Watch for red brake-lights
Price patterns are a lot like the brake lights on the cars around you when you are driving in traffic. When you see the brake lights come on in the car in front of you, you know that the car is slowing down and that you need to slow down too unless you want to crash into it. What you don't know is whether the car is going to accelerate and continue moving in the same direction after it slows down, or if the car is going to come to a complete stop and change direction.
When you see a price pattern starting to form on a forex pair chart, you know the pair is starting to slow down, or consolidate, and that you need to slow down, take a step back and evaluate what may happen to it. What you don't know, is whether the currency pair is going to breakout and continue moving in the same direction after it slows down, or if the pair is going to turn around and change direction.
Price patterns are an underutilized and extremely valuable tool in your forex-trading arsenal. It may take a little while to get comfortable with dealing with the subtle nuances and occasional ambiguity that are a part of price patterns, but once you do, you will feel like you are able to see into the future.
Price patterns are visual representations of market psychology. They tell you when traders in the market are excited and moving, when they need to take a moment and catch their breath and regroup and when they are ready to get moving again.
Attributes of Price Patterns
All price patterns are made of the following four pieces:
Old trend: the trend that the currency pair is in as it starts to form the price pattern
Consolidation zone: a constrained area defined by set support and resistance levels where the trend is undefined or channeling
Breakout point: the point which the currency pair breaks the consolidation zone
New trend: the trend the currency pair enters coming out of the consolidation zone
Types of Price Patterns
Price patterns are divided into two major categories: Continuation Patterns and Reversal Patterns.
Continuation patterns tell you that the new trend is going to continue in the same direction that the old trend was moving
Reversal patterns tell you that the new trend is going to reverse directions and move in the opposite direction that the old trend was moving
The only real difference between continuation patterns and reversal patterns is which direction the new trend is moving. Both types of patterns have an old trend, a consolidation zone, a breakout point and a new trend. The next two sections discuss these patterns.
Forex Essentials Course - 21 lessons:1. What is the forex
2. Supply and Demand
3. How Trading Works - Interbank and the Forex
4. Choosing a Dealer
5. Forex Pairs - Characteristics and Qualities
6. Earning Interest in the Forex
7. Margin and Leverage
8. Short Term vs. Long Term Trading
9. Forex Futures vs. Spot Forex Accounts
10. Fundamental Analysis in the Forex
11. The Calendar and Economic News
12. Introduction to Charting and Technical Analysis
13. Support and Resistance
14. Fibonacci Analysis
15. Price Patterns
16. Continuation Patterns
17. Reversal Patterns
18. Technical Indicators
19. Portfolio management – Diversification
20. Portfolio Management - Position Sizing and Stop Losses
21. Introduction for Forex Options