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The good news is that all forex brokers which are regulated by ESMA the European Securities and Markets Authority will be able to provide you with this extra level of protection, ensuring that you never become in debt with your broker. Margin Margins are a good way for traders to build up their exposure. Put simply, in order for a trader to maintain position and place a trade, the trader needs to put forward a specific amount of money first — this is the margin.

Rather than being a transaction cost, the margin can be compared to a security deposit. This will be held by the broker during an open forex trade. It is commonplace for forex brokers to give their customers access to leverage see above. Hedging In order for you to lower your risk of exposure and offset your balance, you might consider hedging.

This is a procedure which involves traders selling and buying financial instruments. When there are movements in currencies, a hedging strategy can reduce the risk of disadvantageous price shifts. The protection of this technique is often a short term solution. Traders often turn to hedge in a panic as a result of the financial media reporting volatility in currency markets.

This is usually down to huge events like geopolitical turmoil conflict in the middle east , global health crisis COVID and of course the great financial crisis of To counteract negative price movements, market players will tactically take advantage of attainable financial instruments in the market. This is hedging against risk in its truest form.

Hedging will give you some flexibility when it comes to enhancing your forex trading experience, but there are still no guarantees that you will be totally protected from any losses or risks. A hedging strategy example would be: As a concerned investor, you open a contrasting position on trade.

This is also commonly referred to as a direct hedge. While it can take some time to get your head around heading in the forex markets, the overarching concept is that it presents both outcomes. That is to say, irrespective of which way the markets move, you will remain at the break-even point less some trading commissions. More specifically, the spot trade is a spot transaction, with reference to the sale or the purchase of a currency.

Essentially, spot forex is to both sell and buy foreign currencies. So, without having to own the asset, you can still make the most of price movements, whilst also avoiding the need to sell or buy vast amounts of currency. CFDs are also accessible in bonds, commodities , cryptocurrencies, stocks, indices and of course — forex.

With a CFD you are able to trade in price movements, cutting out the need to buy them at all. When it comes to a MetaTrader platform, traders can use bar charts, line charts and candlestick charts. You can usually toggle between the different charts, depending on your preferences, fairly easily. Candlestick Chart The first record of the now-famous candlestick chart was used in Japan during the s and proved invaluable for rice traders. These days, this price chart is without a doubt one the most popular amongst traders all over the world.

Much like the OHLC bar chart see below , candlestick charts provide low, high, open and close values for a predetermined time frame. Live forex traders love this chart due to its visual appearance and the range of price action patterns utilised.

This allows you to gain a better understanding of how live trading works before you take any big financial risks in the market. As the title suggests, this one is a bar chart, and each time frame a trader is looking at will be displayed as a bar. In other words, if you are viewing a daily chart you will see that every bar equates to a full trading day. The highest market price traded within the selected timeframe will be represented by the high of the bar.

The lowest market price traded within the selected time frame is represented by the low of the bar. The dash on the right will represent the closing price, and the dash on the left will be the opening price. The red bars are also called seller bars; this is due to the fact the closing price is less than the opening price.

The green bars are also referred to as buyer bars; opposite to above. This is because the opening price is lower than the closing price. With this price chart, traders are able to establish who is controlling the market, whether it be sellers or buyers.

OHLC analysis was the starting block for the creation of the ever-popular candlestick charts please further down. It is a great tool for looking at the bigger picture when it comes to trends. The line chart arranges the close prices at the end of that time frame; so in this case, at the end of the day, the line will connect the closing price of that day. Forex — How to Trade In this section of our forex trading PDF, we are going to talk about the different ways in which you can sell and buy a forex position as well as things to look out for.

Ask price: This is the price you are able to buy currency at When it comes to forex trading you can trade both short and long, but always make sure you have a good understanding of forex trading before embarking on trades.

After all, forex trading can be a bit complex to begin with, especially when mixing long and short trades. Long Trade Buy In a nutshell, going long is usually a term used for buying. So, when traders expect the price of an asset to rise, they will go long. Short Trade Sell When forex traders expect the price of an asset to fall, they will go short.

