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The following three chart patterns are amongst the most powerful indicators of potential forex movements. However, these chart patterns and the relationship to volume cannot be overlooked.
Wedges.
The wedge formation is similar to the symmetrical triangle pattern where it also has converging trendlines that come together at an apex. The main difference with wedges is that they are identified by a noticeable slant, either to the upside or to the downside. As with triangles the volume should be diminishing during the patterns formation and then increase on its breakout.
Falling Wedge
A falling wedge is considered bullish and is usually found in uptrends and it's worth noting that they can also be found in downtrends. This pattern is distinguished by a series of lower tops and lower bottoms as the movement progresses.
Rising Wedge
A rising wedge is considered bearish and is usually found in downtrends and can be found in uptrends. Rising wedges will have a series of higher tops and higher bottoms but in a proportionately diminishing amount - hence the wedge shape.
Flags
Flags and pennants are known as continuation patterns and represent brief pauses in a dynamic market. They are often seen after a large, rapid move. After a pause the market usually takes off again in the same direction. Research has shown that these patterns are some of the most reliable continuation patterns in technical analysis.
Bullish flags are distinguished by lower tops and lower bottoms and the pattern is usually slanting against the trend. Unlike wedges, their trendlines run parallel.
Bearish flags are comprised of higher tops and higher bottoms. "Bear" flags will slope against the trend and their trendlines also run parallel.
Pennants.
Pennants look like symmetrical triangles but are typically smaller in size in volatility and in duration.
Rectangles.
Rectangles should be traded as continuation patterns.
They represent areas of market indecision that are usually resolved in the direction of the trend.
Trendlines run parallel in a rectangle. Supply and demand with this pattern indicates a balanced market. Buyers and sellers also seem equally matched. The same 'highs' are constantly tested as are the same 'lows'. The market vacillates between two clearly set parameters. As with other continuation patterns volume of trading increases substantially on breakout.
Volumes.
While this isn't a trading pattern as such - its importance cannot be understated. Chart patterns should also be interpreted in relation to the volume traded to validate a potential movement.
Volume is simply the number of contracts that are traded over a period of time. Volume is used as a trading indicator when patterns don't seem to 'neatly fit' into the aforementioned categories. It is simply another tool in the traders' arsenal to try to determine the reliability of a potential pattern. For example a breakout from a bullish flag may be apparent at first glance but volume may have decreased which would indicate that the pattern is not yet complete with further swings to come before the real breakout occurs.
Volume tends to follow the trend - up days = stronger price increases v's weaker falls, with the converse holding true. This is why reading the volume as an indicator adds extra strength to pattern interpretation.
Therefore if volume starts to diminish in an uptrend a trader can interpret this as market topping for a reversal pattern. Thus a trader would then look for classical reversal pattern structures such as a top head and shoulders!
Traders also are familiar with volumes being sticky in the low end when their is indecision. A lot of this has to do with traders waiting for the move to occur before taking a position - thus the market trades the ranges. Under these conditions the market is often stimulated by external factors such as news reports.
Chart patterns, volume and technical analysis all have some forecasting qualities but none are foolproof. When they are used together with experience they can be very helpful in your trading and investing. They should only be looked on as tools to try and establish a markets bias or trend.
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