What is the most effective pattern in forex?

Technical analysis through forex patterns can provide traders with a quick trading route at a glance. That’s why many traders, particularly those who enjoy fast-paced strategies, want to find the ones that actually work.

The issue is that these patterns are highly contextual, and there’s no way to single out the best one. Instead, a breadth of knowledge about patterns will help traders navigate various market situations.

Avoid Costly Mistakes in Trading

Another misconception to tackle before getting to the patterns themselves is that only the ones that help traders find winning trades matter. In reality, the more patterns traders are familiar with, the more likely they are to make the right move.

For instance, if a trader’s strategy were to only target bear markets, spotting a pattern that indicates a bullish reversal may help them terminate a losing position before it hits the negative.

Additionally, there are many patterns, sometimes appearing quite similar but indicating different things. Pattern-reliant traders should familiarise themselves with as many shapes as they can, to avoid confusion. Otherwise, they may overcommit when markets are actually saying the opposite.

With the importance of understanding trading patterns covered, let’s look at some of the more common ones. These will include some very basic, two or three-candle shapes that are everyday market occurrences, as well as some more complex shapes.

Head and Shoulders

This is the first pattern most traders learn. It’s a three-candle pattern, consisting of a peak, a higher peak, and then another peak close to the first one. It’s used in bullish markets and is a reversal indicator. In other words, traders that spot this pattern may want to enter a bearish position, or exit an existing bullish one.

Inverse Head and Shoulders

Already from the name, it should be clear how this pattern functions compared to the previous one. It consists of a dip, a further dip, and then a smaller one, comparable to the first. Again, this indicates a reversal, but from a bearish market into a bullish one. The inverse head and shoulders is an important pattern to keep an eye out for since it aligns with the most basic buy-low-sell-high idea of trading.

Double Top

This is a simpler pattern than the previous one, only consisting of two candles. It’s used in bullish markets and is recognisable by both candles being at about the same height. Normally, this indicates that bulls have attacked a resistance level twice to no avail. In other words, bullish pressure may be failing, indicating a potential reversal.

Double Bottom

Again, this is just the inverse of the previous pattern, applicable in bear markets. It consists of two dips close to each other in size. Like the Double Top pattern, that means that price pressure isn’t strong enough to break through a key resistance level, signifying a retraction.

Triple Top

While double top is a useful pattern, many traders don’t consider it reliable enough. Triple Top is the same thing in essence, with three bars topping out at the same level, indicating trend exhaustion in bullish markets. Of course, the additional bar adds more certainty to the pattern.

Tripple Bottom

Like with Double Bottom, this pattern indicates a lack of strength in Bear Markets. Again, the added bar adds certainty to the position, making it more likely that the market will actually react as the pattern indicates.

More Trading patterns

Bullish Flag

We’ve covered quite a bit of reversal trends and it’s time to step into a new area. The Bullish Flag is a continuation indicator that can be recognised by a consolidation period after a strong uptrend. Generally, it means that another strong uptrend will follow. Traders use the Bullish Flag pattern to decide what to do when the market is consolidating.

Bearish Flag

Continuing the trend in this article, this is the inverse of the previous pattern. It has a mirrored appearance, considering that it shows up in bearish markets. So, when traders see a consolidation after a strong downtrend, they may not want to bet on a reversal, since the Bearish Flag suggests a continuation.

Bullish Pennant

This pattern may appear similar to the flag, with a symmetrical triangle after a line shooting up. Traders often confuse the two, but in reality, it’s not that big of a deal, since both are used to indicate a continuation. The converging lines in the triangle signify market indecisiveness, which usually culminates in a continuation of the previous sentiment.

Bearish Pennant

The Bearish Pennant is useful in declining markets, as it indicates that a bearish trend will continue. The pattern consists of a triangle-shaped consolidation after a long red line. Again, it appears similar to the bearish flag, but both nudge traders in the same direction.

Symmetrical Triangle

The Symmetrical Triangle pattern is different from the same shape in a pennant due to the lack of a strong trend preceding it. Essentially, it’s a pattern of uncertainty, as bears and bulls converge and neutralise each other. However, it indicates that whichever trend breaks out will last for a while.

Ascending Triangle

An Ascending Triangle is a pattern that appears in consolidation periods. It consists of a flat top and a rising bottom. It indicates that, while there’s some resistance, the pressure is overcoming it, which should result in asset values rising after the breakthrough.

Descending Triangle

The Descending Triangle is the reverse, with a flat bottom and smaller and smaller tops. It generally appears in bearish markets and tells traders that selling pressure is likely to prevail.

Rectangle

The Rectangle is another pattern that tells traders there’s some indecisiveness in the markets. It’s – of course – indicated by a rectangular pattern, created by parallel support and resistance levels. Generally, prices will bounce between these two levels for a while, before breaking out in either direction, and trending in that direction for a while.

Doji

The Doji is a candlestick pattern where both wicks are long but the body is fairly narrow. This means that, while there has been significant trading activity and price movement, traders are actually indecisive, and not prepared to fight key resistance levels. In other words, the prior trend is likely to reverse.

Gravestone Doji

The Gravestone Doji takes on a similar appearance, but with the top shadow being much longer. The shape often resembles an upside-down letter T. It indicates that selling pressure is strong and that markets may move in a bearish direction.

Dragonfly Doji

The final indicator for this article is the Dragonfly Doji, which indicates a reversal in bearish trends. Here, the bottom shadow is longer, and the shape resembles a cross or the letter T. It indicates high buying pressure and a bullish market direction.

PSA: Don’t fully trust patterns!

Trading would be extremely easy if what patterns indicated always actually happened. Traders could simply match shapes and win 100% of the time. However, that isn’t the case.

Sometimes markets are erratic. Other times, anomalies happen, and behaviour simply doesn’t match expectations. Finally, some intentionally trade against patterns, always creating the risk of the reverse of what’s indicated happening.

Patterns are only indicators, and without full asset knowledge, and knowing what’s moving markets in the background, there’s no way of being fully confident. So while recognising these shapes is a nice way to have an immediate pointer, traders should never base their routine solely on them, and should always couple pattern knowledge with asset familiarity and market understanding.

INFORMAÇÃO LEGAL IMPORTANTE: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.