If you’re going to trade forex you’ll need a good understanding of forex chart patterns.
These common chart patterns repeat themselves over and over again, no matter what type of trading you undertake.
The great thing is that once you learn to recognise these patterns, you can use them to enhance your trading in many different ways.
You can use chart patterns to make great trading decisions, no matter what timeframe you use.
Chart pattern recognition is a very useful tool to have in your trading toolbox as a beginner!
Chart patterns for forex trading
Candlestick charts are the most common type of chart that forex traders use.
But you can also see the same chart patterns in bar charts and OHLC charts too.
Some pattern sequences, such as triangles, are even easier to recognise using OHLC bar charts.
However, for now, we will concentrate on candlestick chart patterns, as these are the ones most commonly used by forex traders.
Why chart patterns are useful
Chart patterns are really useful because they can help us:
- understand the prevailing market type
- find potential trade entry points
- know when a breakout may occur
- give signals that it’s time to exit a trade
They can also assist us in setting appropriate stop-loss points, which helps with risk management, adding to their usefulness.
Types of chart patterns
There are three different types of chart patterns that forex traders will encounter.
- The price action shown by an individual candlestick
- The patterns made by a small group of candlesticks, less than three or four in a row
- The patterns made by longer groups or a series of candlesticks
We’ll first look at what individual candlesticks tell us, and then the patterns formed by a few candlesticks grouped together, and then go onto the patterns created by multiple candlesticks in a sequence.
The anatomy of a candlestick
First, let’s remind ourselves about the anatomy of an individual candlestick.
All candlesticks tell us the open, high, low and closing value of price action for the chosen time period.
Red candlesticks mean the price closed lower than it opened, so are considered bearish.
Green or blue candlesticks mean the price action closed higher than it opened, signalling bullish action.
Each candlestick usually has three parts:
- a head, also known as the upper shadow, or wick
- a body, which can be long or short depending on price action
- a tail, also called a lower shadow or wick
The shape of individual candlesticks is almost infinite, with multiple combinations of long and short heads, tails and bodies commonly visible on most price charts.
Longer bodies indicate price action is moving with strong momentum.
Short candlestick bodies indicate the price closed close to the point it opened, suggesting market indecision, when neither bulls or bears are in control.
Chart timeframes
Remember that charts can be viewed in many different timeframes, depending on the type of trading you’re doing.
This can range from seconds, to minutes, hours, days, weeks or months.
The candlesticks shown on a price chart are formed completely within the timeframe you’ve selected.
Therefore, if you’re looking at a 15-minute chart, the candlesticks will represent price action (open, close, high, low) for a 15-minute period.
Many traders have different chart timeframes open simultaneously in separate windows, if they are trading on a desktop computer.
For example, if you are day trading, you may have a minute chart open to see what’s happening instantly as you trade.
But you may also have a daily and weekly chart open at the same time, so you have an understanding of the bigger picture, too.
When I started day-trading in 2008, I used three large 58cm (23in) monitors arranged in a crescent shape around my desk.
This enabled me to display my trading platform on one monitor, use another monitor for research and monitoring news events, and the third one for displaying multiple chart timeframes of the asset I was trading.
(I also had a backup laptop to the side of my desk as well, just in case my main computer ever crashed.)
Such a desktop monitor arrangement is common among scalpers and day traders, who may need to be able to view multiple chart timeframes simultaneously.
These days many traders use their mobile phones, iPads and tablets to trade on.
However, it is still very important to understand the differences you’ll see if you change chart timeframes.
For example, this is chart price action of USD/JPY viewed on a four-hour chart:
Below is the identical price action viewed on a daily chart.
See how different the views look?
This is because in the example below, each candlestick represents the culmination of price action over one day, which shows a less sensitive view than the four-hour chart above.
Remember, within a short timeframe such as an hour or a four-hour period, price action may drop within that period, so red candlesticks may be visible. Then the price may recover.
However, if the price rises overall during the day, those red candlesticks won’t be visible on the daily chart if the overall trend is upward.
It’s for this reason that longer timeframes show the true price trend over an extended period, but they are less sensitive to price action minute-to-minute or hour-to-hour.
What candlesticks reveal about price action
The proportions of each candlestick part relative to each other tells us a lot about price action for that specific period.
This, in turn, gives us information about the current market condition, and which market pattern the forex pair is currently in.
For more information about market patterns, see The Advanced Forex Course for Smart Traders 2.0 lesson on market pattern types, and how to trade each one.
If the body of the candlestick is long, with a short head or tail, this tells us there is strong momentum to push price action either higher or lower.
Long candlesticks represent decisive action, where price action moves strongly in one direction or another.
