Market patterns are all about the specific price action behaviour exhibited by financial markets at any given time.
It doesn’t matter whether you’re trading forex or the stock market, the same chart patterns tend to repeat themselves over and over again.
Therefore, if you get to know these market patterns, you can gear your trading strategy to take advantage of them.
This can increase your chances of success.
In this article we look at these reoccurring market patterns, which we also call ‘market type.’
We take a close look at the eight different market types you will come across in your stock market or forex trading.
What are forex market patterns?
Forex market patterns are created by two main factors: price direction and price volatility.
- Price direction means whether the price is going up or down
- Volatility measures the degree of price fluctuation over a given period of time
If there is high volatility in the market, it means you’ll see significant price swings, both up and down.
A forex pair or stock with low volatility will show a more stable price pattern, with less movement up and down.
These two factors combine to create different market environments (or market types) that all traders should understand.
Recognising the current market type for the asset you’re trading will enable you to pick a successful trading strategy for that market type.
The fact is that not all trading strategies work in all market types.
Therefore, you need to adapt your trading around the market type that you see in front of you in your trading charts.
Price direction
Price direction in the forex market refers to the overall trend or movement of a currency pair.
There are only three possible market directions:
- a bull market (price increasing, upward trending)
- a bear market (price decreasing, downward trending)
- a sideways trending market (horizontal price, no movement)
In the chart pattern below, on the left you can see the price rising in a bull market pattern.
Notice the long green candlesticks, indicating the price is increasing
This is followed by a period of consolidation, or sideways price movement.
To the right you can see the market pattern change to a bear market, with the price declining.
Notice how the majority of the candlesticks are red, indicating that price is falling?
Bull Market (upward trending)
A bull market is characterised by rising prices, where the value of a stock, CFD or currency pair is consistently moving higher.
You can spot a bull market by seeing a series of higher highs and higher lows in the candlesticks on a price chart.
In a bull market, traders typically look for buying opportunities to make a long trade, expecting prices to continue their upward trend.
You can spot a bull market by the presence of lots of green candlesticks. This means the price ended higher than at the opening of that period.
The longer the green candlesticks, and the more of them, the stronger the bull market is.
Bear Market (downward trending)
In a bear market, prices are falling, and the value of the currency pair or CFD is consistently moving lower.
You can tell a bear market by observing lower lows and lower highs in the chart pattern.
In a bear market we generally look for short selling opportunities, anticipating a further decline in price.
You can tell a bearish market chart pattern by observing red candlesticks.
Again, the more red candlesticks you see, and the longer those candlesticks are, the stronger the downward pattern or bear market trend is.
Sideways Market (sideways, or no trend)
A sideways market, also known as a ranging or consolidating market pattern, occurs when the price moves sideways within a range.
There is no clear upward or downward chart pattern.
It indicates that neither the bulls nor the bears have control of market direction.
Many traders may be sitting on the sidelines waiting for a new trend pattern to develop.
Sideways price action is often seen in an environment where there is low volatility, or when there are few traders in the market.
It is also common to see sideways price action outside of standard business hours, for that particular region’s currency.
For example, during the night hours in Japan, currency pairs involving the yen may range sideways.
This because there are few transactions taking place at that moment in time.
However, as soon as Japanese traders wake up and start work, the direction of the yen may suddenly take off in one direction or another.
There are many more buyers and sellers in the market, so liquidity is higher, causing the price to move.
This market trading pattern is very common at the start of all trading sessions, not just at the start of the Asian session forex trading hours.
In sideways markets, traders often look for opportunities to buy at the lower end of the trading range, or sell at the upper end for a short trade.
Alternatively, they patiently sit and wait for a breakout. They know that when prices do break out of a range, the movement is often dramatic, and so worth trading.
The role of support and resistance in chart patterns
The range of price movement on a trading chart is usually defined by support and resistance levels.
These are price levels that have proved to be ‘turning points’ in the past.
They are like the floor and ceiling between which price action bounces, forming a sideways chart pattern.
If you use Bollinger Bands as your primary trading indicator, it is easy to spot when a price breakout occurs.
Look for:
- price action that has been trending sideways, and tight, narrow Bollinger Bands
- price action that has remained towards the centre Bollinger Band for a period of time
- a suddenly price movement that breaks above or below the upper or lower Bollinger Band
- rapidly widening bands
Here is a typical example of the pattern to look for in Bollinger Bands when a breakout occurs after a period of sideways price action:
You can find out here about how to trade breakouts using indicators.
Market volatility on trading charts
Volatility refers to the degree of price movement in the market, indicating how much the price of a currency pair fluctuates over a specific period.