This means benefiting from buying at a lesser value. To achieve this, you simply need to place a sell order. Current Prices and Demand The current exchange rate of a forex pair is always based on market forces. This will change on a second-by-second basis. As we noted earlier, you also need to take the spread into account, so there will always be a slight variation in pricing.

For instance, if you exchange 1 USD for 17 ZAR, the sale and purchase price offered by your forex broker will be either side of that figure. The currency pairs with the most notable supply and demand attached to them will be considered the most liquid in the forex market.

The supply and demand aspect is thanks to the investment of importers, exporters, banks and traders — to name a few. The most liquid currency pairs are therefore the ones in high demand. Forex Trading System to Consider When you feel you are ready to take the plunge and begin live trading, you need to select a forex trading system. There is a vast amount of trading strategies for you to pick from.

This is because investors, speculators, corporations and banks have been trading for decades. In this part of the forex trading PDF, we are going to explain a few of the strategies available to you. Intraday Trade: Concentrating on 1-hour or 4-hour price trends, forex intraday trading is considered more of a conservative way of trading. Focusing on the leading sessions for each individual market, these trades remain open for anywhere between 1 and 4 hours. As such, this could make it a suitable option for beginners.

Currency Scalping : This particular strategy is often viewed as a low-risk form of trading. It is focused on selling and buying currency pairs within an extremely short time frame. This is usually anywhere between a matter of seconds, and 2 to 3 hours at the most. This strategy makes it very practical to potentially gain a number of smaller profits, with the hope of creating a stockpile of profits. Swing Trading : Often referred to as a medium-term approach, unlike scalping and intraday, swing trading concentrates on bigger price movements.

With this strategy, traders are able to leave their trade open for days or even weeks. Some traders like to use this option in order to embellish existing daily trades. Trading Platforms — Explained If you want to buy and sell currency pairs from the comfort of your home or even via your mobile device , you will need to use a trading platform. Otherwise referred to as a forex broker, there are literally hundreds of trading platforms active in the online space.

This makes it extremely difficult to know which broker to sign up with. In the below sections of our forex trading PDF, we explain some of the considerations that you need to make. Analysis Tools and Features You should also look out for analysis tools available to you. In some cases, this might be embedded, while some offer tools such as technical analysis and fundamental analysis. This is because it will save you a lot of leg work having to move between different sites and sources of information.

Crucially, both MT4 and MT5 are fast and receptive trading platforms, both providing live market data and access to sophisticated charts. Confidence in Your Forex Broker It is essential before you begin trading seriously that you fully trust the trading platform you intend on using.

This is especially the case if you intend on using a scalping strategy, for example. However, if you like to trade, it is vital for your peace of mind and your finances that you are fully confident with the fast execution of data transfer. This is also the case with the precision of quoted prices, and the speed of order processing. All of these things are going to help you to have a successful forex trading experience. To enable you to make the most of new opportunities, the ideal forex broker will be available to you 24 hours a day and 7 days a week, in line with the forex market opening hours.

Independent Account Manager To save you from having to request that your broker takes action for you, your forex broker should enable you to manage your account and your trades separately. By doing this, you will be in a much better position to quickly react to any shifts in the market, and hopefully, make the most of potential opportunities. This will enable you to gain better control over any open positions as and when they arise.

Safety and Security It is important to ensure that your forex broker of choice is a reputable company, who will ensure that your personal information and trading funds are fully protected and backed up. Segregation is frequently used amongst forex brokers as a way to separate your funds from the funds of the company i.

So, no matter what happens to the forex broker, your money is safe and segregated. If you find that a forex broker is unable to do this, we would suggest you find a better broker as it is standard practice these days. All of the brokers listed towards the end of this forex trading PDF are regulated by at least one reputable licensing body.

Forex Trading — Getting Started In terms of getting set up as an online forex trader, the steps remain constant regardless of which broker you decide to join. Below we list some of the steps that you will need to take. Step 1: Open an Account In order to open an account, you will need to enter some personal information. Standard details requested by the broker will be things like your name, residential address, and contact details. Some brokers will also require your tax status and will ask you to provide more financial details such as employment status, net worth and any regular income.

