Decoding Patterns – Forex Edition

In this blog, we’re going to go over patterns. We’re going to be talking about some different patterns that you will notice in the market, that can help you pick out a good trade from a bad trade. There are some good patterns out there and, you know, we could go really deep but for this one, we’re going to keep it simple and just skim through a few favourites.

Double Top/Double Bottom

This is one of the most well-known patterns and is very common. You will have price moving up… hitting a support… coming down… coming back up, and this is the critical point where you need to make the decision to buy or sell. If it breaks this, then you know you could see it buy up, and that is why you have a tight stop loss if you decide to sell.

You are usually going to see them on higher time frames and most of these patterns are coming with a major reversal. When you see a lot of these patterns, that means there is a major reversal happening in the market.

Head and Shoulders

These are good patterns to recognize and notice in forex. There are 2 types – regular head and shoulders and inverse head and shoulder. When you see a regular head and shoulders you want to sell on the crest of the right shoulder. For inverse, you literally start seeing the same pattern upside down and in this case, you’re looking to buy at the dip of the right shoulder.

In all honesty, you’ll notice them in the charts regularly, but they’re nothing crazy. It’s typically a major point of reversal.


Blocks

So a block is when you have one large candle that shoots down, then a larger candle that shoots back up (that is no larger than half of the body of the first candle), followed by another massive candle. To make it easier to understand, let’s add values to these. Let’s say your first candle is 10 pips and your second candle is 20 pips. You want a push up that’s about half of the original 10 pips candle and the next one to be about double. Usually, it continues to go down and then retraces back up so test again and again – that is what we call the retracement zone. As soon as it hits this halfway price – do it.

People often wonder how profitable block patterns are, so let’s look at that. Say you lose 20 pips at a time, and you win 60 pips at a time. Well, you can lose three trades and win one trade and break even. Say you are a 50% trader on these, you can win five out of ten and be incredibly profitable. Incredibly profitable! It’s all risk odds.

Divergents

This is the star of the show. If you can understand divergents, you can become a good trader. This is also how you’re going to learn the difference between a real double top and a bad double top. One of the main trades I look for is when you have a price point and an uptrend, but you have your TDI forming a downtrend. Like that, you have a very good potential for the TDI to catch up. Remember that it’s measured from the bottoms if you’re buying, and it will be measured from the tops if you’re selling. Again – tops for selling, bottoms for buying.

It is the strongest indication that you will find in the market. If you only took this trade and nothing but this trade on the h4 time frame you could take four trades a month, one trade a week, and be incredibly profitable.

These patterns are what I look for in the markets every day. There’s a lot to learn but the education is out there if you look for it and stay hungry, smart, and patient!

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