Chart Patterns

1. The M-Shape or Double Top

A double top is a characteristic structure that signals a reversal of the price trend. If the price has been rising up to that point, once this structure completes, the trend will reverse and the price will fall. This chart pattern appears after a period during which the price has been continuously increasing.

The “tops” form when the price hits a certain level beyond which it cannot break. These tops represent an extreme, an upper limit that the price encounters during its upward movement. When this limit is reached, the price behaves in a very predictable manner: it hits that level twice and then drops. This tells us that we have found a price ceiling. This is the ideal moment to open a short position and sell the currency pair, because after completing this graphic formation called an M or double top, the price will fall like an avalanche and nothing can stop this depreciation. We say that the price has found a resistance level. Resistance levels are essential because together with support levels they create the frameworks that control price movements and make them predictable. These levels play a regulatory role. They give the price movement clear boundaries. Within these boundaries we can perform our speculative activity.

After hitting this extreme level, the price will pull back slightly, but then it returns again to test whether it can break through it.

If the price turns back again from that level, then you have a DOUBLE TOP! Because you are certain that this resistance level will hold. And this time, there is no turning back. The price will continue to fall until it finds a new support level—a price floor—which will force it to rise again. That is the moment to open a short position.

2. The W-Shape or Double Bottom

The double bottom is also a graphic formation that signals a trend reversal, but this time the situation is the opposite of the “double top.” Bottoms represent a lower extreme that the price encounters after a long period of decline. When this lower limit is reached, the price behaves very predictably: it hits that level twice and then rises. This indicates that we have found a price floor and that the downtrend has ended. That is the moment to open a long position.

3. Head and Shoulders

This price structure is also a trend-reversal formation. It is formed by a peak (shoulder), followed by a higher peak (head), and then a lower peak (shoulder). We have three attempts by the price to break a resistance level (a price ceiling) before falling. This formation signals a price decline.

4. Inverted Head and Shoulders

This is the same structure as above, but inverted. It consists of three bottoms, where the middle bottom is the deepest. These three bottoms are formed as a result of the price attempting to break below a certain support level (price floor). When this formation is completed, we expect an upward movement.

5. Harmonic Patterns

Harmonic Price Patterns include:

• The ABCD Pattern

• The Three-Drive Pattern

• The Gartley Pattern

• The Crab Pattern

• The Bat Pattern

• The Butterfly Pattern

ABCD Pattern

Let’s start with the simplest harmonic pattern. After all, what’s more basic than the classic ABCD?

To identify this diagram, all you need is sharp vision and the Fibonacci tool.

For both bullish and bearish versions of the ABCD harmonic pattern, lines AB and CD are known as legs, while BC is the price correction. If you use the “Fibonacci retracement level” tool on leg AB, BC will retrace back to the 0.618 level. The extension is represented by leg CD, which should extend to the 1.272 Fibonacci level. All you need to do is wait for the entire pattern to complete (reach point D) before taking a long or short position.

Rules for a valid ABCD pattern:

1. The length of line AB must be equal to the length of line CD.

2. The time it takes for price to move from A to B must equal the time it takes to move from C to D.

Three-Drive Pattern

The three-drive pattern is very similar to the ABCD pattern, except this time it has three legs (known as drives) and two corrections or pullbacks. This formation also has bullish and bearish versions. Once the formation completes, we have the opportunity to open long or short positions accordingly.