Forex Pattern Recognition

Many technical forex traders and professional technical analysts now use the well known chart patterns established by stock and futures traders over the years to generate trading signals and forecast future exchange-rate movements.

The following will discuss some of the benefits of performing forex pattern recognition on various chart types and in different ways.

Benefits Of Forex Pattern Recognition
Basically, by going through the detailed visual process involved in forex pattern recognition, a skilled technical analyst can identify standardized chart patterns as they are forming as a result of the collective forex market price action.

Not only does this pattern analysis give them insight into the psychology of the market, but it also usually allows the analyst to draw a specific breakout line to watch that will subsequently yield a measuring objective once the market actually breaks out.

Recognizing Tick, Line And Bar Chart Patterns
By using fairly well established set of graphical analysis methods and technical analysis rules, technical analysts and traders can recognize a variety of reversal, continuation and consolidation chart patterns that commonly occur in forex market price action as seen on tick, line and bar charts.

To start with, any good forex pattern recognition analyst should be able to identify the most common chart patterns like:

• Channels and trends.

• Double and triple tops and bottoms.

• Head and shoulder tops and bottoms.

• Ascending and descending wedges.

• Ascending, descending and symmetrical converging triangles.

• Bullish and bearish flags and pennants.

• Rectangles and ranges.

The characteristics of most of these patterns will be covered by any good forex technical analysis course, and the appearance of such patterns can often be confirmed or validated by observing characteristic changes in trading volume that occur during phases in their evolution. In addition, several rarer or less reliable bar chart patterns exist that some more advanced technical analysts might be able to recognize.

Recognizing Chart Patterns On Other Chart Types
Many savvy technical analysts use charts other than bar charts to look for a variety of reliable chart patterns. This is especially true of those trading USDJPY, who often use Japanese candlestick charts to look for specific patterns. A myriad of such candlestick patterns exist, and unlike the classic chart patterns listed above, they usually only involve observing a few periods or less to obtain a trading signal.


Furthermore, many professional forex traders will watch their Point and Figure charts closely for the occurrence of recognizable price patterns specific to that unique chart type that has no time axis and so allows the trader to focus only on the price action itself.

Pattern Recognition In Elliott Wave Theory
Perhaps one of the most advanced and potentially useful forms of chart pattern analysis that can be used by forex traders is the observation of cycles of successive waves and subsequent corrections that was originally identified by R. N. Elliott as characterizing market price action driven by mass psychology.

A technical analyst using the methods laid out in Elliot’s Wave Theory will typically review patterns appearing in forex market price action to ascertain whether the market is in an impulsive or corrective phase.
Impulses generally unfold in five waves and further the prevailing trend. On the other hand, a corrective wave reverses the direction of the preceding impulse and usually unfolds in three waves, although five wave consolidation periods known as triangles are also observed.