After knowing the support and resistance points on the chart the next step is to find out the chart patterns . Of the many technical analysis methods, you could say analysis with Chart Patterns is the most accurate and simple technique for reading market price movements.

It has higher accuracy than traditional candlestick patterns, because it takes into account more candlestick formations. However, Chart Patterns keep it simple because you don't need to use anything other than the price chart itself.

The problem is, not many novice traders know the meaning of Chart Patterns because they still depend on indicators as trading signals. In fact, most of the indicators are derived from price movements on the chart itself. Logically, if you can see market dynamics with the naked eye, why bother installing stacks of indicators?

Let's explore the meaning of Chart Patterns from the basics first, so you understand the basic application.

What Are Chart Patterns?

The meaning of Chart Pattern is the formation patterns of movement on price charts. At a glance, from this understanding it means that you will observe price formations as instructions for executing Market Orders, whether it's Buy or Sell.

Chart Pattern is a price chart pattern that occurs repeatedly, so the pattern can be used to predict where prices will move. Chart patterns are very important in technical analysis, because apart from being able to detect price directions, these patterns can also be observed on all timeframes, from minutes to months.

Once again it needs to be underlined, the main attraction of Chart Pattern analysis is the repeated appearance of certain price formations. So, a price formation can appear many times in one pair with the same or different timeframes.

Also note, that the market reaction is not always the same to a certain pattern. Because, the clearer the formation of a price pattern, the stronger the market sentiment towards the price pattern. For example, even though in the textbook a pattern is taught that has a high probability of predicting price in one direction only, but in reality there are market players who actually use price patterns to trap novice Forex players.

Well, the explanation is indeed long and complicated if we have to prepare all trading scenarios. But that's not the point of this article. We will only discuss the basics so you can understand why understanding Chart Patterns is important to learn.

The example above is just one of the many Chart Patterns. There are many more profitable price patterns that you need to know about.

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Variety of Chart Patterns

Have you ever heard of the term Triangle? Or Head & Shoulders? Or even never at all? Indeed, the understanding of Chart Patterns varies. To make it easy to remember, Chart Patterns are generally categorized into two types:

A. Reversal Pattern

This price pattern gives a signal that the price has a high probability of reversing from the previous main trend. That is, price patterns in this category can provide early signals when you can sell at the highest price point or buy at the lowest price level. Very profitable, right?

Double Top and Double Bottom

This price pattern is one of the price patterns with the highest frequency of occurrence, because the formation is easy to identify. The Double Top Formation indicates that the price tends to slow down when it reaches its peak.

Double Top is the Bearish version, while the Bullish version is Double Bottom.

Triple Top and Triple Bottom

This price pattern is a variant of the previous price pattern. The difference is, the accuracy of this pattern is slightly higher because the price shows a strong reaction at the Resistance or Support point. chart pattern, triple bottom

Head And Shoulders

The first and second shoulders are smaller than the head as an indication of weakening momentum to maintain the price to its highest point (head). As soon as the price starts to appear to have broken the neckline, you can execute a Sell order. The Head And Shoulders pattern also has its Bullish version, which is Inverted Head And Shoulders.

Falling Wedges

Understanding this Chart Pattern is quite simple; if the price has started to appear to be conical downwards it means there is potential for the price to reverse upward. Falling Wedge also appears frequently on price charts.

Rising Wedges

Simply put, this price pattern is a Bearish version of a Falling Wedge. If the price goes up, then there is potential that the market will respond with a Sell-Off.

Rounding Bottom

Compared to other reversal patterns, this pattern is quite rare. The reason is, the Rounding Bottom formation requires a lot of candlesticks, so you can be sure that this price pattern is designed for long-term trading.

Bump And Run

This chart pattern actually appears quite often on charts. However, not many people recognize this pattern. In fact, the formation is simple and quite promising.

B. Continuation Pattern (trend forwarding pattern)

Unlike the Chart Pattern Reversal patterns, this time the price pattern gives a signal that the trend will continue even though it had reversed direction. This is quite common, especially because market movements often experience retracements.

Flags

At first glance, the price formation of this pattern is similar to that of the Trendline Channel tool. It's true, the Flag and Trend Channel patterns are often used by traders to monitor potential breakouts from Resistance or Support limits (diagonal lines).

