Continuation Patterns: An Introduction

• The fluctuations in a stock’s price might seem utterly random to a trader. In many cases, this is the case, although patterns may still be seen within the fluctuations in price. For example, chart patterns are recognizable in the price data and may be used to interpret price movement and forecast future price levels.
• Most traders believe that the price trend will continue if they see a continuation pattern. However, seasoned traders understand that no pattern is 100% accurate 100% of the time. This article serves as a primer on continuation patterns, outlining them and how to recognize them in your trading.

MAIN POINTS

Traders look for continuation patterns as a sign that a price trend will continue.

During a trend, traders look out for similar patterns, concluding that the trend will restart after the pattern is through.

Searching tick charts and daily or weekly charts, among others, may help identify continuing patterns.

Traders often use continuation patterns like triangles, flags, pennants, and rectangles.

Varieties of Continuation Patterns

Midway through an up or down trend, a pause of different lengths in the price action may form, forming a pattern known as a continuation pattern. These patterns may indicate that the trend will continue until the pattern is complete. Once a pattern has developed (can be drawn) and “breaks out,” perhaps continuing the prior trend, it is said to be complete. Tick, daily, and weekly charts are suitable for observing continuation patterns. Triangles, flags, pennants, and rectangles are common shapes used as continuation patterns.

Triangles

• Converging price ranges with higher lows and lower highs characterize the classic triangle pattern; as the prices go closer together, a triangular pattern forms. As with any other shape, triangles may be categorized as either symmetrical, equilateral, or right. When it comes to making deals, all three varieties of a triangle are interchangeable.
• The period of a triangle might vary but always includes at least two price spikes and two price troughs. A breakout becomes more likely as the price approaches the triangle’s apex, which it will do if the convergence between high and low continues.
• The definition of a symmetrical triangle is a pricing range with a falling upper limit and a rising bottom limit.

An ascending triangle has a horizontal upper limit and a rising lower limit,

A falling triangle has an upper limit that slopes downward and a horizontal bottom limit.

Flags

A flag occurs when the trend stalls and the price moves sideways between two lines instead of continuing on its previous trajectory. A flag-like pattern results from this lull in the action midway through a trend. Flags often endure for just a few bars, unlike trading ranges and trend channels, which confine price movement in both directions. Flags may be horizontal, angled upwards, downwards, or even vertical, as seen below.

Pennants

Pennants resemble triangles but are smaller and often made from just a few bars. One possible criterion for classifying a pennant as a triangle is the presence of more than 20 price bars inside the pattern. The pennant shape is achieved when prices converge inside a narrow range in the middle of the trend.

Rectangles

Often, there will be pauses in a trend during which the price action moves sideways, bound between parallel support and resistance lines. Rectangles, also known as trading ranges, can last for short periods of time or many years. This pattern is prevalent and can often be seen intra-day and longer-term.

Working with Continuation Patterns

• The price action makes sense as a result of the continuation patterns. When a trader is aware of the trends, they can take better advantage of them. You may use these patterns to find trade opportunities you would not have found elsewhere.
• Unfortunately, the label “continuation pattern” is no guarantee of accuracy. Even if a pattern develops during a trend, the trend might still reverse. Additionally, once we have created the pattern on our charts, the limits may be partially broken without a complete breakout. This is known as a “false breakout,” It may happen more than once before the pattern is broken and a continuation or reversal takes place. Due to their widespread use and great exposure, rectangles are often the target of fake breakouts.
• What one trader sees and how another trader might sketch or characterize the pattern in real time are two examples of how patterns may be subjective. This is only sometimes negative since it might provide investors with a fresh viewpoint on the market. Finding patterns, sketching them, and developing a strategy for using them are all skills that a trader has to hone with time and practice.

The Bottom Line

Triangles, flags, pennants, and rectangles are examples of continuation patterns that may be used to infer the market’s future direction. These patterns are often seen during an ongoing trend and serve as a reliable predictor of the pattern’s completion. The pattern has to break out in the right direction for the trend to begin. Trades may benefit from continuation patterns, but they are only sometimes trustworthy. Issues may arise, such as a trend reversal rather than a continuation or repeated false breakouts, once the pattern starts to establish itself.