However, if the body of the candlestick is very short, it means the opening and closing prices were very close to each other, which suggests indecision. These candlesticks are known as dojis.
How candlesticks reveal market type
Sideways or consolidating price action
If there are several doji candlesticks with short bodies in a row one after the other, it implies price action is moving sideways.
Market conditions are slow, volatility is low, and there’s not much price movement at all.
We often refer to such patterns as consolidation patterns, and they are recognisable by the presence of dojis in the sequence.
It implies that traders are standing to one side, waiting for the next trend to develop.
Such patterns are also often seen outside of the main trading times for a particular currency pair.
Here are a series of dojis showing a period of consolidation before an upward breakout takes place.
Trending price action
By contrast, if a strong trend is happening, then candlesticks tend to have longer bodies as price moves up or down in the direction of the trend.
Several candlesticks in a row of the same colour with long bodies signifies strongly trending price action in a particular direction.
It means there’s strong momentum driving the price action.
Such sustained up or downtrends are the ‘bread and butter’ of trend traders.
For example, look at this strong downtrend on a daily chart, with several large red candlesticks in a row:
In the downtrend, notice that each day’s closing price is close to the next day’s opening price.
This means there is a strong continuation of the downward price action, which is an indication of strong momentum.
Here is a strong uptrend, showing a series of long green candlesticks one after the other:
In this case, the uptrend starts off strongly, then loses some momentum as price moves back towards the middle Bollinger Band.
It then starts again with renewed vigor, as shown by the long green candlestick which penetrates the top Bollinger Band.
Volatile price action
A volatile market often sees long candlesticks in a seemingly random pattern, with price action going up, then down, then up etc.
This makes for a chaotic chart pattern, where there’s no discernible direction either up or down.
Here’s an example of quiet, normal and volatile price action, so you can see the different patterns associated with changing market types.
This type of choppy, volatile price action is often seen after a major announcement, or as the result of an unexpected news event.
Patterns formed by individual candlesticks
Individual candlesticks tell us the story about price action within the chosen timeframe. But the story depends on where that candlestick appears in a sequence.
If you want a deep dive into the science of candlesticks, we recommend you read Lousie Bedford’s ‘The Secret of Candlestick Charting.’
Hammers
Hammer candlesticks have a short green body with a long tail, and little or no head. They are often found at the bottom of a price trend, and are a reversal signal.
A standard green hammer looks like this:
Here is an example of a green hammer at the bottom of a downward price trend before a reversal:
See that the price opened at the same level as the previous close? During the period it did drop lower, as shown by the long tail, but then rallied to close higher than the close of the previous red candlestick, signalling a reversal in market sentiment.
The variations on a hammer are:
Hanging man: A red hammer also often found at the bottom of a downtrend, signalling a reversal.
Here’s an example of a red hanging man at the bottom of a downtrend prior to a reversal.
However, hanging man candlesticks can also be found at the top of an uptrend too. They almost always signal a reversal in price direction.
Inverted hammer: This is a hammer ‘upside down,’ with a short red body and a long head. It is usually found at the top of an uptrend, and also signals a reversal.
Here’s a typical example of an inverted hammer at the top of an uptrend before a reversal:
All these variations on a hammer have one thing in common – they usually appear at the end of a trend, and signal that price action is about to reverse.
Their long heads or tails at the top or bottom of a shorter body tells us that bulls or bears had a go during the session to move price, but the rally failed and eventually price action closed fairly close to where it opened.
Dojis
This is the Japanese word for ‘simultaneous.’ Dojis are characterised by having either no body, or a very a short body.
They are often seen after strong upward or downward trends, and suggest that neither the bulls nor the bears are in control.
During periods of consolidation, rows of dojis are very common. They indicate market indecision.
This is what the various dojis look like and are called:
Standard dojis:
These can look similar to a plus symbol (+) having either no body or a very short body and a tiny head and tail.
Here is a sequence of dojis during a period of market indecision:
Long-legged dojis:
There are also long-legged dojis, which indicate that either bulls or bears had a go at pushing the price higher or lower, but that push eventually failed, and price action closed very close to the opening level.
Here is a sequence of candlesticks showing the battle between bulls and bears illustrated by long-legged dojis:
All these single candlesticks tell us what price action did in a single period or session, depending on the timeframe you’ve chosen in your charting software.
Now we’re going to look at what candlesticks can tell us when they form patterns of multiple candlesticks in a row.
