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Forex Trading with Reversal Patterns in Foreign Exchange Market

Forex Trading with Reversal Patterns in Foreign Exchange Market

Forex trading  reversal patterns are essential patterns of the trend end and the start of a new movement.  They are formed after the price level has reached its maximum value in the current trend. The main feature of trend Forex Trading reversal patterns is that they provide information both on the possible change in the trend and the probable value of price movement.

Reversal Pattern in forex
Forex Trading Reversal Pattern 

These patterns serve to indicate that the ongoing trend is about to change the course. A pattern formed during an uptrend signals a trend reversal where the price will head down soon. On the other hand a Forex trading reversal chart formed during a downtrend indicates that the price will move up.

One of the key factors to recognize a chart pattern is to know where certain patterns are most likely to occur in the prevailing trend. Patterns occurring at market tops are known as distribution patterns, where traders more enthusiastically sell than buy the trading instrument. Conversely, patterns occurring at market bottoms are known as accumulation patterns, where traders more actively buy than sell the trading instrument.

Head and Shoulders

Head and shoulders in forex
Head and shoulders in forex

indicates both the end of trend and the possible change in the direction of asset’s price.The given pattern is formed in an uptrend representing three peaks of the market price arranged at different levels. Two lower peaks called shoulders are located at two sides of the highest peak called the head.The pattern’s lows are connected by support level called a neckline. If the price falls below the neckline or support level a sell signal arises.Though prices may rebound to the neckline forming a resistance level it is expected that the decline will continue.

How to calculate

T = N – (H – N),
Where:
T – target level;
N – neckline level (initial support);
H – pattern’s head level (highest top).

Inverse Head and Shoulders

Inverse head and shoulders in forex.png
Inverse head and shoulders in forex.png

represents a trend Forex trading reversal pattern indicating the change in direction of the asset’s price. Being formed in a downtrend this pattern comprises three consecutive lows of the market price which are arranged at different levels: two higher bottoms called shoulders are located at two sides of the lowest bottom called head. The pattern’s highs are connected by resistance level called a neckline. If the price climbs above the neckline or resistance level a buy signal arises.Though prices may rebound to the neckline forming a support level it is expected that the surging will continue.

How to calculate

T = N + (N – H),
Where:
T – target level;
N – neckline level (initial resistance);
H – pattern’s head level (lowest bottom).

Double Top

Double Top in forex.png
Double Top in forex.png

represents a trend reversal pattern which precedes existing trend reversal.Though it is formed in an uptrend there is an expectation
that it may be followed by a drop in prices. Moreover, if it takes much time for the pattern to be formed more reliable it will be.
This pattern comprises two horizontal lines (support and resistance levels) connecting two most recent highs and a low of the price.
When the market price breaks the pattern’s low or support level the formation is considered completed.
In such a case it identifies downward direction of the trend serving as a signal to sell.

How to calculate
T = S – H,
Where:
T – target level;
S – support level (recent local low);
H – pattern’s height (distance between support and resistance levels).

About Muhammad Shahid Memon

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