Updated: 5 days ago
Chart patterns seem tricky,
lots of retail investors like to complicate their trading screens with extremely colourful lines and annotations, It's almost like a competition to see who's trading screen can look the busiest...
In reality they are very simple, and made even simpler using our forex chart patterns cheat cheat.
Also bear in mind that they are definitely not as essential as you may think they are!
In this article I will walk you through...
In this article we will focus on the correct way to trade the forex markets!
Traders are always looking edge over the markets, the main way that Traders try to gain this edge is through the use of chart patterns.
There are hundreds of different ways interpret charts and movement in markets, these are very complex methods that require practice, by the end of this article you will have an understanding of how and why traders use chart patterns.
You will learn the professional method of analysing markets and the SECRET to unlocking the professional standard of analysis.
This will give you your own edge over the markets!
What are Price Charts?
To understand chart patterns you first need to understand price charts, any analyst, retail trader or market watcher will use price charts to measure price in real time and the historic movement of any forex pair.
Forex charts depict historical behaviour across lots of different time frames and measures the movement between the two forex pairs, charts allow traders to essentially look into the past and according to technical analysts this past behaviour can be and insight into what the asset may do next.
What are chart patterns and what do they tell us?
When looking at a 'price action' chart patterns of movement can start to be noticed.
These patterns are normally seen in historical data, analysts find these forex chart patterns and if the pattern has repeated itself multiple times with the same outcome in the historical data a trader will try to predict when this pattern will emerge again and then enter a position based on this historical data.
With so many ways to trade currency, picking common methods can save time, money and effort.
Eventually traders will be able to spot these patterns and know immediately what trades they want to execute.
There are many simple methods spotting these patterns, it is called technical analysis, traders use indicators like the RSI or an ATR to try and determine what markets are doing, they also use Fibonacci and trend analysis as some of the most common patterns of movement shown on price charts.
The act of reading these price charts using all these strategies to determine a pairs future movement is called technical analysis.
But what is technical analysis? and why does it look so complicated?
its is not as complicated as it seems, let me explain...
What is Technical analysis?
All traders professional or retail use technical analysis as a way of determining the validity of a trade, however, they use this analysis in very different ways...
We will explore this further later on in the article but for now, let's take a look at the essential patterns every trader knows and uses regularly.
Forex Chart Patterns you NEED to know!
Reversal chart patterns
Reversal patterns are those chart formations that signal that the ongoing trend is about to change course.
These patterns include (but are not limited too) the head and shoulders pattern, reverse head and shoulders, rising wedge pattern, falling wedge pattern the double bottom pattern and last but not least the double top pattern.
All of these patterns are shown in the infographic below and on the downloadable poster...
Continuation chart patterns
Continuation chart patterns are those chart formations that signal that the ongoing trend will resume, wedges can be considered either reversal or continuation patterns depending on the trend on which they form.
Examples of Continuation patterns are...
Bull flag patterns, Bearish flag patterns, Bullish Pennants, Bearish Pennants, Falling wedge patterns and Rising wedge patterns.
again, all these patterns listed are in the infographic below and in the downloadable poster for your benefit.
Bilateral chart patterns
Bilateral chart patterns are much more complex because these signal that the price can move EITHER way.
The best Bilateral chart patterns to use are the ascending triangle chart patterns, the descending triangle chart patterns and the Symmetric triangle chart patterns.
For a permeant reminder of these patterns to add to your trading plan download our poster below...
Some other chart patterns that we haven't shown you may be familiar with are...
Various candlestick patterns
A-Y trading patterns.
Different candle doji patterns which you can read more about here!
Cup and handles chart patterns or 'teacups' - which you can read up on the investopedia website!!
Download your very own Forex Chart Patterns cheat sheet pdf so you can never miss 'em again!
Top 3 Forex Charts Software
Now that I have given you the best chart patterns to use, I can now show you the 3 best charting and analysis software’s where you can go out and test these chart patterns.
The software’s we will be looking at are NinjaTrader, Finviz and TradingView. For each software I will start with a brief description, followed by a good old pros and cons list and then my own humble opinion on the software in the form of a rating out of 5.
By the end of this section, you will understand what each piece of software offers, what makes them unique and a little bit about how they work, hopefully helping you make an informed decision on what software would best suit you.
First off let’s go through what Chart software’s actually are…
Trading software facilitates the trading and analysis of financial products, such as stocks, options, futures, or currencies.
Brokers will normally provide their clients with trading software to place trades and manage their accounts, however, with a broker’s own software you normally have to open an account for access, with the software’s we will be going over, you do not!
The software may be downloadable and launchable from a desktop or mobile device, or it may web-based, where the trader accesses the software via a website they log in to.
