Recognizing Chart Reversal and Continuation Patterns

Proper identification of an ongoing trend can be a tremendous asset to the trader. However, the trader must also learn to recognize recurring chart patterns that disrupt the continuity of trendlines. Broadly speaking, these chart patterns can be categorized as reversal patterns and continuation patterns.

Tip: Remember, a pattern that fully forms is easy to see. One that fails while in progress is more difficult to see.

FOREX Reversal Patterns

Reversal patterns are important because they inform the trader that a market entry point is unfolding or that it may be time to liquidate an open position.
Four figures below illustrate the most common reversal patterns.

[caption id="attachment_13091" align="aligncenter" width="550"]Double Top Double Top[/caption]

[caption id="attachment_13092" align="aligncenter" width="550"]Double Bottom Double Bottom[/caption]

[caption id="attachment_13093" align="aligncenter" width="550"]Head-and-Shoulders Top Head-and-Shoulders Top[/caption]

[caption id="attachment_13094" align="aligncenter" width="550"]Head-and-Shoulders Bottom Head-and-Shoulders Bottom[/caption]

FOREX Continuation Patterns

A continuation pattern implies that while a visible trend was in progress, it was temporarily interrupted, and then continued in the direction of the original trend. The most common continuation patterns are shown in five Figures below.

[caption id="attachment_13095" align="aligncenter" width="408"]Flag or Pennant Flag or Pennant[/caption]

[caption id="attachment_13096" align="alignnone" width="460"]Symmetrical Triangle Symmetrical Triangle[/caption]

[caption id="attachment_13097" align="aligncenter" width="390"]Ascending Triangle Ascending Triangle[/caption]

[caption id="attachment_13098" align="aligncenter" width="465"]Descending Triangle Descending Triangle[/caption]

[caption id="attachment_13100" align="aligncenter" width="401"]Rectangle Rectangle[/caption]

The proper identification of a continuation pattern may prevent the trader from prematurely liquidating an open position that still has profit potential.

These are some of the most common classical bar chart formations. Do they work? Sometimes. They worked more often in years gone by when fewer traders knew about them. Nowadays, everyone knows what a head and shoulders looks like. The result? Traders will begin to anticipate the second shoulder and sell before it forms. The result -- often, no head and shoulders forms -- just one shoulder and a head. This is how the market discounts information. Methods that work well initially become less and less effective over the years.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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