Forex Trading Patterns: What Happens Next?

Nobody can foresee exactly how the markets are going to move – that would be far too simple. However, there are certain patterns you can look out for to improve your chances of success when trading. Learn about 12 common foreign exchange trading patterns and test your knowledge to see if you can accurately predict how each pattern plays out.

Forex Trading Patterns
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Double Top
Double tops often form towards the top of a move up during an uptrend. The price peaks at a certain level before dipping down slightly - this alone is known as a ‘top’. As the name suggests though, the price can do something quite different after hitting the neckline…
In a double top, the price will go back up to form a second ‘top’. Generally this will go no higher than the first ‘top’ before falling again, indicating an imminent reversal as the buying pressure is about to end – however some traders opt to add 1x ATR range around the last top as an allowable range for a double top to form. Can you see any double top patterns in the USD/JPY currency pairing?
“This type of formation can occur on numerous time frames though, so should always be analysed in the context oflarger trends.” Michael Boutros, DailyFX Currency Strategist
What Happens Next?
The price moves back up
The price levels out
Double Bottom
Double bottom formations usually appear towards the lower end of the given move and follow an opposite trend to the double top. Initially the price will hit a low point, before rising again.
A double bottom pattern is defined by price making two consecutive lows at or near equal levels. The rise after the second ‘bottom’ is seen as a bullish development and suggests that prices may continue higher. The second ‘bottom’ will rarely go lower than the first low, as the selling pressure will have been exhausted, however similar to a double top, some traders will add a 1x ATR range around the last bottom as an allowable range for a double bottom to form. Keep an eye out for double bottom trends after a strong downturn in price. See if you can spot a situation where a double bottom might occur in the AUD/USD currency pairing.
What Happens Next?
The price continues to rise
The price falls again
Head and Shoulders
A head and shoulders is an interesting chart pattern which is given its name due to two peaks (shoulders) sandwiching a larger peak (head). A break below the support trendline connecting the two troughs, referred to as the neckline, constitutes a break of the formation with such a scenario shifting the focus lower in price.
The distinctive pattern shows how the currency price can have two troughs and another increase before finally dropping. Notice how the shoulders, while not always identical in height, never exceed the height of the head. Traders will often look for a level of symmetry between the two shoulders, meaning the time between the first shoulder and the head can be similar to the time between the head and the second should, however this is not a firm rule. Necklines tend to form a polarity point in markets where necklines that previously acted as support in an uptrend turn into resistance in the reversal. After the second should has been reached, it’s a good signal that the price will then fall. Can you identify any emerging head and shoulders patterns in the USD/CAD currency pairing?
"Many tests of support / resistance can look like they are taking the shape of a head and shoulders formation. The single most important component to look for is a break of the neckline – then and only then does the objective measure move become a viable target.” Michael Boutros, DailyFX Currency Strategist
What Happens Next?
The price continues to fall
The price experiences a slight rise before falling again
Inverse Head and Shoulders
As the name would suggest, the inverse head and shoulders follows a similar path to the head and shoulders pattern, only upside down. This pattern will often manifest towards the bottom of a given move and is defined by three consecutive troughs, of which the middle point shows a more significant low.
A ‘neckline’ - the point where both high points level out - forms, and if you are to measure the distance between the lowest point (the inverse ‘head) and this neckline you can judge the approximate distance the price will increase after it breaks the neckline on its way back up. Traders will often look for a level of symmetry between the two shoulders, meaning the time between the first shoulder and the head can be similar to the time between the head and the second should, however this is not a firm rule. Necklines also tend to form a polarity point in markets where necklines that previously acted as resistance in a downtrend turn into support in the reversal. See if you can identify any emerging inverse head and shoulders patterns in the GDP/JPY currency pairing.
What Happens Next?
The price continues to rise
The price falls slightly, before rising again
Rising Wedge (uptrend)
A rising wedge (uptrend) will usually be found in an up trend when the price is beginning to consolidate itself, indicating that higher lows are being formed faster than the higher highs.
Buyers will often show more enthusiasm in response to the lows rather than what is happening at the highs, however a rising wedge should warn buyers about the dangers of chasing a trend near the end of a move. Does this trend appear to be emerging in the EUR/JPY currency pairing?
"What will generally be looked for is a pullback; and traders should look for a retracement to a longer-term support level to allow for continuation of the bigger-picture trend. If that support does not hold, a reversal may be afoot.” James Stanley, DailyFX Currency Strategist
What Happens Next?
Advancing trend consolidates
The price drops
Rising Wedge (downtrend)
A rising wedge (downtrend) will often show around longer-term bullish reversals, as traders become more enthusiastic at the lows and ignore what shows at the highs, which can often indicate a shifting sentiment in the backdrop of a particular market.
This leads to the price, coming from a downtrend, consolidating and experiencing higher highs and higher lows. In this situation the price can often break and the downtrend will continue. See if you can spot this trend in the NZD/USD currency pairing.