In this instance, you will usually need to answer some multiple-choice questions based on your experience. This is usually a fairly simple process. Some brokers will verify this using scanned copies of documentation. Forex charting software can be a powerful tool that users can customize and also trade directly from in electronic forex markets.

TradingView Forex Charting with Technical Indicators Forex charts will have customizable settings for technical indicators , such as price, volume, and open interest. Active traders commonly use these indicators, since they are designed to analyze short-term price movements. There are two basic types of technical indicators: Overlays: These indicators do just what the name implies.

They may use the same scale as prices and plot over the top of the prices on a stock chart. Oscillators: Technical indicators that oscillate, or change, between a local minimum and maximum, and will plot, or display, above or below a price chart. Most charting software will have many types of technical indicators from which to choose.

So, with thousands of options, a trader must select the ones that work best for them. Also, these indicators can, in most cases, become part of an automated trading system. Forex charting software might also be available from a broker through the use of a demo or trial account. It is advisable that new traders experiment with a couple of different brokers and chart offerings before deciding where to open their accounts.

While there are a number of forex chart patterns of varying complexity, there are two common chart patterns that occur regularly and provide a relatively simple method for currencies trading. These two patterns are the head and shoulders and the triangle. Dow published hundreds of editorials in The Wall Street Journal, many of which espoused his theories on the technical analysis of equity price movements.

Today, many forex traders follow his theories as they trade the foreign exchange market FX. The Dow theory, as codified by his successors at The Wall Street Journal, is composed of six tenets, which argue that asset prices move based on trends that result from the dissemination of new information. Dow theory values the study of trading volume in understanding the underlying dynamics of a market, and forex traders who heed its advice will usually discount changes in exchange rates that result from a low volume of trades.

A forex chart is a price chart showing the historical price and volume data on one or more currency pairs. Forex charts are readily found online through financial portals, online brokerage platforms, or sites specializing in forex information. Interactive charts that use technical overlays and tools can be made using your broker's online toolkit.

Forex-specific platforms and charting software can also be used by more advanced traders in need of greater functionality.

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In other words, the daily close is more important as a signifier of market sentiment than the hourly close. Therefore the close that is used in a daily line chart is the New York close. Our lesson on trading sessions has more information when which market opens and closes. Features of a Line Chart The Forex line chart is the same as the line chart you learned in science class in grade school.

It consists of two axes perpendicular to one another. The horizontal or x-axis denotes time and the vertical or y-axis denotes prices. Prices from specific times are placed on the vertical axis at the same interval between any two prices and connected with a line. Prices that are placed on the chart are named ticks. For example, the wider application of the term tick is that it defines the smallest price change by which a security can move.

In both spot and futures Forex, that is normally 0. To avoid confusion, when talking about the ticks on a line chart, most analysts will call them price points or data points rather than ticks. Benefits and Drawbacks of a Line Chart The chief benefit of a line chart is its simplicity. A line chart offers a visually easy way to grasp changes in numerical value over time.

Without adding any other indicator, your eye immediately sees a broad uptrend. A line chart lacks detail and nuance. The line chart shown here could have been assembled out of a series of days on which the high-low range was the same or nearly the same, or out of a series of days on which the high-low range was very wide on only a fraction of the days and very small on the majority of them. Every situation will be slightly different, which is fine.

Double Top The double top is one of the simplest patterns on charts. How to read the pattern: When the price reaches a new high, it shows conviction behind the uptrend. Each trend alternates between impulse and consolidation moves, so the correction following the high is to be expected. The situation turns interesting when the price resumes its trend and reaches the high again.

Instead of breaking through and putting in another higher high, the buying pressure evaporates and the price is unable to surpass its previous high. As you might know, uptrends are characterized by higher highs and higher lows. When the price fails to break above the prior high, it breaks the pattern of an uptrend and signals possible weakness.

Perhaps it will take a bit more time for buyers to attain a new high or perhaps sellers are about to take control. You can assume that sellers are strong enough to reverse the trend or at least drive the market into an extended consolidation. Both cases can be a good set-up for a short trade. The double top pattern is completed when the neckline breaks. Traders often set a profit target by measuring the distance between the neckline and the high of the pattern and projecting it to the neckline break.