Traders can also purchase third-party trading software that supplements or enhances the software provided by brokerages. These are basically upsells with more indicators and extra help and maybe even news insights, we will get into why you may not even need all these extras later on in the blog.
NinjaTrader was founded in 2003 and the company offers analysis software and brokerage services to its clients. Its primary function is as charting and technical analysis tool however its brokerage service has increased in popularity over the past few years.
Excellent charting, great technical analysis tools, as well as partial and full strategy automation.
The NinjaTrader Ecosystem offers thousands of apps and add-ons from third-party developers.
Learn the platform and practice trading before risking real money.
Platform guides, video library, and free daily webinars.
Basic platform features are free with a funded account, but you'll need to pay to access premium features.
Easy setup for futures and forex traders, but you'll have to use a supporting broker to trade equities.
If you’re looking for smoothness NinjaTrader is not the platform for you, even though it provides a great variety of technical analysis tools its interface is famous for being fairly clunky and busy, making it hard to navigate.
I also had problems with the setup when testing this software out, as to receive the download for the chart software you have to enter your email, however, I ha to wat for over an hour for my download to be sent, which meant I was missing out on some good trades!!
Overall, I would rate NinjaTrader a 3/5 as its platform gives you the basics for free, but the design could be improved and so can the service.
Finviz is a fully web-based stock screener that provides various charts and graphs on a variety of different data points, this software is mainly sued for CFD and Equity analysis as they provide technical and also some fundament indicators and information on company performance.
Huge amount of data including a summary of important headlines and different signals for each stock.
Finviz runs indicators combining technical indicators including a chart pattern indicator and also fundamental indicators such as news releases and earnings reports.
Built for investors that know what they are doing.
Not very beginner friendly as there is a lot of information thrown out at once, that only an investor/trader with experience could understand, with only one short tutorial video.
Not very forex friendly, it is mainly a stock screener and forex information is hard to find.
As someone involved in the investment industry, I would score Finviz as a 4/5, due to a plethora of information and also additional features like a portfolio tracker, however, from the eyes of a beginner it can be very complicated without a lot of information or learning materials.
What stops it from becoming a 5/5 is even though it gives you insights into economies it doesn’t give you huge ideas about the forex market plus there is a lack of actual analysis tools and is probably best used alongside the next software I will review which is…
TradingView is a powerful stock analysis tool, providing a huge range of tools investors can use to learn more about the markets. Some of TradingView’s most used features include its fully operational mobile app, wide range of screening criteria, custom script incorporation and much more.
In addition, TradingView also offers news feeds associated with each asset, read articles, view real-time market data, and even watch livestreams with professional traders to improve your skills. Paper trading accounts are also available to help you master TradingView’s wide selection of tools.
Although TradingView’s content can be overwhelming for newer traders and investors, the platform remains among the most impressive research hubs on the internet.
Its main pull is the vast number of on-chart indicators, analysis tools and editing software’s. TradingView’s charts are completely editable and allow you to set them up as busy or as plain as you want.
Impressive selection of research tools.
Comprehensive stock screening.
Free accounts available.
Wide selection of engaging educational resources.
Customer service choices not all-inclusive.
Higher tier plans out of some investors’ budgets.
TradingView gets a 5/5 from me, not only is it what I use for my stock and currency technical analysis but the sheer editability of the charts and the insight through company earnings data and other fundamental tools make it one of the most comprehensive analysis tools on the web!
Does trading chart patterns actually work?
No, they don't work! Well, not by themselves anyway...
A common misconception with chart patterns and technical analysis is that it is a reliable way of predicting market moves.
Whilst they are still used by professionals it is not for the same reason as retail traders and this is why we see consistent growth from The Professionals and not so much from the retail traders.
Technical analysis and chart patterns uses purely historical data to predict future market moves, they do not take into account current economic or political conditions of either of the two economies involved in the forex pair.
These economic or political events/shifts can have a huge effect on the price of a currency in real time and in the future leaving patterns useless!
Indicators like unemployment rates, interest rates, homebuilding and consumer confidence all have huge effect on currency and cannot be predicted by technical analysis.
Don’t be disheartened, I know I have told you that chart patterns are not the most effective way to trade but I have the solutions for you, just hang on in there!
Chart patterns and technical analysis still play a role in the professional method of trading...
The REAL purpose of Chart Patterns
This means they used by professionals to time the entries into the markets and provide the best risk to reward ratio possible.
They are a key factor in working out risk management and are instrumental of the overall management of a trade before it is even entered.
Think of technical analysis as a final gateway to the opening of the position, identifying you a time and a place to enter a trade that gives you confidence and stability!
Technical analysis give you a route into a market but they are not the whole journey, technical analysis needs to be paired with fundamental analysis, using both these methods of analysis together is what these professionals are paid for.
