The forex market is experiencing glorious volatility for day and swing traders. It is a major wealth-building opportunity for those who take advantage. I discussed some of the ways to take advantage in Things to Remember When Trading Volatile Markets. In that article, I mentioned that “biases kill me” in volatile conditions. Trying to predict which way the price will go will mean lots of missed profitable opportunities. I let the price lead and I trade with it. In other words, even if I am convinced the price of a pair will move one way, I am willing to trade in both directions, assuming I get a valid trade signal. This is something to keep in mind when looking at the chart patterns below.
The charts below are hourly charts. While trading off the hourly chart is fine, it is also possible to drop to the 15-minute or 5-minute and find even better entry and stop loss points (fewer pips risked). I like to look for short-term consolidations near the chart pattern trendlines, and then trade breakouts in either direction.
A consolidation breakout, near a trendline, that moves the price out of the larger chart pattern signals a breakout of the larger pattern.
A consolidation breakout, near a trendline, that moves the price back into the pattern signals the larger pattern is continuing.
Stop losses are placed outside the smaller consolidation on the opposite side from the breakout.
If the price stays within the pattern, I will often use the other side of the pattern as a profit target. The price will likely consolidate again near the profit target, providing another trading opportunity anyway.
If the price breaks out of the chart pattern, utilize a trailing stop loss.
Forex Chart Patterns to Watch
NZDCHF is getting squeezed toward the apex of a triangle pattern after a sharp price drop and rally.
A short trade recently occurred as the price consolidated on the 5-minute chart near the upper trendline and then broke to the downside.
I’m waiting for another consolidation near the upper or lower trendline. Alternatively, simply waiting for a chart breakout is an option. With this method, a stop loss is typically placed just outside the opposite of the pattern from the breakout. The price target is the height of the triangle (wide part) added or subtracted from the upside or downside breakout point, respectively.
EURNZD has a similar pattern and just started rallying off the lower trendline of the pattern. There is room to run up toward the top of the pattern.
This rising wedge in the GBPJPY has provided multiple opportunities so far, and the price recently consolidated near the top of the wedge and has started moving back lower. There is still some room to run toward the lower trendline, if the price continues dropping.
The wedge may still provide another opportunity or two, but as the price range (wedge) gets narrower, a bigger move is likely to come when the price breaks out of the wedge.
USDCNH has provided a number of fantastic opportunities over the last week, with the price consolidating near the pattern edges and then quickly moving to the other side. We’ll see if more trades set up within the pattern. Otherwise, a breakout of the pattern is also tradable.
Final Word On These Forex Chart Patterns
I am trying not to get tied to thinking in only one direction. These conditions are volatile, and even a counter-trend move can produce huge profits and run a long way. That doesn’t mean I buy and sell wherever I want. I always prefer to place trades near trendlines or important support or resistance levels, where the price could go either direction anyway. In these chart patterns, there are people who think the price will stay in the pattern, and those that think the price will break out of the pattern. Both can’t be right, so those that are wrong typically cause a sharp price movement as they exit their positions.
Also, in these conditions, a trend can change very quickly, and with little warning. One piece of unexpected news, or a scary (or good) news headline can send a currency flying the other way. I want to be in as many big moves as I can right now. When volatility is low and opportunities are few, it is important to cherry-pick the best opportunities. When things are really moving, I want as much action as I can handle assuming all the trades still align with my trading plan.
By Cory Mitchell, CMT, join me on Twitter @corymitc.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, or even more than you deposited if using leverage.