Having a solid understanding of basic chart patterns is one of the best tools a trader can have in their arsenal. When most new traders look at a chart, all they see is random action and they are completely confused by what is happening on their screens. However, traders that have learnt to look for basic patterns repeating themselves are able to put price action into an understandable context and make actionable predictions based on expected outcomes. For the accompanying tutorial video, please click here.
We teach the best chart patterns to look out for in our Forex Trading Course and explore how best to trade them.
Trading these chart patterns can be extremely profitable but depending on trading methodology can also risky as they don’t always play out exactly as hoped.
In maximizing the profitability of trading chart patterns, traders need to find another tool which acts as a filter, to confirm the trades they anticipate and on of the best tools for this is our very own Order Flow Trader.
Order Flow Trader maps the flow and volume of Non-Commercials (Banks & institutions) in the markets and generates signals in line with their activity. So where we get a pattern break and an OFT signal, we know that Non-Commercials are involved in the move that it’s highly likely to continue, thus acting as a powerful confirmation for pattern breaks and also as a great tool for filtering out false breaks.
Lets take a look at some of the chart patterns featured in our course and how we can combine them with Order Flow Trader to generate maximum profits.
A symmetrical triangle is what we call a continuation pattern- it signals a phase of consolidation in a trend, followed by a period of continuation of a previous trend.
The triangle is created where a descending resistance trend line and an ascending support trend line meet, as buyers and sellers begin to increase pressure, causing a contraction of the range. The point at which they meet is called the apex point, and from there, the two trendlines will have a similar slope (hence the name symmetrical).
In a symmetrical triangle, the asset price will tend to bounce between the trendlines aiming for the apex, and eventually break out in the direction of the previous trend. However this isn’t always the case and a lot of times, we can see triangles form reversal patterns. If traders are anticipating one outcome, and are presented with another they may very well miss the trade altogether. This is where the Order Flow Trader is so incredibly useful.
In the chart above we can see we have clearly defined triangle formation in the GBPAUD. Now as price had been in a bullish phase before forming this triangle we would be expecting a topside break, however what we actually see, is price break down through the triangle and sell off. Now had we been trading this triangle using price action alone, we most likely would have been sidelines for this trade, not wanting to sell what we would thought would have been a bullish trade, however we can see that just two candles after breaking the triangle, OFT gave us a sell signal, confirming the downside break and indeed, price went on to sell off more than 400 pips from that sell signal
It’s similar to triangular patterns because the price movement bounces between the two trend lines. In a rising wedge, the gradient of the lower trend line will be greater and the upper trend line flatter. This shows you that momentum is easing; so buyers have trouble pushing the price up further when the asset is under pressure.
A sell signal will be developed when the price breaks through the lower support line. This shows you that sellers are starting to gain momentum.
In this chart we can see that GBPUSD formed a fantastic rising wedge pattern which lasted for just over a month. We can see at the highs that price reversed and broke down through the ascending trendline. It attempted to recover the trendline but failed, at which point OFT gave a sell signal for a trade which went on to sell off more than 700 pips
This pattern is a continuation pattern, and it tends to be preceded by a downward trend line. As sellers begin to pressure buyers around a fixed support zone. It starts out with a decrease to a low point which sends the price higher. It will then test the descending trend line aiming for the apex until the price is unable to support the level- and this results in a downward trend.
In the NZDUSD chart above we can see a great descending triangle pattern with lower highs putting pressure on a horizontal support line. Eventually the descending triangle pattern breaks and we see price sell off through the horizontal support line. As price breaks the support line we get an OFT sell signal which precedes a 400 pip sell off.
An ascending triangle is a bullish pattern. It shows you that the price is headed higher upon completion. This pattern is also created by two trend lines, but in this case, there will be a flat line at a point of resistance and an ascending trend line acting as price support where buyers are beginning to pressure sellers around a fixed resistance line.
The price will fluctuate between these trend lines until it breaks out above the flat line, and an upward trend usually follows.
You need to keep an eye on the ascending support line, as will show you when sellers are starting to leave the market. This is important because once sellers are out, the buyers are likely to take the price above the resistance point and continue an upward trend.
Looking at this 1 hour chart of USDCAD, we can see that we get neatly formed ascending triangle, in an overall bullish trend. Price breaks higher through the horizontal resistance line and as it does so, OFT gives a buy signal which goes on to make over 100 pips.
So as you can see, this strategy of using OFT as a confirmation tool for entering trades based off chart patterns is highly effective and demonstrates another fantastic way in which the OFT indicator can be employed to create high probability trading ideas.