The Forex or Foreign Exchange is quite a complicated discipline and forex trading, more so. You need a specific degree and a set of skills to be able to become a successful forex trader. It is not an easy concept to grasp, but it is also not something that should give you sleepless nights, should you take it up as a career. Like every domain, forex trading is also dominated by jargons and visuals that one must understand and learn to decode. And though it might take you a couple of weeks or months to get the hang of the domain, fortunately, there are resources and materials on the World Wide Web that can help you in this endeavour.
One such topic that we have decided to talk about in this article regarding forex trading, is the patterns of forex trading. By the end of the article, you should be able to grasp the basic concepts of forex charts, learn the different types of forex charts and use them for the purpose of technical analysis. Of course, the discipline is far too complex and requires introspection that goes way beyond this article. But, hopefully, this article shall gear you in the right direction and make the nebulous affair of forex trading a bit simpler for you.
The Chart Types:
Speaking of forex trading, there are a few chart patterns that you must definitely wrap your heads around before delving deeper into the core. These chart patterns help you understand the pulse of the market and ensures that you are capable enough to do your research. Research is imperative in cracking your way to the best deals. Similarly, research is also essential when you have to make a successful forex trading career. Of the many chart patterns, the two patterns that are used widely are the Head and Shoulder (H&S) pattern and the Triangle pattern. We shall be dealing with these patterns first, and then move on to the others.
Head and Shoulders (H&S)-
There are essentially two things that you must understand while decoding the Head and Shoulders chart pattern. There can either be a topping formation or a bottoming formation. Now, you must be wondering what these two formations are. Here is what you need to know. The topping formation is an uptrend that denotes a high price followed by a retracement and then again, followed by a higher price. The bottoming formation is suggestive of a low price, followed by a retracement and then again, followed by a lower price. These are the two most important points that you must remember while trying to understand and decode this chart. You must also not forget that a neckline connects the two highs and the two lows and this pattern provides an entry level, a stop level and a target for profit, which thus, makes it tradable.
Now, this particular chart works best when you have a short time period to consider. It is one of the most commonly used charts and can be further subdivided into symmetric, ascending and descending. You must understand that the pattern of triangles occur when high prices and low prices start converging, thus, giving rise to the formation of triangles. And just like the pattern we discussed in the previous section, that is the Head and Shoulders pattern, this pattern too is tradable because it provides an entry, a stop and a profit target. You shall know that it is the entry level when the perimeter of the triangle is penetrated. There are, however, several other technicalities associated with reading this chart and trading them. But, for the ease of your understanding, this is what you must wrap your heads around first.
The Other Types of Patterns:
Now that we have covered the two most important forex trading patterns, we shall discuss about a few other patterns in brief for a holistic approach to the matter at hand. One other pattern that is used elaborately is the Candlestick pattern. The Candlestick pattern is convenient since it helps in measuring the movement of prices in not just one time frame, but in all other time frames. This comes in real handy while navigating the domain of forex trading. The second pattern that we need to talk about is the engulfing pattern, which happens to provide a brilliant trading opportunity. It makes it easy to understand the price movements across the time frames and provides an instant read on the market.
Reasons to Decode the Forex Patterns:
The reason why it is crucial for forex traders to be able to decode the pattern is because these charts provide an instant insight into the prevailing conditions of the market. These charts make it quite easy for technical analysis, and you might have a near-perfect solution to your forex trading endeavours. This is why it is important that forex traders learn to read what the patterns imply. Penetrating the market without the technical knowledge of reading the charts or understanding the pulse of the market can get scary, especially when the market we are talking about is that of forex trading. You will not have the first idea of what is going on in the domain. There are several tools that too can be used to analyse these charts. The more efficiently an individual uses these tools to understand the domain, the better chances shall he have in carving a niche for himself/herself as a forex trader.
A Few Final Words:
Forex trading can get overly complicated at times, if you are not too skilled in reading the charts and analysing the direction in which the wind blows. Hopefully, this article has been able to shed light on the crucial aspects of forex trading. The points that we have discussed in this article shall help you get an idea of how the charts work and how you could use them in trade. Read some more and follow up with research to understand the nuances of this field better.