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Top 5 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and selling pressure. Chart patterns have a proven track-record, and traders use them to identify continuation or reversal signals, to open positions and identify price targets.
Top 5 Chart Patterns Every Trader Should Know
Chart patterns are specific price formations on a chart that predict future price movements. As technical analysis is based on the assumption that history repeats itself, popular chart patterns have shown that a specific price movement is following a particular formation of price (chart pattern) with high probability. Therefore, chart patterns are grouped into (1) continuation patterns – that signal a continuation in the underlying trend, and (2) reversal patterns – that signal reversal of the underlying trend.
In this article, we will show the top 5 chart patterns that every trader should know. The first part will reveal the reversal patterns and how they are used.
Reversal Patterns
Head and Shoulders
Head and Shoulders is a reversal chart pattern, that indicates the underlying trend is about to change. It consists of three swing highs, with the middle swing high being the highest. After the middle swing high, a lower high occurs which signals that buyers didn’t have enough strength to pull the price higher. The pattern looks like a head with a left and right shoulder (the three swing highs), and that’s how it got its name. The neckline is connecting the two shoulders, and a break-out below the neckline is considered a selling signal, with a price target being the distance from the top of the head to the neckline. If the Head and Shoulders pattern occurs during a downtrend, the same inverse pattern (with three swing lows) is called an Inverse Head and Shoulders pattern.
Double Top and Double Bottom
Double Top and Double Bottom are another reversal pattern, occurring during up- and downtrend, respectively. A double top, as the name suggests, has two swing highs at about the same, or slightly different price. It shows that buyers didn’t manage to push the price higher, and a trend reversal might be ahead. The trigger signal for opening a sell position is the break of the neckline, with target price being the distance between the top and the support line of the formation. A double bottom pattern is the opposite, with two swing lows. Sellers didn’t have the power to move the price more downward. The trigger signal is the break of the resistance line, with the target price being the distance between the bottom and the resistance line.
Continuation Patterns
Rectangles
A rectangle is a continuation pattern, which means it confirms that the underlying trend should continue. It is divided into bullish and bearish rectangles, depending on the underlying trend. A bullish rectangle appears during an uptrend, when the price enters a congestion phase, during a sideways trading. The price will likely break out in the direction of the preceding trend. The trigger signal is the break of the upper line of the rectangle, with the price target being the height of the rectangle. For the bearish rectangle, the opposite rules apply. It forms during a prevailing downtrend, when the price enters a congestion phase and trades sideways. This means the trend will most likely continue downwards, with the break of the lower rectangle line. The price target is again the height of the rectangle.
Wedges
A wedge is another continuation pattern. A bullish wedge forms during an uptrend, as the price trades inside converging trendlines. These converging trendlines imply that sellers are trying to push the price lower, but don’t have enough strength to win against the buyers. Ultimately, the buyers win and the price breaks through the upper trendline, indicating that the uptrend will resume. Target prices are calculated as the maximal height of the wedge, which is then projected to the point of break-out. A bearish wedge is similar to a bullish one, with the difference that it is appearing during downtrends, and the slope of the wedge is up. Converging trendlines are again showing that buyers interrupted the downtrend, trying to push prices higher. A break-out through the lower trendline indicates that sellers won the battle, and the downtrend is resuming. The target price is, like by bullish wedges, the maximal height of the wedge which is then projected to the point of break-out.
Flags
A flag is very similar to a wedge, with the difference that the trendlines which form the flag are parallel, and not converging. A flag pole is also a part of the flag pattern, because the target price is measured in a different way than by other chart patterns. Flags can be bullish and bearish, with a bullish flag shown on the chart above. A bullish flag forms during an uptrend, with parallel trendlines above and below the price-action, which form a down slope. A break-out above confirms that the uptrend is resuming. A bearish flag is pretty much the same as a bullish flag, with the difference that it forms during downtrends and has an up slope. The price target is measured as the height of the flagpole (green arrow) to the top of the flag, which is then projected to the lowest point of a bullish flag (or highest point of a bearish flag).
We have written this article with the main aim to show you another angle of trading. As can be seen, these chart patterns might help you determine trend direction, but you should not rely solely on them. I have covered the major 5 chart patterns every trader should know. I believe that these are the most important ones, but if you feel like I have omitted an important one, please share with the rest of us in the comments below.
If you are interested in understanding more on how to trade these price patterns with a strategy that is consistently profitable - sign up for one of our forex trading courses with one of our successful mentors. You will get really great forex trading content and mentorship like no other.
Happy Trading
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Risk disclaimer: The information presented on our blog are for educational and entertainment purposes only. Nothing on this website serves as investment advice or recommendations. Trading is risky and you can lose more than your initial investment. MyFxMentor cannot be held responsible for any decisions visitors make. Please consult a financial advisor before making any investment decisions. Risk disclaimer.
What is Currency Correlations? And How To Use It In Forex Trading
What is Currency Correlations? And How to Use It In Forex Trading
Trading Forex requires great knowledge of technical indicators and fundamental events. Although most traders tend to focus on one of the aforementioned approaches, today, more and more attention is being paid to proper trading psychology and risk management.
