Patterns and their application in technical analysis (part 2)
In the first part, you got acquainted with some of the peculiarities of building patterns in Forex on a real chart, and also learned three basic patterns that suggest the possibility of a trend reversal. These candlestick combinations are rarely found in their pure form, so they should be reinsured (confirmed) by drawing levels and technical indicators on the chart. For example, reversal patterns are well complemented by oscillators.
Forex patterns – common patterns with high prediction accuracy
Most of the patterns are reversal patterns, which differ in that they are formed in different market conditions. There are also flat and trend combinations that allow you to make a forecast in which direction the price will continue to move.
A pattern in Forex, consisting of 2 candlesticks, which necessarily have the following features:
- The first candlestick is not a doji, that is, it has a body.
- The first candlestick has a trend color, the second one has the opposite color. If an uptrend has dominated the market for some time, the first candlestick is an upward one, the second is a reversal one.
- The second candlestick must completely cover the first candlestick with its body. It’s about the body, not the shadows.
- The shadow of the second candlestick should be small in the reversal direction. For example, an uptrend was replaced by a reversal candlestick with a long downward shadow. This means that sellers tried to turn the price down, but it came back anyway. This may indicate the strength of buyers who, at the next candlestick, can bring the price back into an uptrend.
Forex pattern, which has an absolutely logical rationale. The figure is a series of extremums in both directions, the amplitude of which gradually decreases. The model is built using at least 4 points and only over a large area. For example, for M5, the pattern can be formed for more than 12 hours. The logic of the figure is similar to the essence of building channel indicators. The market moves in a corridor without a significant preponderance of one side or the other (not to be confused with a flat). The volumes of transactions are decreasing, because some of the traders take a wait and see attitude. Then comes the breakout.
An analogue of the previous Forex pattern. The price forms a corridor with equal amplitude of movement and breaks through it in one direction or another at some point. Having practiced visually finding such models with drawing levels, you will quickly understand the principle of their construction.
7. “Pin bar”
This pattern is analogous to Doji with the only difference that the candlestick has a body. Otherwise, its essence is the same. A reversal pattern, which is a small candlestick relative to the previous ones with a trend in the direction of the trend. The next candlestick has the opposite direction. The types of pin bars differ from each other only in which direction they are directed and what is the color of the pin bar itself. For example, a signal pin bar can have both a reversal candle color and a shadow direction. The names of such models are hammer, dragonfly, shooting star.
8. “Dark Veil”
An analogue of the Absorption model, with which it is often confused. First, this pattern is considered bearish only, that is, it forms at the top of the chart. Secondly, the location of the reversal candlestick is important here. If in “Engulfing” the reversal candlestick should almost completely cover the body of the signal one, then it is important here that the falling reversal candlestick is moved up. The condition of the same body size for both candlesticks remains. The pattern in Forex is rare.
Forex pattern that combines the idea of a Triangle and Rectangle. It has the following logic: the price moves with some impulse in a sharply rising or falling direction. At some point, a correction occurs, which is drawn in levels and forms a kind of flag. Then the breakout of the channel occurs and the price continues the initial direction. The deal is opened at the moment of the breakdown of the correction corridor.
Price gap. This is not even so much a pattern as a logical rationale for further movement. If, for one reason or another, gaps occur, it is obvious that the next candlestick after the gap will be in the same direction as the previous one. True, this condition works only for one candlestick, so a strategy based on such a pattern should be classified as scalping.
Conclusion… Patterns in Forex are an auxiliary tool related to candlestick analysis, but not stand alone. We would recommend trading on technical and fundamental analysis, evaluating patterns even when there are prerequisites for opening a trade. If you have any questions, write them in the comments!