Chart patterns formed by three candlesticks in a row
These are the candlestick patterns we’re going to look at which consist of three or more candlesticks in a row:
- Evening Star
- Morning Star
- Three Soldiers
- Three Black Crows
- Rising Three
- Falling Three
Evening Star
This is a three-candle pattern with one long green bullish candle at the top of an uptrend, then a doji or spinning top at the top of the trend, followed by a large bear candlestick.
It implies a bearish reversal after an uptrend.
Here’s a typical example of what to look out for:
Morning Star
This pattern is the reverse of an Evening Star, and suggests that a downtrend has ended and a new uptrend is beginning.
It is seen at the bottom of a downtrend. It features a long red bearish candle, then a doji or spinning top, followed by a large green bullish candle.
If you see this pattern at the bottom of a downtrend, be prepared for an upward reversal.
Three Soldiers
The Three Soldiers pattern develops over three periods or days, and is a strong bullish signal after a downtrend.
It consists of three green candles with long bodies and short wicks, which open and close progressively higher than the previous day.
It shows steady buying pressure, which suggests the start of a strong uptrend.
Three Black Crows
This three-stick pattern is the reverse of the Three Soldiers. It can often be found after a strong uptrend.
It consists of three consecutive long red candles, with short or non-existent shadows or wicks.
Each session opens at a similar price to the previous one, but strong downward pressure pushes the price lower at each close.
It suggests a strong downtrend is developing as the bears take charge.
Here is an example of Three Black Crows appearing after an uptrend:
Rising Three
Despite its name, this is a five-candlestick pattern which indicates the continuation of a previous uptrend after a pause.
It consists of one long green candlestick, then three smaller short-bodied red candlesticks which all form within the body of the first long candlestick.
The final candlestick in the pattern is another long green one which opens above the base of the first green one, and usually closes higher than the high of the first green candlestick.
This pattern is usually found within an existing uptrend and is confirmation of a bullish continuation.
Falling Three
This is the equal and opposite counterpart to the Rising Three pattern described above.
It is a continuation pattern for a downtrend after a failed upward rally.
It consists of five candlesticks – two long red ones with three short green ones in between.
Just like the Rising Three, the short green candlesticks fall within the body of the first red candlestick.
Here’s an example of what a Falling Three pattern looks like on a standard chart:
I found these two patterns of Falling and Rising Three to be highly reliable patterns, which can result in a successful trade.
Entry is made in the prevailing trend direction once the fifth candlestick pattern has formed. These patterns don’t happen very often, but when they do, it’s easy to recognise and trade these chart patterns.
Patterns formed by a longer series of candlesticks
Here are some of the chart patterns we’re going to look at which consist of a recognisable longer pattern or series of candlesticks:
- Channel breakout patterns (rectangles)
- Head and Shoulders
- Inverse Head and Shoulders
- Rising and falling wedges
- Bearish and bullish pennants
- Triangles
Channel breakout patterns
Channel breakouts are frequently encountered patterns in forex trading – in fact, they’re the most common pattern you’ll see.
They include both bullish and bearish rectangles which are defined by support and resistance lines.
Rectangles, or channels, emerge when the price consolidates within parallel horizontal lines, indicating a period of uncertainty before the continuation of the prevailing trend.
Key Characteristics
- Bearish rectangle: Consolidation occurs within a horizontal range amid a downtrend
- Bullish rectangle: Consolidation takes place within a horizontal range in an uptrend
The example below shows the price action consolidating between two horizontal lines, with the support and resistance levels forming a rectangle, before a sudden breakout.
Trade signal
Breakouts happen when the price breaches above the resistance (bullish) or below the support (bearish) of the parallel lines formed by support and resistance lines.
You’ll see a consolidation period, where price action fluctuates between support and resistance levels. The market is going sideways, biding its time.
This is often followed by a sudden breakout in either direction.
The inclination of the channel, whether slightly upward or downward, is insignificant; what matters is the rebounding off the support and resistance levels.
Here’s an example of a typical bearish breakout from a horizontal channel consolidation phase:
Channel breakouts are the ‘bread and butter’ of trend traders. They make reliable entries for either long or short trades.
They can be used in conjunction with other indicators (such as Bollinger Bands) to make a low-risk trade entry.
For more information on making low-risk/high-reward entries into a trade, see Lesson 7 in The Advanced Course for Smart Forex Traders 2.0.
The trade should be entered when price action dips above or below the upper or lower Bollinger Band line after a period of consolidation.
Here’s an example of a typical channel breakout and price movement below the lower Bollinger Band, indicating the potential for a short trade:
Calculating the trade potential for channel breakouts
To estimate your potential trade opportunity, measure the channel’s height and project this measurement above or below the top or bottom channel line.
This projection serves as your target trade potential.
