16 September 2015

Trading Forex: Reversal patterns

Reversal patterns are used by traders to identify the top and bottom of a particular currency pair, and to signal that a price trend is about to reverse. The opposite of this is a continuation pattern, which indicates a trend is set to continue once the pattern finishes.

​​​​​There are many commonly used patterns: flags, triangles, diamonds, rectangles, wedges, pennants, head and shoulders, as well as top and bottom versions of many of these, and a number of much more complex and niche patterns for very advanced traders. 

To explain one of the more straightforward patterns, head and shoulders gets its name from its triple-peaked formation in the shape of a head, neckline, and shoulders. It occurs when a price trend is about to reverse from either a bullish or a bearish trend.
 
Within technical analysis, candlesticks are a widely used method of representing data on a chart to show price trends and signal potential reversals. They are so called because the rectangles look like candles. Each candle represents the difference between the opening and closing price, and also shows the high and low price over a certain period. An engulfing pattern is when a candlestick is large enough to engulf either the previous or the subsequent candle - the former is a bullish signal and the latter is a bearish signal.
 
There is an almost infinite number of tools at your disposal, and it easy to become overwhelmed so it might be useful to pick a method and stick with it for a while before graduating to a more complex pattern.​


 

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.