Do not copy without permission. Double Bottom The double bottom is the mirror image of the double top. How to read the pattern: When the price reaches a new low, it shows conviction behind the downtrend. As we have pointed out, trends consist of impulse and consolidation moves.

The situation turns interesting when the price resumes its trend and reaches the low again. This is problematic because the downtrend should follow the pattern of lower highs and lower lows. When the price fails to break below the prior low, it signals a possible issue with the trend. That said, this is not yet a buy signal.

Now you can assume that buyers are strong enough to reverse the trend or at least drive the market into an extended consolidation. In both cases, you can favor a long trade. The double bottom pattern is completed when the neckline breaks. Traders often set a profit target by measuring the distance between the neckline and the low of the pattern and projecting it to the neckline break.

Take a look at this guide Head and Shoulders The head and shoulders pattern is a fairly complex formation consisting of three peaks, with the center peak being the highest of the three. This forms the left shoulder. From the low point of the left shoulder, the bullish advance continues and significantly surpasses the previous high. After some time, the price reaches a new peak and now enters a more prolonged consolidation.

This forms the head. A final advance from the low of the head starts but it quickly fails, and the market turns down. This forms the right shoulder. The right shoulder is lower than the head and roughly in line with the left shoulder.

The pattern is completed when the price breaks below the neckline, which is the line connecting the low of the shoulders. The neckline can slope in any direction and is a good predictor of the severity of the price decline. You can project the height of the pattern to the neckline break and set your profit target accordingly.

An example of a successful head and shoulder set-up is shown below: For a beginner trader, the head and shoulders pattern might be more difficult to recognize. You can always zoom out a bit from the price action or switch to a line chart. Inverse Head and Shoulders The inverse head and shoulders pattern is the bearish equivalent of the head and shoulders. It can be found at the bottom of downtrends and indicates a bearish-to-bullish trend reversal.

How to read the pattern: Following a falling market, the price bumps into a bottom and then rises to form the left shoulder. From the high of the left shoulder, a bearish decline starts. It progresses significantly below the previous low to form the head of the pattern. Then the price begins to rise again.

A final decline from the high of the head starts to form the right shoulder. This trough is higher than the head and about equal to the bottom of the left shoulder. From the bottom of the right shoulder, the price starts to rise again. Once it breaks above the connected high points of the pullbacks neckline , the pattern is complete. Below are an example of a winning inverse head and shoulder set-up: We have a separate guide on Head and Shoulders patterns that you can access via this link if you want to learn more about them.

Rising Wedge The rising wedge pattern forms when the market makes higher highs and higher lows within a shrinking range that slopes upward. This pattern is trickier than those we have discussed so far because its signal depends on the trend.

That is, a rising wedge in an uptrend signals reversal while a rising wedge in a downtrend signals continuation. The price makes higher highs and higher lows, which fulfills the characteristics of a healthy uptrend. The reason the rising wedge acts as a reversal signal despite being indicative of a strong trend is the extent of the price increase.

If you take a closer look at the pattern, you will notice that the lower trendline rises at a steeper angle. While the market keeps reaching higher highs, the subsequent consolidations are shorter and shorter. This happens when investors are so enthusiastic that every time the market dips, they rush to buy and immediately bid up the price. Unfortunately, this can go on for only so long before the interest dries up and the market collapses. Every trend has a point where everybody who wanted to buy has already bought.

This is when short-selling intensifies and the market begins ticking down. Thus, people cash out on their long positions, which further fuels the downward pressure. The rising wedge marks this turning point and allows you to position yourself accordingly. The example below will illustrate: How to read the pattern in a downtrend : The rising wedge in a downtrend is created by the same overconfident buyers, except that this time the market is in a downtrend. Each time the market begins consolidating after a drop, traders are speculating on a reversal.

If these traders are in the majority, the market can indeed reverse. The reason for this is fairly simple. There is no reason to risk getting stopped out by the imminent correction. It makes more sense to wait until the correction occurs and enter at a better price.

