Most people who trade the forex markets rely almost exclusively on technical analysis to make their trading decisions. They will spend hours on end staring at charts of the various currency pairs in order to find high probability set-ups that are most likely to make them money. However, if you are going to use technical analysis, there are three forex price patterns who should look out for. The first of these is the breakout price pattern.
Prices will often spend significant amounts of time trading sideways within a tight trading range, which of course makes trading very difficult. However you can make some excellent returns by waiting patiently for the price to break out of this range, because most of the time the initial breakout will signal the start of a new trend.
Breakout trading is one of the most popular forms of forex strategy because it is simple and has a very high success rate. The reason why that is because many other traders are also waiting for the same breakout to take place, so in many ways it becomes self-fulfilling.
You simply draw horizontal lines marking the high or low points, for instance, and then wait for the price to break out of this range (or for the current bar or candle to close outside of this range). You can also use a few technical indicators to help you identify the strongest breakouts. For instance volatility indicators that are showing increased volatility during a particular breakout indicate that the breakout has some momentum behind it.
Often it makes sense to define the support and resistance levels. The more frequently the price has touched these levels, the more valid these levels are and the more important they become. At the same time, the longer these support and resistance levels have been in play, the better the outcome when the stock price finally breaks out.
The second forex price pattern to look out for is the counter-trend set-up. The markets are often trending up or down, particularly on the longer time frames, but one of the best ways to trade this trend is to wait for an initial pull-back followed by a continuation of this trend. In other words if the price is trending upwards and then temporarily falls back down for a few bars, then you should wait and see if this is the end of the trend or whether it’s just a short period of profit-taking. If the price subsequently heads higher again then you have a very high probability set-up because the upwards trend is almost certain to continue.
So this is a very profitable price pattern to look out for and it’s relatively easy to trade. You can simply enter a trade using nothing more than the price to guide you, or you can use technical indicators to help you trade these continuation patterns.
The final forex price pattern that you should be aware of is of course the trend reversal. These patterns can be quite hard to profit from because very often what looks like a trend reversal is actually nothing more than a brief period of profit taking. So therefore you should use various technical indicators such as MACD (and divergence patterns in particular), the parabolic SAR indicator and exponential moving averages to help you spot these reversals.
All of these three price patterns occur regularly throughout the day so you should try and focus on at least one of these patterns when you are creating your own profitable forex trading strategy.
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