Forex Chart Pattern – FX Guide
There are many ways to trade currencies that choosing common methods can save time, money, and effort. For example, traders can determine when to trade based on the head and shoulders, candlestick, and Ichimoku forex chart patterns.
Even though these methods might seem complicated, they can be broken down into simple elements that take advantage of the most commonly traded elements within each of these patterns.
The following two chart patterns, which occur regularly and provide relatively simple trading methods, are among the most common; a head and shoulders chart pattern, followed by a triangle chart pattern.
Currency chart patterns in Kenya are historical patterns in price behaviour for a particular currency pair. Chart patterns can be confusing, and many retail investors add colourful lines and annotations to their trading screens. It’s almost like a contest to see who has the busiest trading screen.
You probably don’t need them as much as you think! They are simple and not necessarily at all! You will learn about the forex chart patterns that can be effectively used in technical analysis. In this article, you will find a list of 10 chart patterns every trader needs to know.
What are chart patterns?
Chart patterns are shapes within a price chart that indicate what prices may do next based on past performance. Technical analysis is based on chart patterns and requires the trader to know exactly what they are looking for and what to look for.
In a wide array of markets, there is no single ‘best’ chart pattern since they all indicate a wide range of trends. However, in candlesticks trading, chart patterns are often used, which allows you to see past market openings and closings more easily.
Some patterns work better in volatile markets in Kenya, while others do not. Some patterns work best in bullish markets, and others do well in bearish markets.
You must know which chart pattern is the best for your particular market because if you use the wrong one or don’t know which one to use, you may have missed out on an opportunity to profit.
Let’s briefly describe support and resistance levels before we get into the nitty-gritty of different chart patterns. The support is the point where the price of an asset stops falling and bounces back. Resistance is where the price of an asset stops rising before dipping back down.
Support and resistance levels are determined by the balance between buyers and sellers or supply and demand. A market’s price tends to rise when more buyers than sellers (or when supply exceeds demand). Conversely, prices usually fall in Kenya when more sellers than buyers are available (supply over demand).
As an example, the price of an asset might rise because the demand exceeds supply. In such a case, the price will ultimately reach the maximum that buyers will be willing to pay, and demand will decline. When this happens, buyers may decide to close their positions.
Due to this, the price begins to fall as more and more buyers close their positions, and the supply begins to exceed demand.
A falling price might encourage buyers to purchase an asset again because it is more affordable – creating a cycle where supply and demand equalise.
The increased demand will resist the price as demand increases relative to supply as the buying increases. When a price pierces through a level of resistance, it becomes a level of support.
Types of chart patterns
Three major chart patterns can be categorised: continuation patterns, reversal patterns, and bilateral patterns.
- The continuation of an ongoing trend signals its continuation.
- A reversal chart pattern in Kenya indicates a possible change in trend.
- In a bilateral chart pattern, traders can see that the price could move in either direction – another sign of extreme volatility.
All of these patterns may be traded using CFDs. It’s because CFDs give you both shorting and longing options – so you can speculate on markets rising as well as falling. You may wish to go short during a bearish reversal or continuation, whereas, during a bullish reversal or continuation, you may wish to go long. That all depends on the pattern and the market analysis that you have conducted.
Suppose you are using chart patterns to do technical analysis in Kenya. In that case, you need to keep in mind that they are not guaranteed that the asset will go in the direction you predicted – they are simply an indication of what might happen to the asset’s price.
Head and shoulders
A chart pattern is a head and shoulders consisting of a large peak, followed by one or smaller peaks. To predict a bearish to bullish reversal, traders use head and shoulders patterns.
In typical patterns, the first and third peaks are smaller than the second, but all the peaks descend back to the same level of support, sometimes known as the neckline. Thus, a bearish downtrend will likely begin when the third peak falls back to the support level.
A double top is another pattern that traders use to indicate a trend reversal. It is quite common for an asset’s price to experience a peak, followed by a retracement back to a level of support. Then, after climbing up once again, it will reverse back to the opposite direction more permanently.
The double bottom pattern in Kenya signifies that an asset’s price dropped below its support level due to a period of selling. There will then be a rise towards resistance, followed by a drop back toward support. Finally, when the market becomes more bullish, the trend will reverse and rise.
The double bottom pattern is considered a bullish reversal because it indicates a declining tendency and a shift into an uptrend.
Rounding bottoms on charts can be indicative of reversal or continuation. For example, an asset’s price may fall back slightly before rising again during an upward trend. In this case, the trend is bullish.
A bullish reversal rounding bottom can be seen as follows: an asset’s price is in a downward trend, but a rounding bottom forms before the trend reverses and it enters an upward trend.
Traders in Kenya will attempt to profit from this pattern by buying halfway around the bottom at the low point and then selling once it breaks above a resistance level.
Cup and handle
Cup and handle patterns are bullish continuation patterns that indicate a period of bearish market sentiment before the overall trend ultimately moves up. The pattern of the cup looks like a rounding bottom chart pattern, whereas the handle looks like a wedge pattern.
A rounding bottom is likely followed by a temporary retracement called the handle since it is restricted to two parallel lines on the price graph. But, overall, the trend for the asset will be bullish, and the asset will eventually reverse out of the handle.
In the case of an asset, wedges in Kenya can be formed when the price moves tighten between two sloping trend lines. There are two kinds of wedges: rising and falling.
In technical analysis, a rising wedge is represented by an attending line caught between two support and resistance lines that slope upwards. This means that the support line is steeper than the resistance line. Generally, this pattern indicates that the price of an asset will eventually decline significantly – as shown when it breaks through the support level.
