Besides trend analysis, support and resistance analysis, chart pattern analysis stands as the third leg of the forex-technical-analysis-stool. So in this article and the next few articles, I will introduce you the very powerful technique used among forex traders.
Chart patterns are formations that appear in price charts that create some type of recognizable shape. In other words, forex traders can only pinpoint the discernable pattern among the price charts, which often lead to similar market movements. Forex technicians believe that these patterns are formed by the behavior of the entire forex market participants, or market sentiment. Remember that market sentiments the collective human trading activities and human behaviors at a certain time.
Therefore, forex technicians believe that chart patterns can capture the trading activities that are driven by fear and greed. I mentioned that fear is the mood so undesirable for forex traders who want to make consistent profit. Sadly, when it comes to the market sentiment, fear is so infectious and greatly amplified by the collective trading activities.
Chart patterns can be divided into two categories: reversal patterns and continuation patterns. These terms refer to the trend for the currency pair in analysis prior to the pattern formation. If the pattern indicates a reversal of the previous trend , it is called a reversal pattern, conversely, it is called a continuation pattern. In the next article I will introduce the most famous chart pattern-head and shoulders pattern-not only in the forex world, but also in every other financial market.