Lesson 4 - An Introduction to Technical Analysis

Price patterns

A chart for a currency pair will begin to form predictable patterns during trends. A pattern usually forms when a pair is in the process of changing: slowing down, reversing trend, etc. When that happens, it's a signal to take a step back and evaluate what may happen.

Proper understanding of price patterns on a chart will help you better determine the probability of the currency pair continuing the trend it was in, or reversing to develop a new trend. This helps you determine whether to buy, sell or hold.

Price patterns are an underutilized and extremely valuable tool in your forex trading arsenal. It may take a little while to get comfortable dealing with the subtle nuances and occasional ambiguity that are a part of price pattern analysis, but once you get the basics figured out, you will be able to confidently make informed trading decisions.

It's also important to understand that price patterns are visual representations of market psychology. They tell you when traders in the market are excited and moving, when they need to take a moment and catch their breath and regroup and when they are ready to get moving again.

All price patterns are made of the following four pieces:

Old trend: the trend that the currency pair is in as it starts to form the price pattern

Consolidation zone: a constrained area where the pair isn't clearly continuing the trend or forming a new one

Breakout point: the point which the currency pair breaks the consolidation zone

New trend: the trend the currency pair enters coming out of the consolidation zone

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