However, they also allow for an advantageous risk to reward ratio , especially the larger structures that form on the daily chart. This combination allows you to secure a nice profit in a relatively short period of time.
The first and perhaps most prevalent is trying to force support and resistance levels to fit. In fact, this is a common issue I see across all of trading, not just wedges. As I always say, if a level is not extremely obvious, it should be ignored. The second mistake I see among traders is attempting to trade a wedge on a lower time frame. Last but not least is the issue of timing. As you may well know, timing is a key factor if you wish to succeed in the world of Forex. And when it comes to wedge patterns, timing is everything.
More often than not, when this pattern breaks, the market will retest the broken level as new support or resistance.
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This retest offers the perfect opportunity for an entry, however it does take patience to achieve. Be careful of entering on the first closed candle outside of the pattern as you will likely get a retrace of some sort. This will not only give you a more favorable entry, but it will also help you avoid making an emotional decision about exiting the position in the event you entered prematurely. The bull or bear flag is another name for a channel. So as you might expect, it is most often traded as a continuation pattern. Like the head and shoulders, flags often form after an extended move up or down and represent a period of consolidation.
I feel confident in saying that you could literally trade nothing but bull and bear flags and make very good money in the Forex market. This, of course, assumes that you have become a proficient price action trader. There are a few reasons, but mostly due to the fact that these formations occur quite often. This is true even if you are trading the higher time frames. That said, you only need one profitable trade each month to make good money as a Forex trader. If that one good trade comes in the form of a bullish or bearish flag pattern, it is likely to have an extremely favorable risk to reward ratio attached to it.
This is another reason why I love having this price structure included in my trading plan. The measured objective in this case often allows for several hundred pips on most currency pairs. Combine that with a precise entry and a well-placed stop loss that is 50 to pips away, and you have a recipe for a profit potential of 3R or better just about every time.
Like the other patterns above, there are a few things you should watch out for when trading this formation. The first is perhaps the most obvious — never cut off the highs or lows in order to make the channel fit. Calculating the measured objective also tends to give traders fits. Just remember that the measurement should include the consolidating price action. However, if you enjoy using raw price action to identify opportunities, the three formations above would make a great addition to your trading plan.
Doing so will only slow the learning process and also send you chasing trades in every which direction. Becoming a successful trader is about finding an approach to the markets that fits your style, defining your trading plan and then refining those rules as you gain experience. So if you enjoy trading technical patterns, as I do, be sure to give some consideration to the three we just covered; they truly are all you need to become consistently profitable. As the name implies, Forex chart patterns are formations that occur on a price chart.
They develop due to psychological triggers as other traders tend to focus on similar patterns in the market. The head and shoulders, channels bull and bear flags , and wedges rising and falling are three of my favorite patterns. In my experience, the higher time frames such as the daily and weekly are the best to identify and trade chart patterns.
The 4-hour can be advantageous as well, but the daily and weekly should come first, in my opinion.
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It contains all three price structures you studied above and includes the characteristics I look for as well as entry rules and stop loss strategies. Save my name, email, and website in this browser for the next time I comment. These three patterns are easy to spot, simple to trade and highly effective. Hi Justin, thank you for your great and consistent work. Can this flag be valid? Awesome post Justin. What I like about these patterns is that once they form on the charts they are for the most part consistent and predictable.
My favorite one is the pennant. I love the way it bounces or rockets in its intended direction.
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It is a pattern that I myself is comfortable with and even teach it to my clients. Tareeq, you got it! In regard to you comment, I would please like you to teach me the pennant pattern you mentioned if possible. Real world trading looks very different to nicely drawn illustrations. Maybe if you offered trade examples from actual trading within a third-party verified account you could be taken seriously.
The thing is this: my five year old niece does drawings similar to those in this article. Hi JLTrader, perhaps you should have a look around the site before making such a drastic judgement call. They work. When people are buying signals they are buying tips on these patterns. Justin, I am regular reader of your blog, I want to know that the patterns you explained is only for forex or can be applied in any instrument like commodities or stocks.
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Hi, Justin, Thank You for all done. Great work. For what I have known, continuation or not should take the combination of 1 The trend type before the Wedge or Flag and 2 The formation type of Wedge or Flag into consideration. Same applied to Wedge. If you agree with that , I will be very happy to see you updated this great article to make it more complete. From East Africa Tanzania. Hi Justin. Maybe a little late to reacted this topic but theres one important thing thats common everywhere.
Thats the famous retest. Imean they have filled their pockets in the consolidation, selled everthing here they got for highest price or buyed all they could get for the lowest price. Why this return!! Japanese Candlestick Cheat Sheet. Thank you for sharing your cheat sheets alvarob!
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Thank you! Thank you friend. TraderFR if i can draw your attention to scroll up 2 comments and view my post before making this decision hehe. Thanks for the tip.
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Are you implying that understanding the market trumps the technical analysis? Some sites seem to be trying to get me to pay a premium on education which seem to be focused heavily on pattern? Is Baby pips enough to get me started. Learning Am Scale and C Major Chord is completely useless unless you know how to combine the chords into chord progressions, or a scale is useless unless you understand Chord Construction and how to use a scale to solo over a Chord.
Knowing the Cheat sheet of … this is Am and this is B and this is C and this is Fm7 etc… Means nothing unless you know how to put it together. Actually i have a cheat Sheet for you Just Kidding. Pick 1 instrument Use it on Demo Get a few hours of screen time a day and basically you can either Demo Trade on it , or Just watch it. Thanks a million. I cannot answers those questions yet but I see other questions eg Why do resistance occur and what cause the eventual break through.