A continuation pattern is a chart pattern described as a series of price movements that indicate that there is a temporary halt in the current prevailing trend, but that the current trend should continue after the break. The Continuation pattern suggests that the price will continue to move according to the present trend. Some continuation patterns often show a reversal before continuing with the trend. These patterns occur in the middle of a trend and signal that once a pattern has completed, the trend will most likely resume.
What are the Continuation patterns?
Continuation patterns assume that the price-action will move in a similar direction as it is now. The patterns can be of short to medium term and sometimes breakaways from the consolidation period. In a consolidation state, the price-action reverses for some time but continues to move in the trend direction.
Although Continuation patterns are of many types, the most common are; triangle, pennant, flag, and rectangle.
1. Triangle
In a triangle pattern, the price forms several highs and lows before converging into a triangle. The triangle has three types; ascending, descending, and symmetrical.
The ascending triangle is a bullish pattern and is plotted by two trendlines (upper and lower). The descending triangle is a bearish pattern and is also drawn by two trendlines.
The symmetrical triangle shows several peaks and troughs before finally moving with the trend.
2. Pennants
Pennants are a variation of the triangle with a smaller size. The price creates several sharp highs and lows in the triangles, but in a Pennant pattern, the price makes fewer highs and lows.
3. Flags
Flags can be considered a type of pennant. The only difference is that flags develop between parallel lines, while the pennant establishes a triangle.
4. Rectangle
As the name suggests, the pattern forms a rectangle around the price, illustrating trend continuity. The price is bounded by support and resistance lines.
How to use Continuation patterns?
Trading with Continuation patterns requires a few steps. They are:
Firstly, a trader should identify a prior trend. As Continuation patterns can be bullish and bearish, it’s important to find out the present trend.
Secondly, traders may look to enter the trade after the appearance of a breakout point. The breakout points represent the consolidation period and describe that the price-action can either go with the trend or against it.
Once the breakout appears, a trader may take positions in the direction of the trend. If the price breaks above any one of the Continuation patterns, it may be a buy signal. Conversely, if the price breaks below the Continuation patterns, it may be considered a sell signal. The stop-losses are commonly set outside the Continuation patterns.
As the market relies on several factors, there isn’t any confirmation that Continuation patterns will always be correct. There is still a chance of false breakouts. The false breakout surfaces when the price breaks from the patterns and comes either inside it or goes out the other way. To solve this problem, traders could look for the volume. If there is an increasing volume, false breakouts may be more less likely to appear.
Bullish Continuation patterns
With these patterns, the consolidation periods form in the middle of a continuing uptrend. Then, the price trend continues upward.
Bearish Continuation patterns
These patterns have consolidation periods that form in the middle of a continuing downtrend. Once the consolidation period ends, the price trend continues its downward bearish move.
Continuation patterns trading strategy
The technical term consolidation has a specific meaning: Consolidation is a sideways pattern of price movement within a limited breadth of trading, in which neither buyers nor sellers are in control. This period of indecision is a third type of trend, in addition to the uptrend and downtrend.
Continuation patterns can show a small and long trend. However, when the current trend is smaller, there is a chance that the price will continue to move in the same direction.
Continuation patterns buy strategy
- Locate the pattern in an uptrend.
- Wait for the price bar to go bullish before entering.
- Enter the trade when the price breaks above the pattern.
- Set a stop-loss at a recent low outside the pattern.
- Exit when the price shows a reversal.
Continuation patterns sell strategy
- Look for the pattern in a downtrend.
- Wait for the price bar to go bearish before entering.
- Enter the trade when the price breaks below the pattern.
- Set a stop-loss at a recent high outside the pattern.
- Exit when the price shows a reversal.
Continuation patterns conclusions
When the market is between trends, traders look for clues from price as to how price will continue to move once a trend is re-established, either reversing or continuing with the initial trend. To look for a continuation of a move, traders will find patterns like triangles, rectangles, pennants and flags.
Continuation Patterns are candlestick patterns that tend to resolve in the same direction as the prevailing trend. The Continuation patterns can can be used on your forex trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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