Currency correlation is strongly connected with risk management, and can help you to better understand the market when trading. Understanding of the correlation between currency pairs can help you avoid overtrading.
What is Currency Correlation?
It is simply a measure of how similarly one currency pair moves in comparison to another. When pairs move in the same direction, they have a positive correlation. If they move in the opposite direction, we observe a negative correlation between them. A perfect correlation occurs when pairs move in the same direction, which is extremely rare. Additionally, we say that correlation is high when pairs move in almost the same direction.
Just as an example, let's say that the EURUSD goes up 500 pips in a month.
During that same month, let's say that the GBPUSD goes up 1,000 pips. We are not too concerned about how many pips the pairs moved but how similar the moves were. If the prices went straight up, then they are highly correlated.
If the EURUSD went straight up and the GBPUSD stayed in a range then shot up, they would be less correlated. When they move in the same direction at the same time, up in this case, they are positively correlated.
Negative correlation is when one pair goes up and the other goes down. In this example, if the EURUSD went up at approximately the same time the GBPUSD was going down and to a similar degree, then there would be a high degree of negative correlation.
How does this us help as traders? If there is a high negative or positive correlation, there may be times when one pair moves before the other highly correlated pair and can serve as a forecast or a confirmation of a move in the pair we are trading. In addition, you might want to stay away from taking trades that are two highly correlated because that increases your risk that the same move will affect all your trades in a similar fashion.
Correlation Trading Tips
Bear in mind that correlations do change, and past performance is not always a guaranteed indicator of future correlations. However, this information can be used to develop your own currency correlation strategy, to minimise your portfolio's exposure. Here are some tips to consider:
Avoid positions that cancel each other out: If you see two currency pairs that move in opposite directions nearly all of the time, you should realise that holding long positions in both of those currencies mitigates any potential gain that could be had.
Diversify with minimal risk: By investing in two currency pairs that are almost always positively correlated, one can mitigate risks over time, while maintaining a positive directional view.
Hedge exposure: Losses can be minimised by hedging two currency pairs that hold a near-perfect negative correlation. The reasoning here is simple. If you hold a position with a currency pair that loses value, the opposing currency (which has a negative correlation to that pair) will likely gain, albeit with a lower final value. While such a strategy won't completely mitigate losses, those losses will very likely be reduced.
There are many tools which you can utilise through metatrader which can help you with currency correlations, we at myfxmentor use a currency strength meter which we have created on Metatrader as an EA. If you are interested in understanding more on the advantages of using currency correlations and currency meters, feel free to contact us on info@myfxmentor.com
Happy Trading
Want to join the MyFXMentor Team? See trades taken by our top trading analysts, join our live trading chatroom, and access our strategy library! Simply contact us on bookings@myfxmentor.com
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Risk disclaimer: The information presented on our blog are for educational and entertainment purposes only. Nothing on this website serves as investment advice or recommendations. Trading is risky and you can lose more than your initial investment. MyFxMentor cannot be held responsible for any decisions visitors make. Please consult a financial advisor before making any investment decisions. Risk disclaimer.
Why Trading Discipline Is The Key To Profitability
What’s wrong with deviating from your forex trading plan if you make a profit anyway?
Making an occasional winning trade, even when you throw your trading plan out the window, may provide short-term pleasure, but entering trades haphazardly can adversely influence your ability to maintain discipline in the long term.
Trading is a marathon, not a sprint!
When you stop following your trading plan, you become rewarded for lacking discipline and you may start believing that abandoning a trading plan is no big deal.
An unjustified reward may increase your tendency to abandon trading plans in the future.
You may be prone to think “I was rewarded once, maybe I will be rewarded again. I’ll take a chance.”
But the positive outcomes of undisciplined trading are usually short-lived, and a lack of discipline ultimately produces the long-term trading losses.
It’s important to distinguish justified wins from unjustified wins.
A justified win is when you create a very detailed trading plan and FOLLOW the plan. A win that results from following a trading plan is justified and reinforces discipline.
An unjustified win occurs when you make a plan but don’t follow it or if you have no plan at all. You might be rewarded, but the outcome occurred by chance.
You might as well flip a coin or hang a printed copy of your charts on the wall and throw darts at it to help you make trading decisions. The win is unjustified and can reinforce undisciplined trading.
Maintaining discipline is vital for consistent and profitable trading.
You trade proven forex trading strategies, over and over, so that across a series of trades, the strategies work enough to produce an overall profit.
It’s like making shot after shot on the basketball court so as to accumulate a winning number of points. The more shots you take, the more likely you will amass points. Just look at some of the most successful athletes in the world.
The winning player is the person who first develops the skill to make the shot consistently so that at every possible opportunity, the ball is likely to go through the basket or goal posts.
They’ve developed the skill to learn how to shoot the ball the same way every single time. Consistency is crucial!
It’s the same for trading. One must trade consistently, following a specific trading plan on each and every single trade.
If you trade one approach this time, and a different approach at another time, your performance will more than likely be haphazard.
If you follow the plan sometimes and abandon it at other times, you throw off the probabilities, and you will most likely end up losing overall.
