The Forex market is cyclical and incredibly interconnected. Therefore, every major movement on the market generally has some precursor movements that lead up to it - and with time you can learn these movements. That is the basis behind the Forex Technical Analysis - a rather reliable way of predicting the movements on the Forex trading instruments.
What Are the Reversal Chart Patterns
The best way to express the Forex market movements is chart patterns - a visualization of the market prices using “candlesticks”. And the most interesting - and potentially profitable - of them are the reversal patterns.
Reversal chart pattern means that the currency pair (or any other financial instrument) is already at its peak, followed by a reversal. In the future, the price will move in the opposite direction which makes reversal patterns a great moment to get into the market.
There are quite a lot of these patterns. We are going to review the most common and useful ones.
Head and Shoulders
This ascending chart pattern is characterized by a series of three peaks with the middle one being the highest. These peaks are called Left Shoulder, Head, and Right Shoulder - with Head being slightly higher (at both the bottom and top points) than the other two. Once the price rolls off the Right Shoulder, it enters a prolonged reversal.
Despite the fact that this pattern is rather common, it often gets mistaken for a different one or applied incorrectly. To make sure that you are definitely looking at the Head and Shoulders pattern, consider if it corresponds to these features:
- There is a strongly marked uptrend before the formation of the pattern;
- The quotes gain a local maximum when forming the Left Shoulder;
- Once the price rolls off the Left Shoulder, it falls below the support level before climbing back up again;
- The base level for the peaks is almost horizontal or has very little incline;
There is also an Inverted Head and Shoulders pattern that forms on descending charts.
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Multiple Top/Multiple Bottom
The trend doesn’t reverse by itself - it bounces off the resistance or support line. However, the traders are rarely unanimous in their decisions and the trend might take a couple of “bumps” - a sharp ascends and descends - at the line before everyone gets the message. On the charts, it generally looks like a Multiple (Double, Triple) Top/Bottom pattern.
At some point all traders come out of the outdated trend and enter the new one, which accelerates the reversal.
WARNING : You may attempt to trade during the development pattern — sell at the tops and buy at the bottoms. However, it is considerably more risky, and if you want a safer strategy — wait for the final bounce off before entering the market.
Rising/Downward Wedge
Wedge happens when the quotes are moving while the trading range of the currency pair - the difference between its highest and lowest local points - is becoming smaller. Wedges can be both upward and downward.
A lot of beginner traders see the wedge and immediately start trading in its direction, but they don’t know that it’s a reversal pattern. And eventually, the wedge turns around and starts moving in the other direction - even further than its starting point. However, a much better option would be to wait until the price break and entering the newly formed market.
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Reversal Chart Patterns Cheat Sheet