The wave

Confirming trade setups based on these patterns requires only a simple indicator called the “wave,” which consists of three exponential moving averages (EMAs): the 34-bar EMA of the high, the 34-bar EMA of the low, and the 34-bar EMA of the close.

This study allows traders to determine which market stage prices are in and apply the appropriate chart pattern. For a momentum setup, the three lines of the wave should be moving sideways.

Notice that because of variance the rectangle does not have a perfectly horizontal resistance line. The more variance in the highs or lows that establish a support or resistance line, the less solid it is. Variance of five pips or less is solid; more than that makes the entry a little less predictable.

The variance of this rectangle pattern’s highs is three pips (0.9831 and 0.9834). This resistance level is solid, as is the support (both lows are 0.9788). The flat wave confirms an accumulation or distribution market is in place. (In rectangle patterns, the wave tends to be sideways and flat.)

Momentum patterns can also form simultaneously when prices begin to consolidate or congest. This gives more flexibility to traders who are more comfortable making aggressive entries from breakouts or breakdowns.

Both chart patterns share a horizontal support line. The breakout in the rectangle occurs when prices trade through the (approximately) horizontal resistance line. Contrast that with the more aggressive entry opportunity that occurs when price breaks the down-sloping resistance line of the descending triangle pattern. Each entry is equally valid — as long as the market stage is sideways. Always check the wave to confirm the stage has not shifted.

Another aspect of trading chart patterns is the confirmation of a breakout or breakdown. It is important the entry confirmation occurs as quickly as possible; waiting for the bar or candle to close is not always realistic in the forex market.