A price pattern is a distinct formation on a currency chart that creates a trading signal, or a sign of future price movements. Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. Remember the third underlying principle of technical analysis, history repeats itself. The theory behind price patterns is based on this assumption. The idea is that certain patterns are seen many times, and that these patterns signal a certain high probability move in a currency pair. Based on the historic trend of a price pattern setting up a certain price movement, chartists look for these patterns to identify trading opportunities.
Price Pattern Theories
So far we have covered the most commonly used price patterns, we will now learn about price pattern theories. The two most common theories used in the currency markets are Fibonacci and Eliot Wave