For instance, if the channel width between support and resistance lines is 50 pips, consider your trade potential to be 50 pips above or below the support or resistance line.
In case of a failed breakout, and a reversal in price action, you can utilise the upper or lower trendline as your stop-loss point.
Double Tops and Double Bottoms
These breakout patterns are commonly known as ‘Big M’s (Double Tops) and ‘Big W’s (Double Bottoms) and are a common pattern that are easy to spot on many trading charts.
Here are what those patterns look like, and how to trade them:
Targets for breakout trades are indicated by the dotted lines.
Key characteristics
- Double Top: Consists of two peaks at approximately the same price level, indicating price action has hit resistance
- Double Bottom: Consists of two troughs at approximately the same price level, indicating price action has hit a support level
Trade signal
Breakout occurs when the price breaks below the neckline (for Double Top) or above the neckline (for Double Bottom)
Here’s what a typical Double Top (Big M) formation can look like in reality:
When I was day-trading, these were my favourite patterns, which I frequently traded. I found them reliable and easy to trade.
Double Top and Double Bottom patterns are both reversal patterns that occur at the end of an uptrend or a downtrend.
These patterns form reliable indicators that a solid breakout is about to occur.
The size of the breakout is measured from the Double Top or Double Bottom resistance level to the neckline, projected up or down as appropriate.
Here’s an example of a Double Top price pattern, showing downside breakout after the formation of the ‘Big M’ with the entry level marked for a short trade:
Head and shoulders
The Head and Shoulders pattern is a reversal pattern that resembles a baseline with three peaks, with the middle peak (the head) being the highest and the other two (the shoulders) relatively lower.
Key characteristics
This pattern forms when an uptrend fails to sustain, and reverses. The first peak represents the left shoulder, followed by a higher peak forming the head, and then a third peak resembling the right shoulder, often at a lower level than the head.
Trade signal
- Bearish Head and Shoulders: A neckline connects the lows of the left and right shoulders. A breakdown below this neckline suggests a potential trend reversal to the downside
- Bullish Head and Shoulders (Inverted): In contrast, an inverted Head and Shoulders pattern forms at the bottom of a downtrend, indicating a potential reversal to the upside when the price breaks above the neckline.
Inverse Head and Shoulders
The inverted Head and Shoulders pattern is also a reversal pattern that resembles a baseline with three bases, with the middle peak (the head) being the lowest and the other two (the shoulders) relatively higher. Here is what an inverted Head and Shoulders pattern formation looks like.
A long trade is usually entered once the formation of the neckline is complete.
My trading experience of Head and Shoulders patterns has been that they are more subjective and difficult to trade than Big W’s or Big M’s (Double Tops and Double Bottoms).
They also occur less frequently, and are more difficult to spot and define accurately.
Rising and Falling Wedges
Rising and Falling Wedge patterns are a reversal pattern. Rising wedges slope upwards, while falling wedges slope downwards.
Both patterns signal that buying momentum is slowing down, and a reversal may soon occur.
Key characteristics
On a Rising Wedge, which is often seen after an uptrend, the narrowing price range suggests that bulls are losing control, and therefore it’s more likely the bears will take over, causing a downward reversal in price action.
On a Falling Wedge, which is often seen at the bottom of a downtrend, the narrowing price range suggests that the bears are losing control, and therefore it’s more likely the bulls will take over, causing an upward reversal in price action.
Rising wedges form during uptrends, with narrowing price movements between upward-sloping support and resistance lines.
Falling wedges occur during downtrends, with decreasing price movements between downward-sloping support and resistance lines.
Trade signal
- Rising Wedge: A breakdown below the lower trendline suggests a potential reversal to the downside, indicating a bearish trading opportunity.
- Falling Wedge: A breakout above the upper trendline signals a potential reversal to the upside, presenting a bullish trading opportunity.
Pennants
Pennants are a continuation pattern characterised by two slowly converging trendlines.
They can look very similar to wedges, but they occur after a period of very strong price movement, which is known as the flagpole.
As they are a continuation pattern, they represent a period of consolidation before the prevailing trend continues.
Their trendlines will converge eventually, but as the trendlines are not as steep as a symmetrical triangle, the breakout usually occurs before the trendlines come to a point or meet up.
Formation
Pennants form as the price consolidates within converging trendlines after a sharp price movement, resembling a flagpole.
Trade signal
- Bearish Pennant: A breakdown below the lower trendline indicates a potential continuation of the downtrend, offering a bearish trading opportunity.
- Bullish Pennant: A breakout above the upper trendline suggests a potential continuation of the uptrend, presenting a bullish trading opportunity.