When enough traders think this way, the selling pressure will ease, allowing buyers to bid up the price. When buyers finally run out of steam, however, all the traders sitting on the sidelines will flock to the market with their shorts. This is why the rising wedge suggests continuation in a downtrend. It marks the point where the bull run fails, and sellers force the market back into trend.

Here is an example: Falling Wedge The falling wedge pattern forms when the market makes lower highs and lower lows within a shrinking range that slants downward. As the price moves to the downside, the two trendlines that connect the highs and the lows will eventually converge. This suggests continuation if the trend is up, or reversal if the trend is down. How to read the pattern in an uptrend : Often, after a new high is reached, the market will enter a period of consolidation.

The falling wedge forms when this temporary decrease happens in a rather aggressive manner but loses its momentum before it threatens the trend. When people see that the consolidation is about to end, they begin buying at the discounted price, which results in the quick price jump at the end of the pattern AKA the breakout.

The following example will help you spot a falling wedge in an uptrend: How to read the pattern in a downtrend : A falling wedge in a downtrend occurs after a severe price drop. It signals an intensifying buying pressure, which is not surprising, as the price at this point is heavily depressed.

When the supply finally dries up, invigorated buyers lift the price, providing you with a chance to catch a market reversal. We prepared an example so that you can familiarize yourself with the downtrend falling wedge. Go to this ultimate guide to learn even more about trading wedges, including strategies for different trading styles.

It forms when the price quickly shoots up and then begins consolidating. The advance is expected to continue after the consolidation. How to read the pattern: The first part of the pattern is the flagpole, which is a huge advance that breaks through a previous resistance level. This huge advance is usually triggered by a news event.

Following the advance, the price goes through a consolidation phase that looks like a flag — hence, the name of the pattern. The flag consists of two parallel trendlines that point slightly down and retraces a small portion of the trend. Note that if the retracement is too substantial, the flag is invalidated, as a reversal becomes increasingly likely. When the price breaks out from the flag to the upside, the pattern is finished.

This indicates that the market is about to make another impulse move in the trend direction. It forms when the price tumbles and then embarks on a modest rise. The selloff is expected to continue after the consolidation. How to read the pattern: A bearish flag pattern has the same components as its bullish counterpart. However, everything points in the opposite direction.

The market experiences a negative surprise shock, which results in a sharp decline. This is the flagpole. Following this decline, the price goes through a consolidation phase consisting of two parallel trendlines that point slightly upward.

This is the flag itself. The flag must retrace only a small portion of the trend, as an extended consolidation might lead to a reversal. The pattern is finished when the price breaks out from the flag to the downside. An example of the bearish flag: Warning: Flag patterns can be quite dangerous due to the heightened volatility. Plus, they tend to be paired with unfavorable market conditions: slippage and wide spreads.

Be very cautious if you decide to trade them. In this case, our dedicated flag pattern guide is the ideal place to advance your knowledge. Bullish Pennant The bullish pennant looks like a short triangle bounded by two converging trend lines. It occurs in advancing markets and hints at a price move in the direction of the prior trend leg. How to read the pattern: Pennants are pretty similar to flags in their structure.

They, too, are preceded by a strong upward move resembling a flagpole. After the upward move, buyers pause to catch their breath and the market begins consolidating. This is where the difference lies between the two patterns. In the case of bullish pennants, the consolidation phase shows a less intensive effort to reverse the trend. Remember that flags usually form in high-volatility situations such as news releases.

Traders often overreact to positive news; thus, the price jump is quickly met with aggressive short selling. The great thing with pennants — at least from our experience — is that you can often catch the breakout from the pattern. This is because, from the higher chart perspective, the pennant is often a simple impulse move toward the trend. Unfortunately, the drawback is that trading pennants can be quite frustrating.

When you trade flags, you will be less likely to catch the breakout. That said, if you do catch it, you can often capture the entire rally that comes. At the end of the day, trade the patterns that you feel most comfortable with. An example of the bullish pennant: Bearish Pennant The bearish pennant is also characterized by a triangle-like appearance and two converging trend lines. However, unlike its bullish version, it occurs in declining markets and suggests further weakness.

