NEW YORK (TheStreet) -- No matter how many variations exist among foreign exchange traders on level of wealth, risk appetite or experience, each and every one of them have the same objective: What to trade next.
Many forex traders follow the latest economic developments to provide them with hints on how the forex markets will evolve, while others' trading plan is to look out for chart patterns that often occur. The latter is a simple and easy method for deciding when to trade as chart patterns can be easily spotted with some practice.
Two of the most common ones are the head & shoulders and triangles.
A very popular chart pattern searched for is the head & shoulders. As the name implies, the pattern is comprised by a "head" between two, lower shoulders. The regular head and shoulders pattern is usually formed at the top of an upwards trend and is an indication the price is about to fall.
The pattern's formation begins during the price's upward trend, when it reaches a new high and followed by a new low. This is how the left shoulder is formed.
The head of the pattern is formed when the price goes on to a new higher high and falls down to another low. Then the right shoulder is shaped when the price makes another high that is lower than the head's high and after continues to fall below the neckline.
AUD/USD Daily Easy-Forex Chart
The example above is from the AUD/USD daily chart during autumn 2013. There is is also the reverse head and shoulders pattern that forms at the end of a downwards trend and is therefore an indication of a rise in price.
Another interesting and common type of pattern is the triangle. Although in practice these patterns differ slightly, the general rule is that the price converges with highs and lows squeezing into a decreasingly smaller area.
In addition to the entry point that the head & shoulders provides, the triangle also gives information about stop and profit targets. The entry point for a position is when the price breaks through the triangle's boundary.
NZD/USD 15-Minute Easy-Forex Chart
In the example above, the entry point is a downwards penetration at the 0.86411 level and therefore an indication to sell. The stop limit is at the highest point of the pattern, in this case 0.86455.
A small calculation is needed for the profit target; it is the subtraction of the pattern's width to the entry price (0.86411). The width of the pattern is 0.86455 - 0.86247 = 208 pips. So the profit target in this example is 0.86411 - 208 = 0.86203, which was easily met and also exceeded.
There are a lot of chart patterns used as methods to find entry points, stop and profit levels. Simple chart patterns such as the head & shoulders can be easily spotted after a bit of experience and is an easy source of information for entry points.
Additional information for exit and stop limits can be provided by the triangle chart pattern, which also develops often. However, the chart pattern methods are not limited to this level, and as forex traders become more experienced they can combine two or more methods involving chart patterns to set up their own customisable trading method.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.