"Traders should watch for continued strength to see if buyer participation does take-over to push up to fresh higher-highs, thereby allowing for bullish trend continuation to show a reversal of the prior down-trend.” James Stanley, DailyFX Currency Strategist
What Happens Next?
Falling trend consolidates before trend continuation
The price falls
Falling wedge (uptrend)
A falling wedge (uptrend) pattern may be showing reversal potential, as sellers are getting more aggressive at lower-high resistance and slowing the approach at or around support of prior lows.
This can be looked at as a slow-motion fill of longer-term resistance in what could turn out to be a bearish reversal of the prior up-trend. When a falling wedge forms on an upward trend, there’s a good chance the trend will continue later on. The question is, how soon? See if you can spot these trends in the USD/ZAR currency pairing.
"Traders should watch for fresh lower lows to indicate that increasing enthusiasm for a bearish move.” James Stanley, DailyFX Currency Strategist
What Happens Next?
The price continues to grow
The price consolidates
Falling Wedge (downtrend)
A falling wedge after a downtrend could signify that the downtrend is getting a bit dated, increasing the potential for a pullback in the price. Traders can respond to resistance when witnesses the enthusiasm that drove the original downtrend, however a less aggressive trend-line at the lows can indicate a slowing motivation from sellers when they re-test the lows
The ‘rectangle’ is formed by as both buyers and sellers test the price, but neither trend is yet able to take over. The price is bounded by two key price levels – one of these will break, dictating how the pattern continues.
"While I’d anticipate a bearish resumption at the end of the pattern, it is still of paramount important to have stop losses in place and manage the trade accordingly should the trend resume lower.” Tyler Yell, CMT, Sr. Currency Analyst
What Happens Next?
The price continues to grow
The price consolidates but drops slightly
Bearish Rectangle
A bearish rectangle tends to take place after two distinct scenarios; either a sharp drop in price when traders fear that the price has moved too low too fast beyond potential fair value, or when there is short covering as sellers take their profits on a short trade after a sharp drop in price.
The ‘rectangle’ is formed by as both buyers and sellers test the price, but neither trend is yet able to take over. The price is bounded by two key price levels – one of these will break, dictating how the pattern continues.
"While I’d anticipate a bearish resumption at the end of the pattern, it is still of paramount important to have stop losses in place and manage the trade accordingly should the trend resume lower.” Tyler Yell, CMT, Sr. Currency Analyst
What Happens Next?
The price levels out before eventually falling
The price continues to drop
Bullish Rectangle
A bullish rectangle forms under similar circumstances as the bearish rectangle, however instead it usually appears after a sharp jump in price when traders fear the price has moved too high too fast beyond potential fair value. This can also occur when traders take some money off the table on the profitable trade after a sharp jump in price.
Trend reversals are quite rare and tend to require a fundamental shift of the supporting factors that led to the trend in the first place as well as market sentiment around the asset. Therefore it is likely that, following the rectangle, the price will go up again.
"As a technical trader, I favour trend continuation over a reversal when consolidation takes place, and in the case of a bullish Consolidating Range/ Rectangle, I would favour the uptrend resuming.” Tyler Yell, Senior Currency Analyst
What Happens Next?
The price drops
The price levels out before continuing to increase
Bearish Pennant
A bearish pennant is formed after a strong and relentless bearish trend, as the market begins to consolidate sideways. The consolidation tends to be relatively small compared to the depth of the downtrend. As the consolidation drags on sideways, it forms lower highs and higher lows taking the shape of a triangle or pennant – hence the name.
This pattern typically leads to a breakout, often in the direction of the previous trend. In this scenario traders should look for a break lower through support. Take note though: If the pennant was particularly shallow in depth compared to the previous downtrend, then a large continued sell-off is also possible.
What Happens Next?
Trend reverses higher
The price experiences a brief consolidation
Bullish Pennant
A bullish pennant usually appears when, after a strong and relentless bullish trend, the market begins to consolidate sideways. The consolidation tends to be relatively shallow compared to the length of the uptrend.
As the consolidation drags on sideways, it forms lower highs and higher lows taking the shape of a triangle or pennant. This pattern typically leads to a breakout, oftentimes in the direction of the previous trend.
"If the pennant was extremely shallow in its retracement compared to the previous uptrend, then a large rally is possible.” Jeremy Wagner, DailyFX Head Forex Trading Instructor
What Happens Next?
Price slightly pulls back before extending higher
Price reverses lower
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It looks like you’re new to the market and still figuring out how everything works. Why not complement your learning with one of DailyFX’s Webinars? If you’d like to dive deeper into action patterns and what causes them, you can download our Beginner Guides. You’ve got a knack for recognising forex price action patterns, but there’s always room for improvement. Learn about the most common trading mistakes and what we have learned from successful traders in our Traits of Successful Traders guide. There’s a good chance you’ve been a forex trader for some time now, and if you aren’t then you should be! If you’d like to dive deeper into action patterns and what causes them, you can download our Advanced Guides.

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