How to read the pattern: The discussion of the bullish pennant also applies to the bearish version. After a sharp decrease, the price moves sideways in a narrowing price range resembling a triangular flag. When the price breaks out to the downside, you can expect the continuation of the trend. The bearish flag, for instance, has a more intense consolidation where buyers substantially push up the price.

When looking at the bearish pennant, you can feel the accumulating selling pressure. An example: Thinking about trading pennants? Ascending Triangle The ascending triangle is a bullish formation consisting of a horizontal top and an up-sloping bottom. It forms when the uptrend is struggling with resistance but eventually breaks through, suggesting continuation. How to read the pattern: From time to time, each uptrend reaches an area where the selling pressure overcomes demand. Perhaps the price is near the yearly high and traders begin taking profits.

Or perhaps a large hedge fund decided to reduce its holdings. For whatever reason, the price bumps into resistance and starts declining. The decline is quickly met by increased demand as buyers view the lower price as a steal. The renewed buying pressure reverses the decline, and the price climbs back to the same level.

At this higher price, however, more traders become willing to sell, forcing it down again. This situation repeats itself for some time. You might notice that each fall stops at a higher low. Buyers gain more control as the price runs up to the resistance level and, eventually, a breakout occurs.

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It also shows above mentioned parameters: open price left line , close price right line , maximum bar's top point and minimum bottom bar's point. If close price exceeds open price, that is to say right line is above left, then we see the bar showing growth of price for a certain time period.

Chart of Japanese candles represents the same information on price change that bar chart does. The only difference is that Japanese candles have "body". If close price is above open price, then candle "body" is covered with white, if it is vice-verse, then color is black. It is necessary to note that modern trading terminals allow to paint candle "body" with any color, therefore they are not always black and white.

For example, by default chart of Japanese candles in FreshForex terminal looks as below: Apart from "body", Japanese candles also have "shadows": cutting from upper edge of candle body to maximum value - "upper shadow", cutting from bottom edge to minimum value - "bottom shadow". Besides, Forex technical analysis involves tick-by-tick chart, which represents rendering of price by ticks. Then the price begins to rise again. A final decline from the high of the head starts to form the right shoulder.

This trough is higher than the head and about equal to the bottom of the left shoulder. From the bottom of the right shoulder, the price starts to rise again. Once it breaks above the connected high points of the pullbacks neckline , the pattern is complete. Below are an example of a winning inverse head and shoulder set-up: We have a separate guide on Head and Shoulders patterns that you can access via this link if you want to learn more about them.

Rising Wedge The rising wedge pattern forms when the market makes higher highs and higher lows within a shrinking range that slopes upward. This pattern is trickier than those we have discussed so far because its signal depends on the trend. That is, a rising wedge in an uptrend signals reversal while a rising wedge in a downtrend signals continuation.

The price makes higher highs and higher lows, which fulfills the characteristics of a healthy uptrend. The reason the rising wedge acts as a reversal signal despite being indicative of a strong trend is the extent of the price increase. If you take a closer look at the pattern, you will notice that the lower trendline rises at a steeper angle.

While the market keeps reaching higher highs, the subsequent consolidations are shorter and shorter. This happens when investors are so enthusiastic that every time the market dips, they rush to buy and immediately bid up the price.

Unfortunately, this can go on for only so long before the interest dries up and the market collapses. Every trend has a point where everybody who wanted to buy has already bought. This is when short-selling intensifies and the market begins ticking down. Thus, people cash out on their long positions, which further fuels the downward pressure. The rising wedge marks this turning point and allows you to position yourself accordingly.

The example below will illustrate: How to read the pattern in a downtrend : The rising wedge in a downtrend is created by the same overconfident buyers, except that this time the market is in a downtrend. Each time the market begins consolidating after a drop, traders are speculating on a reversal. If these traders are in the majority, the market can indeed reverse. The reason for this is fairly simple. There is no reason to risk getting stopped out by the imminent correction.

It makes more sense to wait until the correction occurs and enter at a better price. When enough traders think this way, the selling pressure will ease, allowing buyers to bid up the price. When buyers finally run out of steam, however, all the traders sitting on the sidelines will flock to the market with their shorts.

