Top 3 Patterns You Need to Trade Forex

In this chapter(Part#2), I’ll show you all technical patterns that you need to master, so we can continue building your trading strategy. Below is the link to Part#1 to learn the key steps that you need to follow to spot the trend.

Part#1 – How to spot the currency Trend in less than 2 minutes please check it first If you did not read it

What are Patterns?

Patterns are one of the most commonly used techniques that technical analysts use. Patterns, in reality, are just the graphical representation on a chart, and we (technical analysts) are trying to spot this systematic movement on the chart that will help us predict future movements. Of course, like any other tool in trading, patterns are not perfect, but since we can identify them in real time, this gives us a clue where the market is going next.

Three Patterns That We Need To Learn?

There are a lot of chart patterns that you already know, like head & shoulders, double top, wedges etc… it’s nice and handy to know them, (check recordings of our session if you are not familiar with basic patterns) but right now, I want us to focus only on one pattern: Triangle.

Triangles made me the most money in the last 6 years, so I want to build a trading strategy just based on them. One very smart trader told me a long time ago, “If you find what’s working, just stick to that!

First off all, you need to understand that there are a few variations of the triangle pattern, and I choose only #3 triangles for our strategy. To make everything a little more clear, let’s call our patterns T1 T2 T3. Let’s dive into these 3 patterns right away.

T1 Trading Pattern.

Triangle_Pattern_T1 for TradingThe first pattern is called T1. Please understand that I really love triangles that have five legs, so T1 is going to be a simple five legs pattern. Every leg of T1 is shorter than the previous one. For trading, breakout in a direction of the larger trend is going to be the key. On the picture below, you can see how T1 pattern should look like.

T1 Pattern Rules

Every pattern needs to have rules that we need to respect so I want you to follow this rules every single time or forget trading.
Rule #1 – Leg #3 Must End Above Ending Point Of Leg #1
Rule #2 – Leg 4 Must End Below Ending Point Of Leg #2
Rule #3 – Leg #5 Must End Above Ending Point Of Leg #3

T1 Trading Pattern Example

EURNZD_Triangle_Pattern_Trading

The chart above shows price movements of the $EURNZD pair on the 1h. We can see slight upwards movements first, after that we have consolidation and if you look at this consolidation really close you can see a five legs. When we draw a trend line between legs 1-3-5 and 2-4, we have a perfect triangle where each leg is shorter than previous. After a breakout, we can see that price continued to trade in a direction of the previous trend move (in this case up).

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How To Trade T1?

Learning to trade T1 triangle pattern is relatively easy. First of all, you need to spot the triangle on the chart. Check if you have five legs and pull your trend line tool, draw it from the ending point of the 2nd leg through the ending point of 4th leg. Now, use this trend line as your entry point. For target #1 you are going to use inverse 161.8% of the 1st leg (use Fibonacci retracement tool for this) and for target #2 you are going to go and use the inverse 200% of the 1st leg. For stop loss, you have two options to choose: 1st (favorite) use the ending point of final 5th leg, or you can put stop loss at the ending of 3rd leg (since you know that if 5th leg breaks below 3rd leg it’s not allowed according to rules).

If this looks clear enough, let’s move to the second pattern from our group T2.

T2 Trading Pattern.

Triangle_Pattern_T2 for TradingSecond pattern is similar to T1. Our T2 pattern is also from the five legs triangle group and again we need to have every leg shorter than the previous one. The main difference between T1 and T2 is in the ending point of 4th leg. In T2 the 4th leg will end around the ending point of leg 2, so if you look at the picture below you are going to see something as classic resistance zone. Again, we are going to look for the breakout of that trend line as place to enter into trade and again you are going to have few rules to remember.

T2 Pattern Rules

Rule #1 – Leg #3 Must End Above Ending Point Of Leg #1
Rule #2 – Leg 4 Must End Below Ending Point Of Leg #2
Rule #3 – Leg #5 Must End Above Ending Point Of Leg #3

T2 Trading Example

AUDCAD_Triangle_Pattern for Trading

Here we have 1h chart of the AUD/CAD pair, and you will notice similar things to the last example. First, we have a nice upward movement followed by triangle pattern. Again, we have five legs, but if we draw a trendline between 2nd and 4th leg we can see a nice resistance area, that’s the only reason why is this called T2. Once a trendline breaks out, we can observe a really strong reaction, because a lot of resistances were broken (and ideally stop). Now, let’s see how to trade this pattern.

How To Trade T2?

Trading style between T2 and T1 is more-less the same, so again, once you find the T2 triangle on the chart, we are going to go and connect the ending points of the 2nd and 4th leg with trend line tool. For entry point, go and look for the breakout (but don’t forget to check if all rules are still holding. Target #1 is going to be the inverse 161.8% of 1st leg and for Target #2 we are going to use the inverse 200% of 1st leg. Stop Loss for T2 is going to be only the ending point of 5th leg (in this case end of 3rd leg won’t give us any risk/reward, so forget that).

Now it’s time to learn the final T3 pattern.

T3 Trading Pattern.

Triangle_Pattern_T3 for TradingSince news moves through the market pretty fast these days, sometimes our triangles like T1 and T2 don’t have time to develop the final leg 5, so we end with 3 legs. I know you’ve probably guessed it already; our T3 is just a 3 legs triangle. Now since this triangle can appear a lot, we are going to use this triangle only if we don’t find any T1 and T2 patterns early in the session. This triangle only has two rules and I want you to stick to them as much as possible (makes the chance of success bigger).

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T3 Pattern Rules

Rule #1 – Leg #2 Must End Below Starting Point Of Leg #1
Rule #2 – Leg #3 Must End Above Ending Point Of Leg #1

T3 Trading Example

AUDUSD_Triangle_Pattern_T3

The picture above shows the 4h chart of the AUDUSD pair. I’ve picked up this example on purpose, and more so because we have not one, but two patterns that you are going to watch for trading. The first pattern appears after a nice upward movement, but if we check this smaller triangle we can see only three legs inside, breakout moved us higher and after that we have a five leg triangle, that is T1, after a breakout of T1 we have another spike higher.

How To Trade T3?

The final T3 triangle is going to be easy to trade because there are only few different things to keep in mind if we compare it to trading T1 or T2. For entry point, you are going to look for a breakout of the trend line that you are going to draw from the starting point of 1st leg through the ending point of 2nd leg. For target #1 we are going to use the inverse 123.6% of the 1st leg and for the target #2 we are going to use inverse 161.8%. Stop loss in this case is logically going to be at the ending point of the final T3 leg, so put the stop loss at the end of 3rd leg. Don’t forget that you should trade T3 only if T1 and T2 patterns don’t appear early in the session.

Most Important Thing About Patterns?

You need to understand one thing completely, there is no 100% winning pattern, so stick to the rules and you will have a good chance to make money… Also keep in mind that our triangles (T1, T2, T3) also appear on the bearish market, everything is same just flip the images down …

Let’s now move to next chapter What are two most important Indicators to use every day in Day Trading from our Ultimate Trading Strategy.

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