Sunday, May 6, 2012

Understanding Forex Trading - Triangle Chart Patterns

Triangle chart patterns are important when carrying out technical analysis in forex trading. They assist traders in spotting potential places where the market will break out. In addition, they also give an early indication of whether the price will continue in its current trend or reverse. The most common triangle chart patterns are symmetrical patterns, ascending triangles, and descending triangles.

A symmetrical chart pattern forms when the market is making lower highs and higher lows. This implies that neither the bulls nor the bears have enough pressure to make the price have a clear trend. As a result, the price highs and the price lows converge together to a point that appears to be a triangle.

As the prices converge together, it gives the indication that a breakout is imminent. Thus, to trade this pattern, traders often wait for an established trend to form, either a strong downtrend or a strong uptrend. In most cases, after the price has come out of the symmetrical chart pattern, it normally continues with its previous trend.

An ascending triangle chart pattern is evident when there is a resistance level and a slope of higher lows. What takes place in the formation of the pattern is that there is a particular level that bulls are unable to break; nonetheless, they are slowly starting to propel the price up as manifest by the higher lows.

As the diagram above indicates, the bulls are starting to exert pressure on the pair since it is making higher lows. As a result, a breakout to the upside is imminent. However, in some cases the breakout does not occur to the upside because the resistance level is too strong. And, the price may rebound to the opposite direction. Thus, it's important to wait for an established trend to form before trading this pattern.

Descending triangle pattern is the reverse of the ascending triangle chart pattern. In a descending triangle, there is a lower support line that holds the price of the currency above it and a series of lower highs that creates the upper line. Since the price of the currency pair is slowly making lower highs, it implies that the bearish pressure is starting to exceed the bullish pressure; therefore, a breakout to the downside is imminent. However, this is not always the case as price may meet a strong support area and bounce off strongly to the upside. Thus, it's of essence to wait for a confirmation of the trend before trading this pattern.

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