This is why the rising wedge suggests continuation in a downtrend. It marks the point where the bull run fails, and sellers force the market back into trend. Here is an example: Falling Wedge The falling wedge pattern forms when the market makes lower highs and lower lows within a shrinking range that slants downward. As the price moves to the downside, the two trendlines that connect the highs and the lows will eventually converge.

This suggests continuation if the trend is up, or reversal if the trend is down. How to read the pattern in an uptrend : Often, after a new high is reached, the market will enter a period of consolidation. The falling wedge forms when this temporary decrease happens in a rather aggressive manner but loses its momentum before it threatens the trend.

When people see that the consolidation is about to end, they begin buying at the discounted price, which results in the quick price jump at the end of the pattern AKA the breakout. The following example will help you spot a falling wedge in an uptrend: How to read the pattern in a downtrend : A falling wedge in a downtrend occurs after a severe price drop.

It signals an intensifying buying pressure, which is not surprising, as the price at this point is heavily depressed. When the supply finally dries up, invigorated buyers lift the price, providing you with a chance to catch a market reversal. We prepared an example so that you can familiarize yourself with the downtrend falling wedge. Go to this ultimate guide to learn even more about trading wedges, including strategies for different trading styles.

It forms when the price quickly shoots up and then begins consolidating. The advance is expected to continue after the consolidation. How to read the pattern: The first part of the pattern is the flagpole, which is a huge advance that breaks through a previous resistance level. This huge advance is usually triggered by a news event. Following the advance, the price goes through a consolidation phase that looks like a flag — hence, the name of the pattern.

The flag consists of two parallel trendlines that point slightly down and retraces a small portion of the trend. Note that if the retracement is too substantial, the flag is invalidated, as a reversal becomes increasingly likely. When the price breaks out from the flag to the upside, the pattern is finished. This indicates that the market is about to make another impulse move in the trend direction. It forms when the price tumbles and then embarks on a modest rise.

The selloff is expected to continue after the consolidation. How to read the pattern: A bearish flag pattern has the same components as its bullish counterpart. However, everything points in the opposite direction. The market experiences a negative surprise shock, which results in a sharp decline.

This is the flagpole. Following this decline, the price goes through a consolidation phase consisting of two parallel trendlines that point slightly upward. This is the flag itself. The flag must retrace only a small portion of the trend, as an extended consolidation might lead to a reversal. The pattern is finished when the price breaks out from the flag to the downside. An example of the bearish flag: Warning: Flag patterns can be quite dangerous due to the heightened volatility. Plus, they tend to be paired with unfavorable market conditions: slippage and wide spreads.

Be very cautious if you decide to trade them. In this case, our dedicated flag pattern guide is the ideal place to advance your knowledge. Bullish Pennant The bullish pennant looks like a short triangle bounded by two converging trend lines. It occurs in advancing markets and hints at a price move in the direction of the prior trend leg. How to read the pattern: Pennants are pretty similar to flags in their structure.

They, too, are preceded by a strong upward move resembling a flagpole. After the upward move, buyers pause to catch their breath and the market begins consolidating. This is where the difference lies between the two patterns. In the case of bullish pennants, the consolidation phase shows a less intensive effort to reverse the trend.

Remember that flags usually form in high-volatility situations such as news releases. Traders often overreact to positive news; thus, the price jump is quickly met with aggressive short selling. The great thing with pennants — at least from our experience — is that you can often catch the breakout from the pattern.

This is because, from the higher chart perspective, the pennant is often a simple impulse move toward the trend. Unfortunately, the drawback is that trading pennants can be quite frustrating. When you trade flags, you will be less likely to catch the breakout. That said, if you do catch it, you can often capture the entire rally that comes. At the end of the day, trade the patterns that you feel most comfortable with. An example of the bullish pennant: Bearish Pennant The bearish pennant is also characterized by a triangle-like appearance and two converging trend lines.

However, unlike its bullish version, it occurs in declining markets and suggests further weakness. How to read the pattern: The discussion of the bullish pennant also applies to the bearish version. After a sharp decrease, the price moves sideways in a narrowing price range resembling a triangular flag. When the price breaks out to the downside, you can expect the continuation of the trend. The bearish flag, for instance, has a more intense consolidation where buyers substantially push up the price.

