Trading patterns are the daily bread of Forex traders and it is no surprise that inversion patterns play a particularly important role in trading, since they allow us to determine the optimal entry and exit points. Here’s how to identify and use price inversions in trading.
Because it is important?
Trading patterns are recognizable, repeated and predictable price movements that traders can use to identify both entry points and exit points. Trading patterns can help you a lot if identified correctly. The problem is that they are not formed so often (especially the best ones) and, when they do, they generally do not resemble what you saw in the manuals.
So, what should you look for?
In the following example, USD / JPY showed a reversal. The couple formed the classic “head and shoulders” bottom and confirmed the inversion with the breakthrough over the neckline. A “head and shoulders” bottom or top is one of the most frequently observable patterns consisting of three consecutive minimums or maximums, in which the second is lower than the first and the third is higher than the second. These minimum levels can be joined together by the peaks that form between them, giving rise to the fulcrum/resistance level, known as the neckline.
Patterns like this can form within a lateral trading range, so it is important to be cautious, a breakthrough of the neck line followed by a confirmation of new support at the neck level is necessary to confirm the price reversal. In other words, this confirms that the price action has begun to move upwards.
Once confirmed, you can project an output target using the pattern entity. In this case, the lowest level, the head, is at 104.16 and we will have to subtract this value from that of the neck, 107.00, to get 2.84. This means that traders can expect to see the pair move at most up to 2.8400 in the first rally from the support. The support is at the level of the neck, or 107.00 + 2.84 = 109.84. It is possible to see in the graph that torque has actually reached this level and is moving rapidly towards the resistance target. At this point, for traders who have already started the operation, it may be prudent to block some profits, even though the rally has not ended.
The first rally from the support showed a pause just above 109.00. The pause gave rise to a continuation pattern, which suggests that this first upward movement is only half complete. Projecting the entity of the first leg, about 002.00, it is deduced that the rally will continue up to 111.00 in the short term. Looking at the price history we can confirm the 111.00 level as a possible resistance target. This target, now that the price action has come out of its consolidation / continuation pattern, will probably be reached within a few days.
What’s behind this movement? The Bank of Japan issued an aggressive statement two weeks before the events we are observing, giving rise to the reversal. The Federal Open Market Committee was stiffening its positions and, at that very moment, a policy meeting was being held. Their statement, released Wednesday afternoon, may have been the engine that pushed the pair up to 111.00 and perhaps even higher.
Source: IQOption blog 2018-12-10 14:05:37