Continuation Patterns: An Introduction

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Continuation Patterns: An Introduction

When a trader examines a stock’s price chart, it may seem that the fluctuations are utterly random. This is often true, yet patterns may be seen within price swings. Chart patterns are geometric forms observed in price data that may assist traders understand price activity and anticipate where the price is likely to go.

Traders sometimes believe that the presence of a continuation pattern implies that a price trend is likely to continue, but experienced traders understand that no pattern is completely accurate for forecasting purposes. This article introduces continuation patterns, describing what they are and how to recognize them.

Key Takeaways

  • Continuation patterns are indicators that traders seek for to indicate that a price trend is likely to continue.
  • Traders look for these patterns in the midst of a trend and conclude that the trend will most likely restart after the pattern is finished.
  • Tick charts, daily or weekly charts, and other time periods may be examined for continuation patterns.
  • Triangles, flags, pennants, and rectangles are common continuation patterns used by market traders.

Varieties of Continuation Patterns

Continuation patterns occur in the middle of a trend and represent a brief halt in the price activity. When these patterns appear, it might signal that the trend will most likely restart after the pattern is completed. A pattern is deemed complete when it has developed (can be drawn) and then “breaks out,” possibly continuing the previous trend. From a tick chart to a daily or weekly chart, continuation patterns may be noticed. Triangles, flags, pennants, and rectangles are examples of common continuation patterns.

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Continuation patterns arrange the price action that a trader is watching in a manner that enables them to implement a strategy to profit from the moves.

Triangles

Triangles are a typical pattern that may be characterized as a price range converging with higher lows and lower highs. Converging price activity results in a triangular formation. Triangles are classified into three types: symmetrical, ascending, and falling. Triangles of all shapes and sizes may be exchanged in the same way.

Triangles vary in length but will have at least two swing highs and two swing lows in price. Price will ultimately approach the apex of the triangle as it continues to converge; the closer price gets to the apex, the tighter and tighter price action becomes, making a breakout more likely.

A symmetrical triangle is merely a downward sloping upper limit and an upward sloping lower bound in pricing.

Image by Sabrina Jiang © Investopedia2020

An ascending triangle has a horizontal upper limit and an upward sloping bottom bound.

Image by Sabrina Jiang © Investopedia2020

Descending: A descending triangle has an upper limit that slopes downhill and a bottom bound that is horizontal.

Image by Sabrina Jiang © Investopedia2020

Flags

Flags are a trend halt in which the price gets contained in a narrow price range between parallel lines. This halt in the midst of a trend gives the pattern the appearance of a flag. Flags are often short-lived, lasting several bars, and do not include price swings back and forth like a trading range or trend channel. Flags may be parallel or slanted upward or downward, as illustrated below.

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Image by Sabrina Jiang © Investopedia2020

Pennants

Pennants are similar to triangles but smaller; pennants are often formed by just a few bars. While this is not a hard and fast rule, a pennant with more than 20 price bars is considered a triangle. The pattern is formed when prices converge in the middle of a trend, encompassing a relatively short price range; this gives the pattern a pennant look.

Image by Sabrina Jiang © Investopedia2020

Rectangles

During a trend, price movement will often drift sideways, constrained between parallel support and resistance lines. Rectangles, sometimes known as trading ranges, may persist for a few minutes or many years. This pattern is fairly prevalent and may be spotted both intraday and on longer time periods.

Image by Sabrina Jiang © Investopedia2020

Working With Continuation Patterns

Price action is given some rationale via continuation patterns. Knowing the patterns allows a trader to build a trading strategy to capitalize on frequent trends. The patterns provide trade possibilities that would not have been seen using other approaches.

Unfortunately, just because a pattern is referred to be a “continuation pattern” does not suggest that it is always dependable. A pattern may form during a trend, but the trend may still reverse. It is also conceivable that after we have created the pattern on our charts, the boundaries will be partially pierced but not fully broken. This is known as a false breakout, and it may occur many times until the pattern is broken and a continuation or reversal occurs. Rectangles are prone to false breakouts owing to their popularity and easy exposure.

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Patterns may also be subjective in the sense that what one trader sees may differ from what another trader sees, or how another trader would sketch or characterize the pattern in real time. This isn’t always a negative thing, since it may provide traders a distinct view on the market. It will take time and experience for the trader to acquire his or her expertise in seeing patterns, sketching them, and devising a strategy for using them.

The Bottom Line

Continuation patterns, which include triangles, flags, pennants, and rectangles, provide some insight into what the market could do. These patterns are often found in the middle of a trend and, if completed, signal a continuation of that trend. The pattern must break out in the proper direction for the trend to continue. While continuation patterns may aid traders in making trading choices, they are not always dependable. Potential issues include a trend reversal rather than a continuation and repeated false breakouts after the pattern is formed.

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