Traders must have had similar experiences with price charts that appear to be random. While this could be true, there is a pattern among these seemingly random movements. Technical analysis is the process of deciphering charts and patterns in order to forecast future price movements. The continuation pattern suggests that the current trend will probably continue. Let's learn to recognize and interpret them.
When the price enters a consolidation or correction phase during a trend, continuation patterns appear, indicating that the previous trend will most likely continue. A continuation pattern requires the existence of an existing trend, as there must be some trend that will continue after the pattern is completed. The pattern is not a genuine continuation pattern if there is no prior trend. The cup and handle pattern, flags and pennants, symmetrical triangles, ascending and descending triangles, and the rectangle pattern are all valid continuation patterns.
A continuation pattern is labeled as such because there is a slight tendency for the trend to continue after the pattern completes, assuming the right context of price action. But, not all continuation patterns will result in a continuation of the trend. For example, the price may reverse the trend after forming a triangle or pennant pattern.
Continuation patterns are the most trustworthy when the trend moving into the pattern is strong and the pattern is relatively small in comparison to the trending waves. The price, for example, increases sharply, creates a small triangle pattern, breaks above the triangle pattern, and then continues to rise. Here the pattern is small compared to the trend as a whole.
Common Types of Continuation Patterns
Continuation patterns may be identified in all time frames, with the most common continuation patterns being:
- Rectangles
- Triangles
- Flags
- Pennants
- Wedges
To trade these patterns, simply place an order above or below the formation by following the direction of the ongoing trend. Then go for a target that’s at least the size of the chart pattern for wedges and rectangles. For pennants, you can aim higher and target the height of the pennant’s pole.
Dealing With Continuation Patterns
A trader can greatly gain from trades if he is aware of the frequent patterns. Continuation patterns tend to provide a certain level of logic to the price movement which often leads to trading opportunities that may not be seen using other methods.
However, the pattern is not always reliable. The continuation pattern may appear during a trend but a reversal may still occur. This is why, before making trading decisions, a combination of patterns should be considered.
It is also possible that, once traders have figured out the pattern on the charts, the upper or lower bounds may be slightly penetrated, but a full breakout does not occur. This is called a 'False breakout'. It may occur multiple times before the pattern is actually broken and a continuation or a reversal occurs. Rectangle patterns are particularly vulnerable to false breakouts because of their high exposure and popularity.
Patterns might be subjective as well. In terms of defining or drawing a pattern in real-time, one trader's perspective may differ from another. This may appear difficult, but it aids traders in developing a distinct perspective on the markets. Besides, finding a pattern is mostly about chart reading skills that you develop over the years by knowing and looking out for patterns.
Conclusion
Continuation patterns such as flags, pennants, rectangles, and flags provide logic to what the markets can potentially do. These patterns frequently appear in the middle of a trend and imply that it will continue. However, the pattern must break out in the right direction for the trend to continue. While continuation patterns can assist traders in making trading decisions, they are not always accurate. A reversal of a trend instead of a continuation, as well as the occurrence of several false breakouts as the pattern begins to form, are just a few of the issues.
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