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Forex Chart Terminology, Demystified

Perhaps the most daunting part of learning to use forex charts is the obscure and esoteric terminology that traders throw around. It's almost as if experienced forex pros don't want new traders to be able to understand what is going on.

We ain't down with that. To help you understand and learn forex, here are some common forex chart terms and explanations of what they mean:

Reversal Patterns

Whenever a newer FX trader hears the phrase "a reversal pattern is forming," it's natural to become a little fearful. Because what if the reversal is against your position?

For precisely this reason--you don't want to be caught on the wrong side of a reversal--savvy forex online traders pay particular attention to forex chart reversal patterns.

The double top and bottom, triple top and bottom and, and head and shoulders top and bottom are the classic reversal patterns.

The double top occurs when price peaks after an uptrend drops back down and rises again to a same or similar high before dropping again. This appears as two peaks separated by a single trough at the support point. When the final downtrend drops bellow the support it is a signal to sell. And that is exactly what millions of traders will do if that happens.

Similarly, the double bottom occurs when price bottoms, goes back up, and then drops again to the same or similar low creating two lows separated by a resistance peak. When the final uptrend rises above the resistance peak, it signals the time to buy.

The triple top occurs when price rises to the same or similar peak three times and is separated by two support troughs. When the final downtrend drops below the lowest of the two troughs it is a signal to sell.

The triple bottom is the inverse. The currency pair reaches three similar lows separated by two resistance peaks. When the final uptrend rises above the highest of the peaks, it is time to buy.

The head and shoulders is simply a triple top or bottom where the middle peak or trough is higher or lower, respectively, than the other two peaks or troughs.

Continuation Patterns

Continuation patterns, obviously, are the opposite of reversal patterns. But these forex chart signals are just as worth watching for.

Flags, pennants, triangles, wedges, and rectangles are the classic continuation patterns.

A flag is created when a trend is followed by a sharp change in direction that repeats several times with the same or similar amount of rise and fall and then continues in the original direction, creating a parallel channel that appears as a square or rectangle attached to a post.

 A pennant is created when a trend is followed by a sharp change in direction that repeats several times with a diminishing rise and fall each time that then continues in the original direction. The diminishing rise and fall creates a triangle pattern that stemming from the post indicating the original direction appears as a pennant.

There are three types of triangles. Symmetrical, ascending, and descending. 

The symmetrical triangle occurs when a trend breaks off sharply then rise and fall to a diminishing amount with each rise and fall before continuing in the same direction creating a down trend line on top and a symmetrical upward trend line on bottom.

The ascending triangles are considered bullish and occurs when there is a sharp break from the trend that then rises and falls to varying lows but similar highs, creating an upward trend line on bottom and a horizontal one on top.

The descending triangle is considered bearish and occurs when there is a sharp break from the trend that then rises and falls to carrying highs but similar lows, creating a downward trend line on top and a horizontal one on bottom.

All of these shapes are visual representations of buying and selling sentiment for a currency pair. These shapes show the battle between buyers and sellers of a particular currency pair to get the best price.

Pivot Points, Fibonacci, and Elliott Wave

The pivot point is the point where price may turn. This point is calculated by taking the average of the previous day’s key turning points, resistance and support.

Fibonacci proposed a number that is referred to as the Golden Ratio. That number is 1.618. This number suggests a ratio at which the rise or decline of price will retrace a previous pattern and that retracement will occur at set intervals of 23.6 %, 38.2%, 50%, 61.8%, 76.4%, and 100%.

The Elliot Wave is composed of 5 waves. The trend will rise to a peak at point 1 and drop to a trough at point 2, which will never drop below the beginning of wave 1. It will then rise to a peak at point three, which is never the shortest of any of the waves. It will then drop to a trough at point 4 which never enters the price span of wave 1. After that it climbs again to a peak at point 5 before declining again.

Savvy forex pros will traditionally jump into an Elliott Wave pattern around wave 2 or 3.

Point and Figure Charts

The point and figure chart is a somewhat old-school forex chart that indicates price action only. There is no reference to time on it whatsoever. 

The up trend is signified by Xs in a vertical column that rise to high immediately followed by a vertical column of Os which descend to a low at which point another vertical column of Xs begins upward to another high and so on and so fourth.

The point and figure chart is primarily concerned with watching price level breakouts.

Important Forex Information

The most important step in currency trading is finding the right broker; our forex experts can help. See our
reviews of forex brokers for more information.  

It’s logical to assume that you can save some money using free forex charts rather than paying for a currency trading charting package. Find out the best free forex charts.  

Few forex traders comprehend Fibonacci's pervasive influence on price behavior in the currency markets. Learn about Forex Fibonacci.  

The obscure and esoteric terminology can be the most daunting part of learning to use forex charts. Read all about forex chart terminology.