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As any experienced forex trader will tell you, no currency goes straight up or straight down. Bursts of action up or down take a lot of energy, and soon enough the price of the currency pair will need to rest, or consolidate. As it is difficult to watch all currency pairs at all times in order to catch those sudden price movements, experienced traders will instead look for consolidation patterns in order to time their entries. Consolidation patterns allow the currency price to stabilize before its next big move, and so offer a good opportunity for the observant forex trader.
The first type of consolidation pattern is a triangle pattern. There are three types of triangles to watch for: symmetrical, ascending, and descending. An ascending triangle occurs after the price has moved up and is facing resistance at a certain price level. The highs do not exceed the resistance, but the lows inch higher and higher. Pretty soon the pressure builds to a point that the resistance line can no longer contain the price, and the price breaks higher. Ascending triangles are bullish patterns.
The counterpart to the ascending triangle is the descending triangle. As you might expect, the descending triangle is a bearish consolidation pattern, and represents the continuation of a downward trend in price. The price drops and holds at a support level, but the highs get lower and lower. Support eventually gives way and the price continues downward.
Symmetrical patterns are the hardest to trade against as they are harder to interpret. They offer no clear indication of which way the price of the currency pair is going to break, so most experienced forex traders will wait for the trend to reveal itself rather than risk a poor entry.
Flags are a more reliable form of consolidation pattern. Flags are rectangular or parallelogram in shape, and take form after a sharp move either upwards or downwards. The sharp move acts as the flag pole, and the subsequent consolidation rectangle shape forms the flag. The flag formation shows that the price is taking a rest after its sharp move, and it offers the trader a safe entry in preparation for the next leg of the trend.
Pennants are a more uncommon form of consolidation pattern, but also considered more reliable than either flags or triangles. A pennant also has a flag pole, but instead of forming a rectangle flag the pennant forms a sideways symmetrical triangle. Pennants almost always break in the direction of the prior move, but their lifespan is much less than that of a flag; so while their reliability is improved, they are harder to spot simply because they often come and go before the trader has a chance to take advantage of it.
All of the above patterns represent safer entry points for the astute forex trader, but which one to use depends on the type of forex trader that you are. Due to their short lifespan, pennants are best suited to day traders who are in front of their trading platforms more often. Flags are good setups for mid to long term traders, and triangles are best used when an upcoming news announcement can provide enough fuel to break through support or resistance.
About this Author
Adam is a part-time forex trader and is passionate about all things related to the stock market and forex trading. He publishes a FREE forex newsletter that provides informative articles, the latest forex strategies, product reviews, and much more. Visit [http://www.ultimateforexstrategies.com] and get your copy of The Ultimate Forex Survival Guide, free when you sign up for the newsletter!
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