Triangles
Description
Triangles are chart patterns characterised by converging trendlines, indicating a period of consolidation before a potential breakout.
Formation
Triangles form as the price oscillates within converging trendlines, with lower highs and higher lows, creating a contracting price range.
Here are a few examples of the triangle patterns you are likely to see as a forex trader.
Symmetrical triangles
Shape
Two converging trendlines, one drawn connecting swing highs and the other connecting swing lows, with both trendlines sloping inwards towards a common point.
Formation
Represents a period of consolidation, where buying and selling forces are relatively balanced. The price action gets squeezed tighter as the trendlines converge.
Trade signal
Symmetrical triangles are neutral patterns, meaning they can indicate a breakout in either direction (up or down) from the converging trendlines.
Traders wait for a confirmed breakout (indicated by the price closing above the upper trendline, or below the lower trendline) to confirm the trade direction.
The price target for the breakout is the largest distance between the highs and lows of the triangle as the pattern forms, added to the breakout price.
Important Note
Since symmetrical triangles can breakout in either direction, they are best used in conjunction with other technical analysis indicators to confirm the breakout direction.
Ascending Triangle
Shape
Similar to a symmetrical triangle, but the upper trendline is flat (horizontal) and the lower trendline slopes upwards.
Formation
Occurs during an uptrend, and suggests the buyers are gaining control, as the price makes lower lows.
The price keeps getting rejected at the support level (the flat upper trendline) but continues to find resistance at higher levels (as shown by the rising lower trendline).
Trade signal
Ascending triangles are generally considered bullish continuation patterns, indicating a potential upside breakout.
Traders look for a confirmed breakout above the flat support line to enter a long position.
The price target for the breakout is the same as a symmetrical triangle, as shown on the diagram above.
Descending Triangle
Shape
Similar to a symmetrical triangle, but the upper trendline slopes downwards and the lower trendline is flat (horizontal).
Formation
Occurs during a downtrend, and suggests sellers are gaining control as the price makes lower highs.
The price keeps getting rejected at a support level (the flat lower trendline) but continues to find resistance at lower levels (the falling upper trendline).
Trade signal
Descending triangles are generally considered a bearish continuation pattern, indicating a potential downside breakout.
Traders look for a confirmed breakout below the flat support line to enter a short position.
The price target for the breakout is similar to symmetrical triangles, as shown in the diagram above.
Final thoughts for beginners
Understanding candlesticks and the patterns they form is the most vital skill that all traders need to master.
Along with indicators, they dictate where to enter a trade, which direction to trade in, and when a price reversal may occur.
They also assist you to set your stop-loss position, and to set profit targets for the trade.
Therefore, learning chart patterns and understanding the story that candlesticks tell us is the Number One priority if you are a beginner trader.
You can find out lots more useful information about forex trading in our trading course for beginners.
Don’t worry if all the different patterns seem a little confronting as you start your trading journey.
Just like learning to reading music, or learning to speak another language, it gets easier over time, and will soon become second nature with sufficient practice.
The more you look at price charts and become familiar with them, the closer you are to being ready to start trading.
When I’m teaching new traders, I often ask them to talk me through what they see in front of them, and play the game ‘what comes next?’
Look at the ten candlesticks prior to current price action, and speak aloud what story you hear and see.
For example, you may see a long green candlestick with no head or tail, so you might say:
‘This means the price opened at the base of the candlestick, and closed at the top of the candlestick. As there is no head or tail, it means there is strong momentum for an uptrend.’
Then talk out loud what you see in the following candlestick, and so on through the sequence of ten.
Talking about loud exactly what you see in price action helps your brain to remember the new information you are learning.
Once you reach current price action, try and predict what price action will do next.
For example, if you see a doji form at the bottom of a downtrend, you might say:
‘The doji indicates indecision, and may signal a reversal in price action.’
Then look to see if your predicted reversal is correct.
By playing this game of ‘what comes next?,’ you are learning to develop the skills needed to read trading charts, and also to understand different market types.
It’s a skill that be useful to you no matter what asset you’re trading, or what market phase that asset is in.
Just like learning to ride a bike, once you’ve learnt to read trading charts, it’s a skill that will be with you for life, but will improve the more you practice.
If you like this article then sign-up for our newsletter or join over 42,000 traders and get The Advanced Forex Course for Smart Traders 2.0. It’s 100% free.
Sources
Marketmates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
- Louise Bedford – The Secret of Candlestick Charting. https://www.tradinggame.com.au/product/technical-analysis/the-secret-of-candlestick-charting/
- Louise Bedford – Trading Secrets. https://www.tradinggame.com.au/product/books/trading-secrets-3rd-edition/
