Forex League Trading Plan, Forex Trading Market Pattern Guide

TOP 10 RULES OF TRADING

1. JOURNAL TRADES
2. ALWAYS FOLLOW YOUR RULES
3. DO NOT RISK OVER 5 % PER TRADE MAX
4. ALWAYS BE PATIENT, BE CALM
5. DO NOT LET WINNERS TURN TO LOSERS
6. REVIEW ALL TRADES
7. TREAT TRADING LIKE A BUSINESS
8. FIND A TRADING FRIEND
9. ALWAYS USE A STOP-LOSS
10. SET GOALS

Candlestick Analysis

Bullish Signals

1. Hammer or Inverted Hammer 

• The Hammer is a bullish reversal pattern, which signals that a stock is nearing bottom in a downtrend. 
• The Inverted Hammer also forms in a downtrend and represents a likely trend reversal or support.

2. Bullish Engulfing 

• The Bullish Engulfing pattern is a two-candle reversal pattern. The second candle completely ‘engulfs’ the real body of the first one, without regard to the length of the tail shadows.

3. Morning Star 

• As the name indicates, the Morning Star is a sign of hope and a new beginning in a gloomy downtrend. The pattern consists of three candles: one short-bodied candle (called a doji or a spinning top) between a preceding long black candle and a succeeding long white one.

4. Tweezer Bottom 

• First, there must be two or more adjacent candles of either color. Second, a clear downtrend should be present. Third, those candles must reach the same low point.

5. Three White Soldiers 

• It consists of three long white candles that close progressively higher on each subsequent trading day. Each candle opens higher than then previous open and closes near the high of the day, showing a steady advance of buying pressure.

Bearish Signals

1. Evening Star 

• The bearish evening star reversal pattern starts with a tall white bar that carries an uptrend to a new high. The market gaps higher on the next bar, but fresh buyers fail to appear, yielding a narrow range candlestick. A gap down on the third bar completes the pattern, which predicts that the decline will continue to even lower lows.

2. Bearish Engulfing 

• This pattern is characterized by a large black body engulfing a preceding smaller white body, which appears during an uptrend. The black body does not necessarily engulf the shadows of the white body but totally engulfs the body itself. This is an important top reversal signal.

3. Tweezer Top 

• First, there must be two or more adjacent candles of either color. Second, a clear uptrend should be present. Third, those candles must reach the same high point.

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Forex News Sources

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2. ForexFactory.com
3. Bloomberg.com
4. ForexLive.com
5. Dailyfx.com

Bullish Engulfing:

• An engulfing candle has to completely eclipse the previous bearish candle
• An insignificant bearish candle with a large bullish candle to follow will not be counted
• Try to stay away from low volume candles

Morning Star:

• A morning star is, a bearish candle first, a doji/ low volume candle second with a bullish candle to follow third that covers at least 50% of the bearish candle
• Bullish candles that fall below the 50% level will not be counted 
• Try to stay away from low volume setups

Bearish Exhaustion:

• Candles both bearish & bullish with long wicks at the end of a bearish push
• The wicks have to be significant, the longer the wick the better because wicks = exhaustion -Look for this setup near important support or resistance levels as price often sharply bounces
• As always, try to stay away from low volume setups

Bearish Engulfing: 

• An engulfing candle has to completely eclipse the previous bullish candle 
• An insignificant bullish candle with a large bearish candle to follow will not be counted 
• Try to stay away from low volume candles

Evening Star:

• A evening star is, a bullish candle first, a doji/ low volume candle second with a bearish candle to follow third that covers at least 50% of the bullish candle
• Bearish candles that fail to cover at least 50% will not be counted 
• Try to stay away from low volume setups

Bullish Exhaustion:

• Candles both bearish & bullish with long wicks at the end of a bullish push 
• The wicks have to be significant, the longer the wick means more exhaustion is present 
• Look for this setup near important support or resistance levels as price often sharply bounces 
• Low volume is more risky so try to stay away from it

Double Bottoms/Tops

*Double Bottoms are reversal patterns found on all time-frames*

A double top is one of the most traded patterns due to it being very accurate and easy to spot. This pattern signals a reversal and a potential change in trend. The pattern is shown with two peaks and resembles the shape of an M.

Triple Bottoms/Tops

Triple bottoms are reversal patterns typically found on lower time-frames *Do not mistake for rectangle*

Head & Shoulders

Head & Shoulder Patterns are reversal patterns Found on all time-frames. High TF= Stronger *The shoulders should line up almost exactly*

A Head & Shoulder pattern is a pattern formation with three peaks and a single neckline within the structure. The two outside peaks (the shoulders) are lower than the center peak (the head). This pattern predicts a reversal in price and is one of the most traded patterns. A break of the neckline is the indication of a completed head & shoulder pattern and potential entry area.

