlestick patterns like Hammer, Hanging man, Harami, Pin tops, and Engulfing candles can be used to confirm chart patterns. Mere completion of the pattern does not warrant immediate price movement, so traders need to look for additional confirmation of price action before deciding to place the trades. Though patterns occur repeatedly, they may not be successful every time; they need to be validated in the context of price action as price movements are very dynamic.
Best technical traders always look for clues in the charts and use the charts to make their trading decisions. Chart patterns provide the traders with invaluable insight and assist the traders in spotting the best entry points. For quick reference, you can download the 28 Forex Patterns pdf file here. He is a recognized expert in the forex industry where he is frequently invited to speak at major forex events and trading panels.
His insights into the live market are highly sought after by retail traders. Ezekiel is considered as one of the top forex traders around who actually care about giving back to the community. He makes six figures a trade in his own trading and behind the scenes, Ezekiel trains the traders who work in banks, fund management companies and prop trading firms. The hyperlink to the forex patterns cheat sheet is still missing when I view this too. However the information is very valuable!
This then is makes me question type of client. Does your budding knowledge within a in the 5вGHz work on their. Browser, shell access Establishing a charitable on the computers editor, and more.
What are the most profitable Forex patterns to trade?. Most Commonly Used Forex Chart Patterns · Head and Shoulders (H&S) · Triangles · Engulfing Pattern · Ichimoku Cloud Bounce · The Bottom Line. Generally speaking, if you are looking for chart pattern to trade, the most consistent, and hence, the most profitable chart pattern is the.