4 Continuation Patterns Every Trader Should Know

Patterns of Continuation: Key Takeaways

Why beginning traders should study continuation patterns…

How to use these patterns to create a robust trading strategy

Four key patterns to study right now, with charts…

What are continuation patterns?

• I primarily rely on technical analysis as a day trader. I watch for breakouts, support and resistance, and morning panics. On a stock chart, you can see all of that.
• Then there are continuation patterns.
• When a price action trend is interrupted by a consolidation period and then restarts, this is known as a continuation pattern. The experienced trader can see recurring patterns on the chart during the consolidation phase. You, too, can develop an eye for these patterns.
• But why does the price experience a period of stability? Typically, traders would cut losses or take profits based on supply and demand. Most market movements are a result of that.
• Say a significant catalyst causes a stock to soar sharply.

• Some traders will close their positions to take profits during the rise. As a result, you might experience a selling period during which the stock’s price somewhat declines.
• Then some traders decide to rejoin. According to them, the stock will continue to trend upward. Thus, the price trend on the next candle is upward.
• Minutes to weeks may pass during a consolidation period. During that time, the price tends to form one of the patterns I’ll show you in a moment and stay inside a range.
• The trend resumes in its original direction after the consolidation phase, at least in theory.

Benefits of Using Continuation Patterns

• Why are these patterns significant? First, they can help you predict how a stock’s price will move.
• d be a more precise science. Not all consolidation periods result in continuation patterns. Reversal patterns also exist.
• Rules are useful. Additionally, if you follow the guidelines and your trading plan, you’ll be more equipped to handle anything the market throws at you.

4 Continuation Patterns Every Trader Should Know

• Let’s look at the most popular continuation patterns used by traders.
• Remember that these examples are centered on shorter time frames because I trade and teach day trading. However, you might also spot these patterns in charts with a longer time frame (say, a one-year chart with daily candles).
• The goal is to develop your ability to spot trends, plan accordingly, and take advantage of them.
• Additionally, I advise using candlestick charts. They have speedy information delivery. Additionally, they make it simpler to see continuation patterns.

1. Rectangle

When the tendency, whether it be up or down, temporarily stops, rectangles appear.

• Within parallel support and resistance lines, price activity consolidates. The trend then resumes in its initial direction following the time of consolidation.
• A Rectangle Continuation Pattern Example
• View the AMC Entertainment Holdings chart (NYSE: AMC). I said I’d usually publish short-term charts, but this is a beautiful illustration.
• If you examine the first spike, you will notice that it began to wane before reaching a consolidation stage shaped like a rectangle before the price exploded upward once more after several months of consolidation.

2. Wedges

• On a candlestick chart, the wedge pattern can be challenging, but with expertise and practice, it becomes more apparent.
• A flat support line should be visible on the wedge’s sides. The opposing support or resistance line approaches the flat line at an angle, depending on whether it is bullish or bearish.
• Wedge Continuation Pattern Illustration
• View the Kaixin Auto Holdings graph (NASDAQ: KXIN). You can observe a couple of spikes that initially increased on August 5 and then increased after consolidating.
• Some of those early episodes of consolidation were wedge-shaped. They had a straight support level at the bottom and a flat resistance level at the top.

3. Flags

• Flags are evident because of the significant initial price movement, or flagpole. A flag typically slopes away from the flagpole and follows it. Following the flag, the pattern keeps going.
• Another thing about this pattern that you might notice is that, similar to the movement before the flag, the price action on the breakout or breakdown following the flag has a similar range.
• For instance, if the flagpole indicates a climb of 20 cents per share, you could anticipate the additional movement of about 20 cents following the consolidation.
• You can get an idea of potential entry and exit sites from this. It aids trade planning and enables immediate loss reduction in a losing trade.
• A flag continuation pattern example
• View the Sonnet BioTherapeutics Holdings chart (NASDAQ: SONN). This flag pattern is an excellent illustration. Look at the downward trend this time.
• This stock started to decline rapidly after making a significant early-day surge. It soon gapped down significantly, consolidated, and gapped down significantly once more. The stock finished below where it began before the significant increase.
• The excellent part about this case is that the size of both gaps was comparable. That typifies a flag continuation pattern perfectly.