3 Tips To Help You With Building Your Discipline
1. Remain Consistent At All Times
Don’t let unjustified wins interfere with your ability to maintain discipline.
2. Follow Your Own Trading Plan
Follow your trading plan and cement in the mindset that if you follow your plan, you will end up more profitable in the long run.
3. Have A Clearly Defined Goal
Have clearly defined goals for all your trades. Know when you will exit a trade and set your profit targets. It is very important to understand goal setting in forex trading and pairing it with a consistent risk to reward ratio.
Happy Trading
Want to join the MyFXMentor Team? See trades taken by our top trading analysts, join our live trading chatroom, and access our strategy library! Simply contact us on bookings@myfxmentor.com
// MY FAVORITE BROKERS
// SOCIAL MEDIA PROFILES
Instagram: https://www.instagram.com/myfxmentor/
Facebook: https://www.facebook.com/myfxmentor
Risk disclaimer: The information presented on our blog are for educational and entertainment purposes only. Nothing on this website serves as investment advice or recommendations. Trading is risky and you can lose more than your initial investment. MyFxMentor cannot be held responsible for any decisions visitors make. Please consult a financial advisor before making any investment decisions. Risk disclaimer.
THE POWER OF PATIENCE IN FOREX TRADING
Whether being a trader is your full-time job or you wish to get an additional return on your savings, investing on the FOREX market involves carefully thinking about which trading strategy you will implement based on your capital, your time horizon, your risk aversion, your money management, your psychology etc.
Whatever the case, each investor should try to answer the following question:
How can I make consistent profits with FOREX trading?
THE POWER OF PATIENCE IN FOREX TRADING
Understanding how important patience is while you start learning to trade will completely change the trajectory of your performance in the long run and help you achieve your goals faster. But before trying to figure out what your trading plan will be, you should first think about why you want to trade: What are you doing this for?
Once you know the reasons why you want to learn how to trade and you have set some goals, you need to understand that there is no quick way to make money while trading. Learning how to trade requires hard work, knowledge, discipline, commitment, dedication and above all patience.
The power of patience shouldn’t be underestimated while learning how to trade, it’s a vital characteristic a trader must have to be successful in the long-term.
Because the FOREX market is very volatile and is open 24hours, 5days a week. A lot of traders decide to use the “scalping trading” method, opening themselves up to the risk of being overexposed. Scalping is a trading strategy used to take advantage of small prices’ variations. This is one of the most aggressive trading strategies around, because traders are aiming for a lot of small quick profits.
Being patient is crucial for those traders, as without it, they are liable to overtrade.
It is not necessary to constantly be in position and believe that you must invest in every price’s movement, or that there is money to make on every single trade. Sometimes the currency pair you are working on will evolve within a sideway consolidation for a while without giving relevant signals.
You must then know how to be patient and open a position only with trades that have the most bullish or bearish potential (breakouts patterns, trend reversals signals). The ability to wait for a technical configuration, a market opportunity to present itself, or to maintain an opened trade until prices reach your goals, will all help you outperform the average trader, who trades on emotion.
Don’t worry about missing the boat and accept the fact that being on the sidelines and waiting is an essential part of trading. It’s a sign of strength and control, not a sign of failure.
You can also observe how patience is important while dealing with losses or gains. Everything is about trusting your trading plan and the strategy you decided to apply.
Observe the way you manage your winnings. It’s easy to close your position when you’re making a lot of money. Is it the right thing to do? Not necessarily, especially if your target price hasn’t been reached yet: this means that there is certainly still an upside potential according to your trading system (or downside potential if you are short).
Nearly 90% of traders take profits too early because it’s easy to do – and the same percentage of traders lose money at the end of the year because they do what is easier…
If you are too stressed and if you have trouble controlling your emotions, you’ll tend not to trust your trading plan or your analysis. You will want to close your position relatively quickly, regardless of the messages conveyed by the technical indicators or your chart analysis. Despite earning potential, you will be impatient and you will decide to close your position because you’re following your instinct and not your analysis.
Once the position is closed, you will often realize that it goes back in positive territory and ends up in the direction you had anticipated and you could have won if you were more patient.
It is therefore very important not to react impulsively to situations or let your emotions dictate your behaviour.
You can dramatically improve your chances of success in trading by simply having the patience and discipline to wait for the right opportunity and follow the trading plan you’ve worked on and back-tested.
Happy Trading
Want to join the MyFXMentor Team? See trades taken by our top trading analysts, join our live trading chatroom, and access our strategy library! Simply contact us on bookings@myfxmentor.com
// MY FAVORITE BROKERS
// SOCIAL MEDIA PROFILES
Instagram: https://www.instagram.com/myfxmentor/
Facebook: https://www.facebook.com/myfxmentor
Risk disclaimer: The information presented on our blog are for educational and entertainment purposes only. Nothing on this website serves as investment advice or recommendations. Trading is risky and you can lose more than your initial investment. MyFxMentor cannot be held responsible for any decisions visitors make. Please consult a financial advisor before making any investment decisions. Risk disclaimer.