There are three types of volatility that you can observe on any trading chart:
Quiet (little movement):
In a quiet market, price movement is minimal, and the market is relatively stable. This type of market is typically seen during periods of low trading activity, such as overnight, weekends, holidays or when there is a lack of significant news events.
Normal (moderate movement):
A normal forex market for the major currencies shows regular price movements without extreme fluctuations. This is the most common market condition, providing a balance between stability and opportunity for most traders.
Volatile (high movement):
In a volatile market, prices fluctuate significantly, often due to major news events or economic announcements. This market type can present both high risk and high reward opportunities, as prices can move rapidly in either direction.
How to correctly identify market patterns
By combining the factors of direction and volatility, you can learn to identify the specific market pattern you are trading.
Understanding the market pattern type will help you tailor your trading strategy to the current market conditions.
This will help you improve your chances of trading success.
If you wish to know more about how to trade different market patterns, you can read my colleague Sam Eder’s page all about trading market types here.
How trading chart patterns reveal market type
There are no specific numbers or chart patterns that define each market type.
In some ways, this is where reading price charts changes from being a science to an art.
It is up to each individual trader to make their own decision about the current market type.
This is where experience in reading chart trading patterns comes in!
Eight primary forex market patterns
Here are the eight primary market types in forex trading:
1. Bull Normal:
The market is trending upwards with moderate price movements. This type of market is ideal for traders who favour trend-following strategies, as the consistent upward trend provides opportunities for profit.
2. Bull Volatile:
The market is trending upwards with high volatility. While the overall trend is bullish, the significant price fluctuations make it essential to manage risk carefully, as rapid changes can occur.
3. Bear Normal:
The market is trending downwards with moderate price movements. Traders in this market type often use strategies focused on selling or shorting currency pairs, as the downward trend is expected to continue.
4. Bear Volatile:
The market is trending downwards with high volatility. Like the bull volatile market, this type requires careful risk management due to the potential for rapid and significant price changes.
5. Sideways Quiet:
The market is moving sideways with little price movement. In this environment, you can either wait at the sidelines and not enter any trades, or focus on range-bound strategies, taking advantage of consistent highs and lows within the support and resistance lines.
6. Sideways Normal:
The market is moving sideways with moderate price movement. This type of market provides rich opportunities for range trading, where you buy at support levels and sell at resistance levels. This type of trading is quite reliable and easy to carry out, although the profits available may not be spectacular.
7. Sideways Volatile:
The market is moving sideways with high volatility. While there is no clear trend, the significant price fluctuations can provide opportunities for short-term trading, although it requires a keen eye on market conditions.
8. Extreme trading patterns:
Extreme trading patterns occur when market conditions deviate significantly from the norm, often due to unexpected events such as geopolitical crises or economic shocks.
These markets can be very challenging to trade, with the price moving tens if not hundreds of pips in a short period of time.
Extreme market events require advanced trading strategies and experienced traders to carry them off successfully.
Here is an example of a 2,000-pip drop in one day on EUR/CHF after the Swiss National Bank removed the currency peg.
Why do market patterns exist?
Market patterns exist due to the psychology of traders, which drives the cyclical nature of price movement.
Even though a large proportion of forex trades are carried out automatically by algorithms, those programs were ultimately created by a human.
Therefore, they reflect the same trading psychology as if it were a human pressing the buy and sell buttons, and not a computer.
Market cycles repeat themselves time and time again due to the collective behaviour of buyers and sellers reacting to various market conditions, economic news, and price action.
Understanding the market cycle is crucial as it allows us to identify the current phase of the market cycle, and adjust our strategy accordingly.
Market pattern explained
Here’s how the market cycle typically works:
Phases of the market cycle
Consolidation phase (Sideways Quiet):
- After a significant price movement or trend, the market enters a consolidation phase. This is because it has run out of buyers and sellers
- During this time, the price moves within a narrow range, as traders wait for new information or clarity
- There is low volatility, and no clear direction emerges, as traders are hesitant to take new positions, not knowing what will happen next
Breakout phase (Bull or Bear Normal):
- The market eventually breaks out of the consolidation phase, initiating a new trend
- This breakout can occur due to technical factors, such as the triggering of stop-loss orders, or fundamental factors, such as breaking economic news
- The trend begins to gain momentum as traders who fear missing out start accumulating positions in the direction of the breakout
Acceleration phase (Bull or Bear Volatile):
- As the trend continues, FOMO (Fear of Missing Out) starts to accelerate and gain momentum, attracting more traders who do not want to trade against the trend
- Volatility increases as the price moves more rapidly in the direction of the trend
- The action becomes more dynamic and potentially more profitable for traders as more and more players enter the market
Profit-taking phase (Sideways Volatile):
- Eventually, traders start taking their profits, especially if prices approach key support or resistance levels, or if new information changes market sentiment
- This leads to choppy and volatile price action as the market struggles to find a new direction
- The market becomes more unpredictable, with rapid price swings in both directions
Equilibrium phase (Sideways Normal):
- After the volatile profit-taking phase, the market begins to settle down again
- Volatility decreases, and prices move within a broader but still defined range.