Pennant

The Pennant pattern highlights the potential for price action to break through after a period of consolidation. At first glance, this pattern is similar to the Wedges pattern, but the difference lies in the degree of inclination. The Wedge Pattern will lean in either direction, while the Pennant Pattern is nearly symmetrical.

Symmetrical Triangle

This pattern also looks almost identical to the Pennant pattern, so what's the difference? In comparison, this pattern usually requires more candlesticks to complete the formation. For example a Pennant can be formed from just a few candles, then the Symmetrical Triangle pattern can take twice the total of candles to complete its formation.

Second, compared to the Pennant pattern, this pattern can be said to be more "fickle", because prices can breakout up or down.

Ascending Triangle

Note the difference between this Chart Pattern and the previous equilateral triangle pattern. In the Ascending Triangle pattern, the price tapers up, but keeps hitting the same Resistance range. As soon as the price breaks the Resistance, a strong Buy signal appears.

Descending Triangle When the Ascending Triangle implies a Buy signal. Conversely, the Descending Triangle pattern indicates a selling opportunity after the price breaks Support.

Rectangle

So, if the price bounces back and forth, so it's not clear which Top and Bottom are, it could be that you're encountering a Rectangle price pattern.

The advantages and disadvantages of Price Patterns

Of course, like other methods, technical analysis using Chart Patterns has advantages and disadvantages.

a. Advantages of Chart Patterns

Technical analysis by observing price formations has the main advantages in terms of practicality and simplicity. So, if previously you only relied on a pile of indicators to get trading signals, now you can clean up the chart display by selecting only high-accuracy price formations.

Regarding accuracy, Chart Patterns are known to be subjective. But if you have mastered it, you can make trading decisions quickly just by observing the formation of certain price patterns. Ideally, this method is effectively used by traders who want to filter trading opportunities on any pair and timeframe, with a fast analysis process.

An example case will be easier to imagine with illustrations of daily trading scenarios: James is a novice trader, he only relies on trading signals from a set of conventional indicators such as MACD, RSI, Bollinger Bands, and the like.

Unfortunately, because he is too dependent on these indicators – whereas each indicator has its own requirements – he is only able to trade in a handful of Major Pairs. Contrast with Jack.

He has experience using pure technical analysis by looking at price patterns. Since he no longer needs the help of indicators, he can comb through a wide range of currency pairs, from Majors, Minors, Crosses to Commodities like Oil and Gold to find the best trading opportunities.

b. Weaknesses of Chart Patterns

Unfortunately, the biggest drawback of technical analysis with price patterns is its subjectivity. Between one trader and another, the departure from the understanding of Chart Patterns is different, even though the pairs, timeframes to brokers are also exactly the same. Don't be surprised if one trader gets a Buy signal, but another trader gets the opposite signal on the same chart.

The problem only occurs if you use price pattern references from other traders as a trading reference without considering your personal trading system.

First, certain price patterns require a long holding time, for example like Rounding Bottom which is generally intended for long-term trading. Just imagine if you are a scalper, the accumulated floating minus could make you close your position earlier before the price reverses.

Second, the accuracy of price patterns depends on discipline in complying with certain price pattern formation criteria. There are some traders who prefer the free Chart Pattern identification technique, so there are some requirements that are a bit off the mark. The goal is for him to get a signal faster at the expense of accuracy.

Third, still regarding accuracy, Chart Pattern signals can be combined with supporting indicators to improve their quality. It's just that you need to remember, adding a stack of indicators doesn't necessarily make the chart pattern signal accuracy 100%.

Is a Trading Strategy Using Chart Patterns Right For You?

Considering the advantages and disadvantages of the Chart Patterns above, technical analysis using this subjective technique may be suitable for you if:

A. You realize that trading signals are still at risk of failure. That is, you understand that no signal can guarantee 100% success. In this case, you need to apply money management to control the risk of failure, so that the total profit is greater than the accumulated losses.

B. You value speed and flexibility. The process of identifying Chart Patterns can be done quickly on a bunch of currencies to find the best trading opportunities. Free on any timeframe.

Conversely, don't force a trading strategy by observing price formations on the chart if you don't like the subjectivity of understanding Chart Patterns. For some traders, technical analysis using indicators from mathematical calculations (such as MACD, RSI, and Bollinger Bands) will be better because these indicators are more objective.

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