Forex Trading Patterns do not always make themselves obvious and are not always reliable.
There are so many Forex Trading Patterns and they have a prophetic reputation. Some Forex Trading Patterns are more reliable than others and the source of the patterns varies. With a proper grasp on their forms and reliability, a trader or investor can make a proper determination. Automatically seeing Forex Trading Patterns is not a license to act as there are no guarantees in the market.
You might be wondering what you should be looking out for…
1. Chart Pattern Shapes
Forex Trading Patterns take on various shapes. The general rule of thumb is that the patterns on the longer time frames are more reliable than the shorter time frames. Trust 4 hour and 1 day charts over 5 minute and 15 minute charts for these.
Why trust longer time frames? Less noise. There’s a lot of noise in the market and it is visible on the shorter timeframes.
Consider using tick charts as these do not take time into account, but rather has a set number of changes in the price per candlestick.
There are Ordinary Chart patterns and Fibonacci Chart Patterns (Harmonic Patterns).
Ordinary Chart Patterns take their cue from just the shape that the candlesticks form on the chart. If the chart has a general appearance of a Cup and Handle, it is a Cup and Handle. The Head and Shoulders Pattern may look somewhat irregular, but it would remain valid as there are no steadfast rules behind it. Appearance is all that matters. This could be one big Rorschach Test though and there’s always the matter of where entry and exit points would be.
To some, this is a Double Top formation and to others it is rather murky.
Fibonacci Chart Patterns take their cue from shape and Fibonacci Retracements and Extensions. These Fibonacci Retracements and Extensions can be found in MetaTrader 4. There are even indicators that find these patterns due to the orthodoxy of the patterns.
Forex Trading Patterns take other forms as well…
2. Candlestick Patterns
This is a more zoomed-in perspective on the individual candlesticks and how the price action evolves over time. Candlestick patterns such as the Harami, Engulfing, Doji, Piercing Line and others exist. Their reliability varies and the time frame plays a role in their effectiveness. As Forex Trading Patterns, candlestick patterns are very easy to spot, code and backtest. They often are a good filter in a trading system.
There are over 100 patterns, which is rather intimidating. However, there is absolutely no need to look for all of them or even use all of them when you go live. Why?
- Many of these patterns appear rarely and cannot be relied upon due to small population size.
- Backtesting through the patterns will give you an idea of which ones are usable.
- You will find ones that fit what you are trying to accomplish and others will simply not.
- Patterns of continuity and reversal mean very little in extreme highs and lows of volatility.
3. Conventional Patterns of Timing
In Forex Trading, there are certain times when there is greater volatility and this means the price is going to move quickly. Market events are usually predictable much like the way individual companies that are publicly held have earnings releases scheduled in advance. Central Banks and Governments will release data, updates to interest rates and their own forecasts. All of these events are known in advance and are on any Forex Calendar. Unpredictable events certainly happen and are very difficult to forecast, but they are not the majority of market events that take place.
These Forex Trading Patterns are of a fundamental rather than technical basis. The market will move in the direction according to the sentiments and whether the actual result meets or exceeds forecasted expectations. Prices generally will react the same way to these events.
Not all scheduled market events matter to the currency markets as a good number are just rather minor events.
Another predictable timing pattern is the higher volatility that takes place at the Open of each regional market. When the Wellington, Sydney, Tokyo, Frankfurt, London and New York markets open, there is typically greater volatility. The way it goes really depends though.
4. Unconventional Patterns of Timing
These patterns are not based on any events or openings. These are just market spikes (downward and upward) at what would seem to be random times. When it happens once, it really stands out as an odd event, but when it is repeated – something is up on the Interbank.
Look for particular timing trends on the 1 minute chart history, not the charts themselves, but rather the chart history. Look for timing commonalities in volatility compared to other times of the day. This can easily be accomplished in Microsoft Excel.
The goal is to figure out what triggers the algorithms of the institutions to make the seemingly random, volatile trades that they make.
Hunting down these opportunities requires patience and quick entries and exits. The biggest problem with these situations is that the direction of the movement is not predictable and there are whipsaws.
Forex Trading Patterns come in different forms, but they are at their best when used with other factors. What is helpful is that backtesting processes, research and automation can save a lot of time, effort and money. Understand the market environments and how patterns interact with them. Context is key.
As always, do not limit your overall trading activity to one strategy in one account, diversify and create a portfolio with multiple sub-accounts based on backtests.
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