The "Bow Tie" pattern is a trend reversal pattern

Trend reversal pattern "Bow Tie." - This is not an ordinary pattern, since it is based not on a repeating stable price pattern with a predictable development, as in most widely used patterns, but on a pattern formed by technical indicators. More precisely, it is a pattern formed by the intersection of three moving averages.

This feature gives the pattern "Bow Tie" one very important advantage - the ability to easily and unambiguously determine this pattern, which is especially important for beginners who do not have much experience in working with patterns. We can consider the "Bow Tie" pattern as an example of a trading strategy using moving averages.

Rules for constructing a bow tie pattern

The "Bow Tie" pattern owes its name to the crossing of the moving averages, which resembles a detail of a man's closet.

To trade on the "Bow Tie" pattern, you need to add the following indicators to the price chart of the currency pair (D1 time frame):

• simple moving average (SMA), with a period of 10 (red);
• exponential moving average (EMA), with a period of 20 (blue);
• exponential moving average (EMA), with a period of 30 (yellow).

Feature upward trend will be the arrangement of moving averages from bottom to top in the following order: EMA (30), EMA (20), SMA (10). For a downtrend, the order of moving averages will be reversed.

The actual "Bow Tie" pattern occurs when all three moving averages cross and change their order.

An ideal bow tie pattern is one in which the moving averages have crossed in one point. As a rule, the ideal on , as in life, is rare, so the crossing of the moving averages in one point is an optional condition.

Using the "Bow Tie" pattern in trading

As a rule, the pattern "bow tie" on the daily timeframe is formed within 3-4 days. By changing the moving averages settings, the "Bow Tie" pattern can be used on other timeframes, up to intraday trading.

The occurrence of the "Bow Tie" pattern indicates a trend reversal. Accordingly, its appearance serves as a signal to close positions that are against the trend, and to open a position in the direction of a new trend.

When using the "Bow Tie" pattern in trading you should remember that the Moving Average indicator lags and, especially on the strong movements, there is a probability of entering not at the beginning, but in the middle of the trend. Nevertheless, early entries when the moving averages have converged but have not yet formed the "Bow Tie" pattern have higher risks, as it loves to punish rash traders and the pattern may never be formed.

The experts of ForTrader.org think that the use of the pattern "Bow Tie" on timeframes from H4 and above will be the most effective, although its combination with other indicators and TA figures can be used on lower timeframes, but it already looks like a whole trading strategy.