4. Triangles

• Triangle-shaped patterns come in a few different variations. Both symmetric and asymmetric triangles exist. Depending on the trend, it can slope upward or downward.
• Pennants are another name for triangle patterns.
• Triangle Continuation Pattern Illustration
• View the chart for Support.com (NASDAQ: SPRT) below. The consolidation in the form of a triangle reverses the upward trend. The convergence of the highs and lows is crucial in this situation.
• I know. The original uptrend’s highs weren’t exactly reached during the consolidation stage, but that’s okay. Rarely are patterns ideal in every way. Recognize the flawed ones as well.

Key Tips for Your Continuation Pattern Trading Plan

• In the beginning, continuation patterns traded similarly. They all have times of consolidation that halt the upward price trend.
• Additionally, the shapes are only sometimes accurate. So if the shape seems strange, don’t demand a deal. It might not be the next step.
• You don’t have to wait for the ideal symmetrical triangle or rectangle. The wait can seem endless. Instead, try to comprehend the psychology of what’s happening, notably the competing purchase and sale forces.
• Look for evidence of the trend’s continuation following the consolidation period.
• Always remember that your trade thesis, stop loss, entry and exit points, potential catalyst, and other elements are all required in every trading plan.
• One of the best penny stock traders, Tim Grittani, got his start in my Trading Challenge. He has numerous spreadsheets that list each trade he has ever done. One explanation for Grittaini’s trading success is this. He makes and follows through on plans.

Remember, small gains add up.

• You don’t have to make significant trades to grow your brokerage account. However, you should only try to trade heavily once you have a lot of experience. Would you attempt to learn anything else in life by starting big?
• Your danger is only raised as a result. Work with modest gains and even more modest losses.
• This is why I enjoy investing in penny stocks. You can gradually develop your modest account with short positions if you know how to make intelligent trades.
• You get experience as you accomplish that. Then, after that, you can look into roles with more responsibility.

Don’t Trust Promoters

• Never believe a promoter. They are not acting in your best interests. They market equities to drive up prices, then sell their holdings to profit.
• Most traders lose money. That is partly because too many newcomers believe the hype from promoters. Never believe the hype; ride it instead.
• Trade With the Correct Information
• Too many newcomers destroy their accounts because they need more knowledge. It repeatedly takes place. Stop. Concentrate on your studies and education.
• Would you like to discover how to identify and trade continuation patterns? Do your best!
• Once more, most traders lose money. I can change that by using my rules and patterns because I encourage my students to think differently. Since I began day trading, I’ve been profitable almost every year. I do occasionally experience losses, but I try to minimize them.
• The lesson here is to educate yourself first and continuously.

Practice First

• Why would you trade without first experimenting with fake money? Trading is hardly rocket science, but. It is a set of knowledge and abilities that can be learned. However, it requires devotion, practice, and hard work.
• I contributed to the design of the trading platform StocksToTrade, which supports paper trading.
• ** When you’re ready, you can practice trading the same patterns I do.
• You can try live trading if you’ve gotten it down where you’re winning more often than not. It’s a great way to develop continuing pattern recognition and much more.

Continuation Patterns for Forex and Stock Trading: Are They the Same?

Several patterns overlap between forex and equities. I don’t trade FX, though. For me, it’s too erratic. Instead, I trade dubious penny stocks, but I’m a cautious trader. I continue to invest in these stocks because I am comfortable doing so.

Continuation Patterns: Frequently Asked Questions

What are reversal patterns?

Reversal patterns indicate a trend is changing. These patterns demonstrate that the short sellers or buyers have lost steam. Reversal patterns occur when a shift follows a period of consolidation in the trend.

What are bearish continuation patterns?

In the middle of an ongoing slump, these patterns develop consolidation periods. After the period of consolidation, the price trend resumes its bearish decline.

What are the patterns of bullish continuation?

The polar opposite of this is bearish. The consolidation periods associated with these patterns develop in the middle of an ongoing rally. After that, the increasing price trend keeps going.

What Are the Patterns of Trend Continuation?

Patterns of trend continuation are trends divided by consolidation intervals. The tendency then resumes its original path.

How long do patterns usually last?

The solution to this is complex. Patterns persist for a short period of years. Although I only trade patterns that appear and go within a few days, this does not preclude you from trading patterns that take longer to establish. Figure out what works for you.

The Bottom Line

Your trading foundation depends on your ability to identify continuation patterns. Find some examples of the four patterns we discussed today by using them. You must be able to see them quite well, but they need not be flawless.

Now is the time to lay the foundation. Starting now, do the following things daily: Create a watchlist, a trading plan, a journal, and patterns to search for.