When looking at the bearish pennant, you can feel the accumulating selling pressure. An example: Thinking about trading pennants? Ascending Triangle The ascending triangle is a bullish formation consisting of a horizontal top and an up-sloping bottom. It forms when the uptrend is struggling with resistance but eventually breaks through, suggesting continuation. How to read the pattern: From time to time, each uptrend reaches an area where the selling pressure overcomes demand.

Perhaps the price is near the yearly high and traders begin taking profits. Or perhaps a large hedge fund decided to reduce its holdings. For whatever reason, the price bumps into resistance and starts declining. The decline is quickly met by increased demand as buyers view the lower price as a steal. The renewed buying pressure reverses the decline, and the price climbs back to the same level.

At this higher price, however, more traders become willing to sell, forcing it down again. This situation repeats itself for some time. You might notice that each fall stops at a higher low. Buyers gain more control as the price runs up to the resistance level and, eventually, a breakout occurs. This is expected to be followed by a significant increase in price. Ascending triangle set-ups occur frequently. An example is shown below: Descending Triangle The descending triangle is just the bearish equivalent of the ascending triangle.

It consists of a horizontal trend line drawn across the lows and an up-sloping trend line connecting the highs. How to read the pattern: This structure is created during a consolidation in a downward trend. Strong sellers are pushing down the price while weaker buyers are trying to reverse the trend.

Prices much higher than that threshold are overvalued and prices much lower are undervalued. If the current price is higher than 1. The sudden demand at the 1. Nevertheless, if sellers are strong, the increase will quickly be suppressed and the price will fall back to the support. This is what happens in the case of the descending triangle. Once the price has fallen back to support, buyers push it higher again just to see it tumble shortly after.

By looking at the pattern, you can see that every attempt to lift the price is stopped at a lower high. This is a great indication of waning enthusiasm and growing selling pressure. The price is pushing into the support until it fails to hold, which marks the completion of the pattern. Spoiler alert! Bullish Rectangle Rectangles are very versatile patterns that occur when the price is bouncing between two parallel support and resistance levels. You must pay close attention to these patterns because you never know if they will be bullish or bearish until the breakout.

Bullish rectangles occur when the breakout is to the upside. This signals continuation if the trend is up and reversal if the trend is down. How to read the pattern in an uptrend : Markets are driven by buyers and sellers. When the price has been increasing for a while, the people who bought the currency pair at the beginning of the trend will eventually begin taking profits. This will create an increased supply at a particular level, as these people must sell their position to reap the returns.

This selling creates the resistance level that you can see at the top of the bullish rectangle. Once selling sends the market down, other traders will take it as an opportunity to buy at a cheaper price. This means a higher demand at a particular level. Consequently, a support level emerges, forming the bottom of the rectangle. Now the market is stuck between these two levels: support at the bottom and resistance at the top. Sellers who think the trend is over will stop the price from moving above the resistance.

When a breakout occurs to the upside, the market tells you that the profit-taking is done and short-sellers were unable to hold the resistance. The odds now shift in favor of trend continuation. This is what the bullish rectangle signals in an uptrend. Below is a trade set-ups to illustrate: How to read the pattern in a downtrend : In this case, the rectangle is preceded by a falling market, which begins consolidating upon hitting support.

The price starts bouncing between two levels: the support zone at the bottom and a newly established resistance at the top. Take a look at the example below: Bearish Rectangle The bearish rectangle is identical to the bullish rectangle except that the breakout is to the downside. Like the bullish version, it can signal both continuation and reversal. If the trend is up, the bearish rectangle acts as a reversal pattern.

If the trend is down, it acts as a continuation pattern. Around this area, the power of sellers and buyers becomes nearly equal. As a result, the price moves in a tight trading range, bounded by a resistance level at the top and a support level at the bottom.

Sellers take control after some time and the pattern completes with a downside breakout. This is the distinguishing feature of the bearish rectangle pattern. Consolidation in the uptrend followed by breakout to the downside signaling the reversal of the trend.