Life is full of patterns. A consideration of that fact can help you acquire a better understanding of stock charts and what to expect. Traders who have a keen eye on patterns have a competitive edge over others as it will allow them to recognize high probability setups before the masses do.
Continuation Patterns Definition
Continuation Patterns can be described as geometric shaped situated in the price data. They can assist a trader to comprehend the price action and predict the potential trend of price because certain patterns have high probability outcomes in a specific direction. In view of that, continuation patterns normally occur in the middle of a trend that pauses and then continues (hence the name).
This could be during an upward or downward trend. A continuation pattern is deemed complete when the stock concludes crafting the prototype and then ‘breaks out’ of it. When continuation patterns occur, they denote a probability of the persistence of a price trend.
It is fundamental to note that continuation patterns can be viewed on every time-frame, from a daily or weekly chart to a tick chart. The most common ones include pennants, flags, triangles, and rectangles. This post will highlight the top three that are essential to understand.
Notably, triangles are among the steadfast continuation chart patterns. In this case, prices keep on converging until they break out. Triangles can take three forms: ascending, descending, and symmetrical as pinpointed below:
- a) Ascending triangles- Have an upward slope and a level top.
- b) Descending triangles- Constitute a level bottom and a downward incline.
- c) Symmetrical triangles- Comprise of an increasing and downward slant.
- Triangle patterns typically have at least four to six points of reversal which are needed to generate the shape of the definite triangle.
- The more the triangle is tested, the more its durability is enhanced, and the stronger the breakout will result.
- The formation generally lasts from one to three months.
- The best approach to trade the triangles is to deal with the breakouts. It’s pivotal to hang on for the completion of the pattern. That implies the importance of waiting for a determined close of the price either beneath or above the triangle.
- The overall techniques to work out an estimated degree of the price target following the breakout involve the need to evaluate the broadest distance of the triangle. Thereafter, it is imperative to apply this distance to the point of breakout and forecast it in the breakout’s direction.
Pennants, like triangles, are another form of continuation pattern. However, they are brief in duration as compared to wedges and triangles. This pattern is formed as prices converge, covering a small price range mid-trend, giving the pattern a pennant appearance. The converging price breaks down or out, resulting in a continuation of the predominant uptrend or downtrend.
Normally, it takes about a month or less for this pattern to be completed. A strong move in prices often precedes a pennant, almost in a straight line to bear a resemblance to a mast or flagpole. The common view of pennants is that they fly in half-mast. This owes to the fact that they seem about the halfway point of the entire move.
Therefore, the initial price’s distance is approximately similar to that of the proceeding price move after the breakout. Ultimately, the height of this initial move (flagpole) can be used to approximate the size of the breakout move.
Helpful hint: A pennant with more than 20 price bars is viewed as a triangle.
A pause in a trend is deemed as a flag. In this pattern, the price becomes restrained in a small price range in between parallel lines. The flag-like appearance in the pattern is given by the pause in the middle of the trend.
Generally, flags are short in duration, lasts several bars and do not comprise price swings as a trend channel or trading range would. Flags may be downward, upward, or parallel sloping. In this continuation pattern, the two parallel lines act as resistance and support. The slope of these lines either be zero, negative or positive depending on the predominant trend;
- In a downward trend, the flag points up and has a positive slope
- In an upward trend, the flag points down and has a negative slope
It is worth noting that the flag can be sideways, often referred to as a rectangle. In the formation of a flag, the price trends in a modest reversal restricted within the top and bottom trend lines of the flag. This precedes the breakout in a similar direction of the larger move that goes before the flag.
- Continuation patterns offer some logic on what the market may possibly do.
- These patterns are perceived mid-trend and show trend continuation upon completion of the pattern.
- Though these patterns are fundamental in helping traders make decisions, they are not always dependable.