Uptrend wedge pattern
Falling wedges occur between downward-sloping levels. Typically the support level is higher than the resistance level. Typically, a falling wedge indicates that an asset’s price will rise and break through resistance, as shown in the example below.
Downtrend wedge pattern
A bearish market is represented by rising wedges in both rising and falling wedges, whereas falling wedges characterise a bullish market.
Pennant or flags
Flags, or pennant patterns, are formed after asset experiences upward movement, followed by consolidation. It is common for a significant increase during the trend’s early stages before smaller movements increase and decrease start.
The pennant pattern in Kenya can be either bullish or bearish, and it may signal a continuation or reversal. Therefore, pennants can be regarded as bilateral patterns because they can either reflect continuations or reversals.
Even though a pennant may look like a wedge pattern or triangle pattern – explained below – a wedge is narrower than pennants or triangles. Pennants differ from wedges in that a pennant is always horizontal, while a wedge is always ascending or descending
The ascending triangle is a bullish continuation pattern, which indicates that an uptrend will continue. Creating ascending triangles on trading charts involves drawing horizontal lines along with the swing highs – the resistance – and then ascending trend lines along with the swing lows – the support.
Often, ascending triangles have two or more peak highs that are identical, allowing the drawing of a horizontal line. Thus, a trend line represents the overall upward trend of the pattern, whereas a horizontal line represents the level of resistance historically associated with the asset.
Conversely, a downwards sloping triangle in Kenya indicates a bearish trend continuation. During a descending triangle, a trader is more likely to make a short position – possibly with CFDs – to take advantage of falling prices.
In descending triangles, there is a high probability of breaking below the support because they indicate that the market is dominated by sellers, meaning that successively lower peaks are more likely to occur and are unlikely to reverse.
A downward-sloping line of resistance and a horizontal support line and symbolise descending triangles. Over time, the trend is going to break through the support, and the downtrend will continue.
Based on the market conditions in Kenya, the symmetrical triangle pattern may be bullish or bearish. However, whether fundamental or technical, it is usually a continuation pattern. After the pattern is established, the market will usually continue in the direction of the overall trend.
An asymmetrical triangle forms when the price converges with lower peaks and higher troughs. Thus, despite an overall bearish trend, the symmetric triangle illustrates that there has been a brief upward reversal.
Indicator of the symmetrical triangle on upward reversal
However, the market can break out to either side if a clear trend does not emerge before the triangle pattern forms. The symmetrical triangle is a bilateral pattern, which means that it works better in volatile markets where it is difficult to predict which way an asset’s price will move.
Do forex chart patterns work?
In terms of price predictions, forex chart patterns in Kenya do not work well by themselves. In chart patterns and technical analysis, a common misconception is that they can predict market movements.
Despite their popularity among professionals, they don’t serve the same purpose as retail traders, which is why we continue to see growth. Retail traders are not as interested in them.
By using technical analysis and chart patterns, you predict future market moves based on historical data, not the current economic or political conditions in the two economies involved in the forex pair.
Economies and politics can have a huge impact on the price of a currency in real0-time and for a long time to come, thereby rendering patterns meaningless!
Technical analysis cannot predict unemployment rates, interest rates, home building, or consumer confidence which have a huge impact on the currency market.
Don’t let the loss of forex chart patterns and technical analysis discourage you, and they are still extremely useful to traders.
Investors in Kenya can use forex chart patterns to gauge market supply and demand more quickly. There are many forex chart patterns to choose from, including Doji patterns, Head and Shoulder, Evening stars, and Morning stars.
There is no consistent way of predicting price direction based on forex chart patterns, and they are only useful when timing fundamental trade ideas.
The patterns in this article can all be used to understand how and why an asset’s price changed in a certain way-and in which direction it may move in the future. In addition, chart patterns serve as a good way of highlighting areas of support and resistance, which can help a trader decide whether to open a long or short position; or whether to close out their open positions if a trend reverses.
Table of Contents
Heinrich is a forex and CFD enthusiast with a passion for writing good informative quality content. He strives to showcase the best forex brokers in Africa. Join him on his Journey!
Content Writer | Market Analyst
Best Time to Trade Forex in Kenya – FX Guide
[top_three_brokers] The best time to trade currency is something one may want to consider when…
Supply and Demand Forex – FX Guide
[top_three_brokers] In Kenya, supply and demand for Forex drive price fluctuations. In a booming economy,…
Forex Trading Strategy – FX Guide
[top_three_brokers] To enhance your chance of success in the Kenyan forex market, you must develop…
How Much do I Need to Start Forex Trading in Kenya? – FX Guide
[top_three_brokers] Forex brokers offer some traders the opportunity to start trading as little as $1,…
What are Forex Trading Signals? – FX Guide
[top_three_brokers] Good Forex trading signals can greatly enhance your profits in Kenya, while poor Forex…
Support and Resistance in Forex Trading – FX Guide
[top_three_brokers] Support and resistance levels in Forex trading are undoubtedly two of the most widely…
Spread in Forex – FX Guide
[top_three_brokers] A spread is a very simple concept, both in the case of Forex assets…
Online Forex Trading – FX Guide
[top_three_brokers] Trading forex in Kenya is the act of buying or selling currency on the…
Forex Scalping – FX Guide
[top_three_brokers] Trading by using the Forex scalping strategy means taking control of very small changes…
How to Start Forex Trading? – FX Guide
[top_three_brokers] The foreign exchange market is one of the world's largest and most active, with…