Certain patterns on a candlestick chart reoccur – and they can lead to predictable (more or less) outcomes. The two most important outcomes that we’d like to know about in advance if at all possible would be:

1. Breakout – and sometimes it’s enough to know that there’s a strong chance of breakout into a new trend, even if we don’t know which way, up or down.
2. Reversal – a trend has come to an end and the price reverses, or reverts to level trading.

You’ll find many of these chart patterns detailed in individual posts, but here’s a few to be going on with:

Symmetrical triangles
In the symmetrical triangles pattern, the highs and lows of the price are converging, such that we can draw lines connecting these which would meet each other.
Neither buyers nore sellers can gain a significant advantage over the other, the price is range-bound and moving towards a constriction – not necessarily, but most likely, something’s going to give.

Absolutely perfect examples of symmetrical triangles are rare – we do live in the real world – the chart, right, gives the idea and here is the same chart continued on in time and with the Bollinger bands also plotted.

The action, when it comes, is dramatic – notice the squeeze building up, followed by a big breakout, here for 120 pips, and so it’s well worth looking to identify symmetrical triangles building into a pattern, and with the additional signals coming from indicators, be prepared to kick off a trade.

What we didn’t know for certain here is which way the price was going to go – so, when the signs are looking right, alert to the possibility, we wait. At some point the market will start to move one way or the other and then it’s time to catch the trend and start trading.
There is another way, with conditional orders – depending on the deal you have with your broking platform, you could place two orders, firstly to buy if the price reaches a given high, and secondly to sell if it dropped through a given low – covering all the options…

Asymmetrical triangles
Another possible breakout pattern, and again the highs and lows converge, but this time only one of them is doing the moving. Again, the market is consolidating, it’s at a balance – but balance points, in forex, tend to tip.

Ascending triangles

Here, there’s resistance on a level, but the troughs of the lows are becoming progressively more shallow.

The difference here, compared with symmetric triangles, is that it’s often said that the most likely way is up. The reasons given are that the sellers are getting weaker with every wave of activity, or that the buyers are resisting ever more succesfully, so the logic is that the price should breakout upwards – well, it just doesn’t always work out that way.

Breakout from the range is likely, but I wouldn’t ever suggest basing a trade on the idea that ascending triangles always lead to an uptrend.

And just to emphasise the fact, here’s a chart with a good enough pattern of ascending triangles, followed by a breakout to the down side.

Reversal Patterns

Head & Shoulders

A head and shoulders pattern consists of a central peak, the head, accompanied on either side by lower peaks, the shoulders. The two shoulders must, by definition, peak lower than the head.

A neckline can be drawn by connecting the two dips in the shoulders – see diagram – the neckline won’t always be exactly horizontal.

The forex action is relatively simple – wait until the price breaks through below the neckline and then place a sell order.

It’s a simple rule, correct more often than not, that the final downtrend reaches the same level below the neckline of this pattern as the head was above the neckline – that level is where you should be thinking about placing a take-profit stop.

This being forex and currency pairs, the identical situation, except reversed, produces the Reverse Head and Shoulders, where the trend goes from bearish to bullish, downtrend into final uptrend, but otherwise all the same rules apply.

There’s lots of other reversal patterns – the Double Top, its inverse, the Double Bottom – but enough innuendo, it’s on to 13. Elliott Wave Theory in Forex →