Key Forex Technical Analysis Figures
Exchange trading and, in particular, forex trading, attracts many novice investors and speculators. Not everyone understands that in order to get a stable and high income, you must at least have a clear trading plan and strategy. Moreover, automatic trading systems and arrow indicators, easy to learn, do not always give profitable signals. As a result, a newcomer who has trusted in aggressive advertising and does not want to independently understand the intricacies of analysis can go into the red or completely drain the deposit.
Graphical analysis is one of the oldest and most relevant types. The market is constantly changing, trading algorithms are losing relevance, but the basic principles of price behavior remain unchanged. In order to be able to draw the right conclusions when analyzing graphs, you need to be able to correctly identify the main figures of technical analysis. They do not always have an ideal shape, as on templates, however, following the rules and gaining experience, even a novice trader can quickly learn to identify them in the chaos of price movement. In today's article, we will cover all the main figures of technical analysis on Forex.
Temporary losses and drawdowns are an integral part of the work of almost any, even an experienced trader. However, the ability to go from minus to plus is achieved through the study of the market and analysis methods. One of the main types of analysis is technical, based on identifying the most popular patterns and figures on the price chart. A market analysis based on figures is also called graphic, since technical analysis itself also includes trading from levels, by indicators, etc.
The main figures of technical analysis
A detailed study of graphic patterns revealed more than two hundred different shapes and patterns. However, most of them are either too rare, or quite controversial and complex in structure to use them as the main signal for concluding deals. We will consider those figures that are considered the most effective in terms of signal processing and are often found on Forex charts.
Figures of technical analysis are divided into two categories: reversal patterns and trend continuation. Sometimes "figures of uncertainty" are distinguished into a separate form, but as a signal source they are useless, so there is no point in focusing on them.
Head and shoulders
The figure "Head and shoulders" refers to the category of reversal. This pattern forms at the top of the uptrend. Seeing it on the chart, it is worthwhile with a high degree of probability (about 70%, according to the average statistics of many studies) to expect a trend to turn down.
The figure consists of three peaks: the two extremes of approximately the same height, and the middle, the highest (two shoulders and a head). After the formation of the first peak (shoulder) and the second (head), the price rolls down, forming a "neck line". This line becomes a guide and support, after its formation, we can conclude that the figure has formed, and expect a pullback down.
The best option for trading on the "Head and Shoulders" - trading pending orders. You need to wait for the formation of the figure and place a pending Sell Stop order several points below the neckline, depending on the timeframe and asset volatility. Stop loss is set 10-15 points above the neckline (in case the breakdown turns out to be false). Take profit can be set below the neck line at a distance equal to the height of the last shoulder multiplied by three (this is not a strict rule, but one of the options).
In addition to the usual “Head and Shoulders” figure, there is also an “inverted Head and Shoulders” - a pattern that forms on a downtrend that is mirrored to the ordinary. It consists of three depressions, the two extremes are approximately the same, the average is the lowest. Trading rules are identical, except that you need to open a deal to buy.
Double top and double bottom
The figures “Double top and Double bottom” are very similar in mechanics to “Head and shoulders” and “inverted Head and shoulders”. Only instead of three vertices in this figure there are two of them, and they should be about the same size.
For example, the “Double bottom” figure is formed after a downtrend, when the price, having reached the bottom point, rolls up, and then, with the final impulse of sales, once again reaches the bottom, and rolls back again. At the point of the first rollback, resistance is formed, similar to the neckline for the “Head and Shoulders”. After the price has bottomed for the second time at the same point as the first time, the figure is considered formed, and we can expect the breakdown of the resistance line and the trend reversal up.
The classic version of trading in this situation is the installation of a pending Buy Stop order several points above the resistance line. Stop-loss is set 10-15 points below this line (sometimes a stop can be set a few points below the bottom line, if money management allows). Take profit can be set at a distance three times greater than the height of the figure.
As for the “Head and shoulders”, the “Double bottom” has a mirror figure - “Double top”. The rules of building and trading for her are mirrored by the Double Bottom and are almost identical to the Head and Shoulder trade.
These paired figures are the main reversal patterns in the Forex and other financial markets.
This figure is one of the simplest, and it will be easy for novice traders to identify it on the chart. It is characterized by a smooth change in price from a downtrend to an uptrend, and vice versa, in the case of an “inverted Saucer”.