Wedge Patterns

*Wedge patterns are found as continuation patterns, however, they can also be reversal patterns*

A wedge pattern is a popular trading pattern that can signify either the start or end of a trend. Being that wedge patterns can be continuations or reversals it becomes important as to where they form. For example, if a bearish wedge forms after a downtrend it will most likely be a bullish reversal. Same goes for a bullish wedge. If a bullish wedge forms after an uptrend, it will most likely turn bearish. This pattern squeezes price to an apex which means price is really consolidating in there! This means that an explosive move typically happens after a wedge is completed.

Broadening Wedge Patterns

*A broadening pattern consistently forms HH’s (in an ascending example) or LL’s (in a descending example) in a specific direction* *Broadening Patterns have no flat side* *Can be bullish or bearish* *Can be a continuation or reversal*

Broadening Wedge Patterns can be a bit tricky as they are not the most popular trading pattern. However they can give great insight as to what is happening in the market. A broadening wedge is the flipped image of a regular wedge. This means that price action starts at the apex of the pattern. From the apex price actions starts to build momentum and increase in volume. Where this pattern forms in a trend is key to the outcome, just like regular wedges. However, this pattern typically forms continuation patterns.

Ranging Broadening Wedge

*Can be bullish or bearish* *Can be a continuation or reversal* *Consistently forms HH’s” & LL’s after each other*

Ranging Broadening Wedge patterns represent a cone. Most of the time this pattern is overlooked as it can be hard to identify. Usually this pattern is a reversal pattern as it shows price action starting at the apex of the pattern and builds momentum from there. This pattern often builds so much volume it explodes out of the pattern and shows a strong breakout.

Flag Patterns

Flag patterns are very popular patterns to trade. They present great opportunities to get into a trade, as they are continuation patterns and are quite easy to spot. The “flag” of the pattern must run between parallel lines and can either be angled up, down or flat (sideways). Flags which are angled in favor of the last move (example: pole up and flag slanting up), weakens the momentum of the pattern. The highest quality Flag would be a strong push up followed by a flat flag or a flag that is slightly angled down. If the push is down, you ideally want to trade a flag that is flat or angled up.

Pennant Patterns

*Lower time frame & Can not be ascending or descending*

Like triangles, pennants are continuation patterns. The main difference is that pennants are found on lower time frames and usually consist of around 30-40 individual candle sticks. Pennants also have what is known as a “Flagpole”. The formation is a high volume push followed by consolidation. The high volume push would be the “flagpole” while the consolidation is the actual pennant. Pennants are always sideways/horizontal. Ascending or descending pennants do NOT exist.

Diamond Patterns

*This is a strong reversal pattern*

Diamond patterns are generally pretty rare in price action, When you see one forming it is usually a strong signal in the opposite direction of the most recent trend (a reversal). These patterns represent heavy consolidation at a key zone/level. Thus, the strong reversal. To properly identify this pattern you need to draw four trendlines fairly symmetrically around price action. You want to see the start of the pattern expanding (forming HH’S & LL’S) while the end of the pattern should be contracting (forming LH’S & HL’s). Remember symmetry! If the pattern doesn’t look like a diamond do not force the trendlines.

Asymmetrical Triangle Patterns

*Typically known as continuation patterns*

Asymmetrical Triangle patterns are very popular patterns traded by most traders. Often the triangle is referred to as a continuation pattern but that is not always the case. These patterns show a push in price action with one side of the triangle being flat. Either support or resistance is the flat side depending on ascending or descending asymmetrical triangles. Usually price breaks through and continues with the pattern.

Symmetrical Triangle Patterns

*Triangles are continuation patterns*

A symmetrical triangle is a pattern with two intersecting trend lines. This pattern has a series of highs and lows where price is squeezed to a point (apex). Both trend lines should be close to equal in slant, length, angle etc. Hence, symmetrical triangle. Symmetrical Triangle patterns look a lot like pennants but the main differences are timeframe and formation. Pennants have flag poles, symmetrical triangles do not. Symmetrical triangles are higher timeframe patterns while pennants are considered lower timeframe. Meaning that triangles can last for days, weeks while pennants may last for a few hours.

Rectangle Patterns

Rectangles refer to a pattern formation that show price action bouncing between a price ceiling and price floor. Often this is referred to as ranging, especially on higher time-frames. This pattern is mostly traded on a break of support or resistance with a retest.

Extra pattern examples