Pattern Recognition – The Heart of Forex

There are many skills that forex traders should have up their sleeves to enhance their performance. While some skills are very popular and highly talked about, a skill that’s less commonly mentioned is recognizing patterns. It’s an essential skill that will help any forex trader make fair forecasts and reduce losses and maximize wins. 

So, let’s see what pattern recognition is and how it is significant for forex trading.

What is a Price Action Pattern?

The Forex market involves a constant tug of war between bulls and bears. This tug of war is manifested in the form of price movements. All such price movements follow some sort of pattern. And these patterns keep occurring again and again. Some of them occur more frequently than others.

Why Should You Learn How to Recognize Price Action Patterns?

Price action patterns help you visualize price movements. There are many kinds of price action charts that give a visual representation of price movements. Candlestick price action charts are the most popular. They show the opening and closing price as well as the high and low prices. Hence, it’s easier for anyone to interpret the data. Such detailed visual representations can give you a better idea of how the market is currently behaving and how it could behave in the near future. Therefore, if you learn to recognize these price patterns, then you can forecast with a fair degree of accuracy how the price movement would be in the near future. This obviously will help you have more control over your trades.

How to Develop Pattern Recognition Skills?

This is a skill that can be developed through wise and continuous practice. It’s fairly easy to recognize these patterns because it’s more or less like a picture and that picture is equivalent to a thousand words.

Three main methods you can use to develop pattern recognition skills are:

1.  Understand the Meaning: first and foremost, you must understand how price movements culminate in price patterns. This will help you get a feel of what is about to happen. Similarly, you should have a good understanding of what a particular price pattern means from a strategic standpoint. This understanding will help you store these patterns in your mind and recall them whenever you see a similar price movement.

2.  Quick Revision: It’s not enough to develop familiarity with price action patterns, but you should be able to recall them fast, lest you lose the chance to convert them into a winning opportunity. A fast recall is possible only when the patterns are vivid in your memory. This means you need to constantly revise the patterns that occur in those currency pairs that you trade. To do this, you can simply paste the major patterns in a document and scan through those images on a daily basis, which won’t take much time. Remember, you’re not reading and interpreting them, but simply blitzing through the images. When you see the patterns frequently, even if it’s for a fraction of a second, the chances for faster recall increase tremendously.

3.      Continuous Preparation: Nothing can substitute continuous preparations. In pattern recognition, this would mean going through the historical data to understand the price patterns that form in various circumstances, doing a post-mortem analysis of your trades to find out if you missed any particular pattern, and the like.

Though it is possible to develop a sharp eye for price action patterns, one should be wary of the challenges involved in it.

What Are the Challenges and How Can You Overcome Them?

There are many, many price action patterns that form in the forex market. It’s very time consuming to understand and learn all these patterns. Simply recognizing a pattern is not enough; a good understanding of the pattern is quintessential for your success. Needless to say, developing such an understanding requires a good amount of time. So, what’s the way out?

The advantage is that all these price action patterns do not form frequently in the market. Only a handful of them get repeated frequently so understanding the basic ones would suffice. However, a basic understanding of other patterns is also essential. Here are some frequently occurring price action patterns:

• The double top and double bottom patterns
• Head and shoulder patterns
• Ascending and descending triangle patterns
• Pinbar candlesticks
• Engulfing candlesticks

Another challenge is that the same price action pattern may have more than one interpretation. Yes, it’s highly subjective. What one trader interprets from a given price action pattern may be entirely different from what others interpret. Therefore, you must combine price action along with other trading concepts. A good trading strategy should be developed and executed based on the price action patterns, lest you will end up having more losses than wins. 

It’s always better to learn how to interpret price action patterns and how to develop strategies based on them from a qualified professional with enough hands-on experience. This learning will help you recognize, retain, and recall price action patterns a lot easier. You may contact Axiory for such guidance, where the professionals will take you through the basics and equip you with all the necessary skills and knowledge needed to be smart at pattern recognition.