What is fundamental analysis?
Fundamental analysis is a way of looking at the forex market by analysing economic, social and political forces that may affect the markets in a major way.
The idea behind this type of analysis is that if a country's future economic and political outlook is good the currency should strengthen.
When choosing a pair to trade the best way to determine direction is comparing each economy and determining which is the stronger of the two and which is the weaker economy.
We also look at what economy has the biggest scope or for growth and which economies have problems on the horizon that we can foresee, such as a potential rising in unemployment or too much domestic spending.
In fundamental analysis we look at a huge range of leading indicators, These indicators are called leading indicators as they tell us what may or may not happen in the future economy, we also focus on economic sentiment to determine the strength of each economy.
Professional traders use fundamental analysis before any kind of technical or chart pattern analysis, these professionals are trained over months and sometimes years in understand in the understanding of macroeconomics and politics.
Of course, we are not asking you get a PhD in political science.
ENTER.. the Macro Currency strength meter from Logikfx!
In very simple terms, a currency strength meter is a tool that shows you how strong, or how weak a currency is, or will be in the future. The free currency strength indicators, available elsewhere online, use an aggregate exchange-rate price calculation to determine strength, which as mentioned above, has no predictive power at all. Why? well its formula is purely based on historical price, so will only tell you what's happened in the past, and not what's happening in the future!
The Logikfx currency strength meter is a lot different to others out there. It's calculated by crawling thousands of economic reports for over 23 different economies and then running them through a clever algorithm to determine currency strength based on future economic growth or contraction. It makes fundamental analysis accessible, and fast for its users.
Simplified fundamental analysis negates the need for a learning curve, it takes away the staring at computer screen and allows you to trade like a professional.
"Fundamentals have never been so easy to trade, till now!"
Marcus, Director at Logikfx
The 3 Step Guide to using Forex Patterns
Here at logikfx we follow the professional trading method of macro trading using our three level system we know how to analyse any trade we put on to get the best possible outcome in every trade we execute.
The first step is value, this is the most important and probably the most complex step, we use fundamental analysis to determine whether trade idea is good or bad and equate its value.
If the fundamentals look good that means the trade is of a high value and there is huge potential for our bias to be confirmed.
If the fundamentals are not so positive or maybe even just neutral the value of that trade decreases and we put those trades on a watch list to see how the fundamentals change over time.
As LITA traders we have access to all sorts of analysis tools and education to help with this step...
Along with a great mentorship programme to help us through this first step process, we call the this the LITA technology and not only is the Macro Currency Strength Meter part of this but also the GDP differential meter both essential in any fundamental analysis.
Non LITA traders and professionals who use fundamental analysis will find all this info and more such as interest rate decisions and consumer confidence surveys themselves through hours of research.
The second Step is optimise, using indicators and chart patterns as a timing tool we determine a viable point of entry for any trade.
This is where the technical analysis comes to the forefront of professional analysis as it provides a door into the market to allow us to enter safely and be able to move on to step 3 with confidence in our bias.
To optimize our trades us LITA traders have lots of useful tools available.
One example is the COT reports mapped over time telling us the bias of hedge funds, effectively allowing ourselves to trade with them, and therefor emulate their success.
Step 3 is where we control our risk, using professional risk management methods we are able to protect our capital and ensure safe and well managed trades where we are able to enter the market with complete confidence and security no matter what way the trade goes.
At Logikfx we use our own software and tools such as the basis point calculator, the position size calculator to determine stop loss and take profit and our exposure limit calculator to manage our deposits and our exposure to gain complete confidence in our trade.
Professional traders also pay close attention to our risk to reward ratio, if the risk is significant and the reward is not then we do not place a trade and we go back to step 2 to try and find a better place to enter.
It is easy to get caught up the hype surrounding new chart patterns, retail traders flashing algorithms and bots that find complex shapes and ridiculous movement in markets, however, you must realise this is not the best way to trade.
Whatever you decide to do remember it is not all about indicators and complex shapes, looking at the bigger picture is what anyone should do to gain clarity on a currency pair.
Still learning how to trade? Learn through Logikfx Investment and Trading Academy (LITA) and take the first steps into growing your value as a trader with our free online courses, webinars, seminars. All from a small team of highly skilled traders with over 15 years’ experience in the financial markets. Learn how to make money trading forex, alongside the best ways to manage your risk through a proper trading journal, and sensible approaches to setting a stop loss (that doesn't get hit)!
Already know how to trade? Save hundreds of hours each month on trading technology, analysis and research using Logikfx's Macro Technology in the LITA Portal. Computing thousands of fundamental reports for over 23 economic regions, you'll know accurate currency strength at the click of a button.
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