The classic saucer is a semi-ellipse in which the candles, as they approach the lower point, become shorter and the trend slows down. After overcoming the bottom itself, a gradually accelerating growth begins.
There are two main ways of trading according to the Saucer - conservative and aggressive. The conservative method prescribes to wait for the formation of the saucer, when the uptrend reaches the point at which the formation of the figure began earlier, and only then enter the market. However, the start point can be implicit, and in this case it is difficult to determine the moment of completion of the pattern formation. Aggressive approach involves entering the market at a time when the bottom point of the Saucer is clearly defined and the market moves to growth. In this case, a short stop loss is required.
Saucer is a rather rare figure, in addition, despite its simple form, few traders manage to determine it at an early stage. Like most figures, the Saucer is simple and upside down - the second form is mirrored, and the trading rules for it are the same. Adjusted for the opposite direction of the trend, of course.
Flag and Pennant
The flag and pennant (as well as their inverted forms) are the figures of the continuation of the trend. Both figures consist of two parts - the "pole" (one or more long candles) and the "panel" (many small candles that form a dense row).
The difference between the flag and the pennant is that the flag has a "rectangular" shape, and the pennant has a triangular shape, gradually tapering.
After the flagpole or pennant is formed, the price begins to fluctuate in a flat, the boundaries of which, as a rule, are directed slightly against the trend (slightly tilted down with a dominant uptrend and upward with a downtrend). After both lines of the banner, upper and lower, are formed, a breakthrough can be expected.
Trading on these figures is best done with pending orders.
For example, for the rising flag, as in the screenshot above, the best option would be to place a Buy Stop order several points above the resistance line (gradually lowering the order line as the banner grows). Stop-loss is set either below the lower edge of the banner, or by 10-15 points from the transaction opening price. Take profit - the height of the banner multiplied by 3, or any other value within the current strategy of money management.
Trading on inverted pennants and flags is carried out according to the same principle, only transactions are opened for sale.
The triangle does not apply to reversal patterns, nor to trend continuation patterns. Nevertheless, the pattern gives a clear signal to enter the market. The peculiarity of the figure is that the direction of opening a transaction - to buy or sell - becomes clear only at the moment of receiving a signal.
A triangle is formed on a weakening trend, when the price, entering the flat, gradually narrows the range of fluctuations. The two main lines of the triangle are built on the extremes of the candles and converge at one point. A signal to open a transaction is a breakdown of one of these lines. The advantage of the triangle is that, having formed, it will in any case give a signal, since sooner or later the price will go out of the narrowing range. The disadvantage is that a breakdown may turn out to be false more often than signals of other main figures (in about 40% of cases).
The best way to trade: placing pending orders for the breakdown at the level of the support and resistance lines of the triangle (on both sides, several points below support and above resistance). Stop-loss is set either firmly, at the same distance from the line as the order, but in the opposite direction; or more freely - at the level of a trade order in the opposite direction.
Sometimes a triangle can be mistaken for a pennant. If a line of one or several long candles was formed in front of the triangle, this figure needs to be traded as a pennant, that is, to receive signals only to continue the trend.
General recommendations for trading on technical analysis figures
We considered only those figures that are considered the most canonical and reliable, and their signals most often bring profit in transactions. Nevertheless, there are other patterns: a diamond, a butterfly, an expanding figure, etc. However, they are more "exotic" - to identify them on the chart is usually more difficult, and transactions are less likely to close in profit.
At the moment, very few traders trade only in technical analysis figures, and even less receive stable profit on such trading. It is necessary to know and be able to recognize the figures, however, trading is much more effective if you use other technical analysis tools: support and resistance levels, price channels, sometimes various indicators. Figures of technical analysis should be taken into account when opening deals according to the signals of their strategy built on other instruments. If the signal of the vehicle coincides with the signal of the figure, then it is highly likely to make a profit, if they contradict each other, it is better to refrain from trading.
It is also better to refrain from trading in technical analysis during the period of the release of important economic news or other events affecting the market. Technical analysis evaluates the market by the crowd behavior displayed on the chart. During important events, participants act as sharply and unpredictably as possible, respectively - the price movement also becomes unpredictable, and patterns at this moment do not work. When the period of panic passes and the market calms down - you can again proceed to system trading.