- There is no clear directional trend, and traders become more cautious, waiting for the next catalyst or event
Return to consolidation (Sideways Quiet):
- The market eventually slips back into a period of consolidation, with low volatility and limited price movement
- Traders continue to wait for new information or developments that could trigger the next market cycle to begin all over again
- It is as if the market were taking a deep breath before the whole cycle begins over again
Each market pattern represents a different phase of the market cycle, driven by the collective behaviour of traders reacting to market conditions.
By understanding the nature of this pattern, you can look at price action, see what phase it is in, and then plan your trading strategy around the phase of the cycle.
Extreme market types
Extreme market types are encountered when something quite dramatic happens.
You will not encounter them very often in your trading career, but when you do, you should be prepared to deal with them.
I first encountered an extreme market event just after I had first started to trade, in mid-2007.
We came to call this period the Global Financial Crisis in Australia, although around the world it was also known as The Great Recession.
This term is used to describe the severe economic downturn that followed the collapse of the US sub-prime housing market and the subsequent financial crisis.
This led to widespread unemployment, housing foreclosures, and a significant decline in economic activity.
The Great Recession had a profound impact on the U.S. economy and the global financial system, and its effects were felt for many years afterward.
As I was a novice trader at the time, I decided to withdraw from any trading activity and wait till the storm had passed.
As part of your trading plan, you should also have a contingency plan, and think about what you will do if you do encounter an extreme market event.
How Bollinger Bands can help identify market patterns
Here at MarketMates, we use Bollinger Bands to find out if the market pattern is quiet, normal or volatile.
- When Bollinger Bands are narrow, it is the sign of a quiet market
- When Bollinger Bands are expanded slightly, it is a sign of a normal market pattern
- When they are stretched out wide, it is a sign of a volatile market
Bollinger Bands Relative Width indicator
However, if you want to be even more precise and specific about market type, you can use our Bollinger Bands Relative Width indicator to show you more precisely the market pattern.
Here is an example of how it works:
A Measure of Volatility
The indicator is the blue line below the price candlesticks. If the indicator is:
- Below the red line, it is a quiet market
- Above the red line, it is a normal market
- Double the distance above the red line, it is a volatile market
If you use TradingView as your charting program, you can get the indicator for free here.
The Market Type indicator
Another indicator that we have developed to assist with the recognition of market patterns is the Market Type indicator.
This indicator will tell you if the market is in a bull, bear or sideways chart pattern.
This example shows the Market Type indicator changing from a bullish indicator at the beginning, to sideways price action, and then when it crosses the central line, to a bearish indicator as price action falls.
- When the indicator is flat it represents a sideways market.
- If the indicator is above the middle line, it represents a bull market.
- When the indicator is below the middle line, it represents a bear market type.
The indicator will also tell you if the market type has transitioned into a bull or bear volatile market type.
This is an example of the indicator showing the market moving from a period of consolidation to a bear market as the indicator dips below the middle line into bear territory.
Final thoughts about market patterns
Recognising and understanding the different market patterns in forex trading is a fundamental skill needed by every trader.
By identifying the market pattern – whether it’s a bull, bear, or sideways market, and understanding the level of volatility – you can adapt your trading strategy to the current conditions.
This will help you improve your chances of success in the forex market.
Whether the current pattern is a bull volatile market, or a sideways quiet market, recogning these patterns will help you make more informed decisions and better manage your risk.
Most traders I know have a preferred market type they trade.
After you’ve been trading for a while, you’ll probably develop a preferred market pattern too.
This will be a reflection of the type of trader you are, how you like to trade, and your personal preferences.
The one thing to avoid is what my colleague Sam Eder calls ‘the search for the unicorn’ – which is a trading strategy that works for all market patterns.
Don’t fall for this trap – remember there is no such thing as a unicorn!
Develop different trading strategies for different market patterns, or wait patiently for your preferred pattern to re-occur, which it inevitably will.
Till next time, happy trading!
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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.
- John Bollinger – Bollinger Bands. https://www.bollingerbands.com/
- Sam Eder – The Consistent Trader https://www.amazon.com.au/Consistent-Trader-Winning-Trading-Psychology/
- Dr. Van K. Tharp – Tharp’s Thoughts Weekly Newsletter https://vantharp.com/tharps-thoughts-weekly-newsletter-archive/
