The Most Profitable Chart Patterns To Trade Forex

Part II Forex Trading Strategies

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12. Chart Patterns Trading Strategy 12.1 The Most Profitable Forex Chart Patterns For many reasons, Forex charts usually form some repeated patterns. If you work with them and your eyes are trained by looking at them, these patterns are very powerful tools to guide you during your trades. There are many patterns and each of them has its name but to be simple and short I explain here only the most profitable patterns which always work and you can rely on.

12.1.1 M and W (Bat) Patterns These are the most frequent chart patterns and more or less have M or W shape. Sometimes, one leg extends or another leg gets short.

Figure 12.1.1.1 A W (bat) pattern 23

These are not very accurate signals but they help you to get a rough estimation of a currency move.

12.1.2 Triangle (Weakening M and Strengthening W) Patterns Contrary to M and W patterns, triangle (or weakening M and strengthening W patterns) are very accurate signals (0.8 or more probable). A weakening M is formed when an upward (bullish) move is completed, then a weaker downward move (one third or half of the first move) happens and then a very weak bullish (usually one candle) comes after it. After completion of the third move you can say with a high confidence that the currency price will sharply drop. This is the place you should sell the currency and make a nice profit. Strengthening W pattern has just the same story but in a reverse order.

Figure 12.1.2.1 A triangle pattern 24

These patterns are tradable in two ways. The first is at the time when only the first few bullish or bearish candles have formed and the move is in its half way to get matured (reach a support or resistance level). At this time we can buy or sell and wait until the move ends (or begins to reverse), then close the trade with profit. However, these are short or medium time moves and we cannot expect so many pips.

The second better use is to enter a trade when a move has been matured and a reversal is expected. I also like weakening and strengthening cascade patterns because they are very reliable, stable and frequent signals and with trained eyes they are quite predictable.

12.1.4 Head and Shoulders Pattern Head and shoulders pattern as its name say is a price pattern that more or less forms a portrait of a man with head and shoulders. These are more than 80% probable patterns and when the left shoulder and the head were formed, the right shoulder would be a tradable opportunity.

Notice that a right shoulder to be tradable must overlap more than 80% with the left shoulder, otherwise it will not be a valid pattern.

Note that charting time frame is essential in detecting patterns. For example, you may not see a triangle pattern on a 1-hour chart but when you zoom out the same chart to 4hour time frame the pattern appears. So, to detect perfect patterns you have to toggle between various time frames.

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Figure 12.1.4.1 A head and shoulders pattern

Figure 12.1.4.2 A reverse head and shoulders pattern

12.1.5 Solid Wall (or Sandwich) Pattern This pattern normally consists of 4-8 alternate bullish/

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bearish bars and the price consolidates in a very tight range in very straight line as if it has bumped into a solid impenetrable barrier. Solid wall or sandwich patterns are excellent patterns to trade because they are highly probable and easy to trade.

Figure 12.1.5.1 A solid wall (sandwich) pattern

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Figure 12.1.5.2 A solid wall (sandwich) pattern

12.1.6 Fractals Fractals in general are regular or symmetric, self-repeating shapes in various time scales. Fractals occur on Forex charts and are very various in shape and size. If a fractal is detected in the early stages (when the first or second fractal has shaped), a trader can benefit from it. Trading fractals needs much experience and usually only Forex professionals can exploit them.

Figure 12.1.6.1 A fractal

12.1.7 Double and Triple Top/Bottom Patterns At support or resistance levels, prices are normally tested two or three times before a bounce back or reversal take place. This test and retest form double or triple bottom patterns at support and double or triple top patterns at resistance levels. You can use them in your trading.

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Figure 12.1.7.1 A triple top pattern

Figure 12.1.7.2 A double top pattern

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Figure 12.1.7.3 A double bottom pattern

Exercise 6. Go to https://www.tradingview.com/e/ and draw a few major currency charts and try to realize any of the most profitable patterns (triangle, cascade, head and shoulders).

13. Price Rejection Trading Strategy As I said before, candles are the most beneficial visual presentation of the currency prices. There are two types of candles. A. Full body candles and B. Pin bars. A full body candle is a candle that opens exactly at the beginning of a time frame and closes at the end of that same time frame.

So, the candle has a full body without any pin and its maximum and minimum prices are the same as its opening and closing prices.

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