Continuation chart patterns are formations that sideways price movement. Continuation patterns show a pause in the trend after a big move.
The most common types of continuation patterns are:
An ascending triangle is bullish. The descending triangle is bearish. The symmetrical triangle is a neutral pattern.
A triangle pattern usually has four to six reversal points which has to be formed to shape the triangle. The more times that the triangle is tested the stronger the breakout will end up being. The formation can last one to three months long.
Trading the Triangles
The best way to trade these triangles is planning on trading on the breakouts. We recommend waiting for a close above or below the triangle.
Measuring the Price Target
To calculate the price target we measure the widest distance of the triangle. You then apply this to the breakout point as seen in the example below.
In a symmetrical triangle formation, prices consolidate that connect the highs and the slope connecting the lows that form together to look like a triangle.
If the prior trend coming into the symmetrical triangle was a downtrend then prices will eventually break out and continue the down trend. If it was an uptrend then prices will eventually break out to continue higher.
An ascending triangle formation has an upper trend line that is flat and the lower line is rising. In an ascending triangle the buyers are more aggressive than sellers. Ascending triangles are bullish continuation patterns which breakout to the upside.
The price must close above the flat upper line for the pattern to be deemed complete and an ascending triangle to be formed. See example below.
The descending triangle is a mirrored image of an ascending triangle. The upper trend line will have a downward slope and the lower line is horizontal. In a descending triangle the sellers are more aggressive than the buyers which a bearish continuation pattern is formed and break to the downside
The price MUST CLOSE below the flat lower line for the descending triangle to be complete. See example below:
Wedges are another continuation pattern that signal a pause in the trend. They are similar to triangles because they have two converging trend lines.
Wedges have a noticeable slant against the trend coming into a wedge. A falling wedge in an uptrend is considered bullish. A rising wedge in a downtrend is bearish.
A rising wedge is bearish.
Measuring the Price Target
To measure the price target you measure the widest distance inside the wedge and then will project that from the breakout point.
Pennants and Flags
Pennants and flags are another type of continuation pattern and are a shorter time frame when you compare it to triangles and wedges. It usually is less than a month for the pattern to be completed.
A pennant is usually preceded by a strong move in prices, almost in a straight line. A bullish pennant as seen below looks like a flag pole with a flag.
Pennants form at the halfway point. We can use the height of this flagpole to estimate the size of the breakout move.
Looking at the example below, after the uptrend, there is a pause and then a blast higher.
We would have entered a buy position slightly above the breakout point. Take the distance of the initial price movement aka the flag pole and project up from that breakout point.
After a big downtrend like seen below the bearish pennant provides for a pause in the downtrend. Here is where sellers take profits and then prices will breakout and continue downward. See example below.
Here we would entered a sell position right below the breakout point.
Flags are very similar to channels. This pattern consists of two parallel lines. Support and resistance. The slope of the lines depend on the prevailing trend.
- If the trend is up the the flag will point down. This will show a negative slope.
- If the trend is down the flag will point up. This will show a positive slope.
The flag can be sideways, and if this is the case then it is called a rectangle. Prices will trend and breakout in the same direction of the larger move that preceeded the flag.
If we are in an uptrend, a buy signal occurs when the price breaks out and closes above the upper line.
If we are in a downtrend, a sell signal would occur when price penetrates and closes below the support line.
Below is an example of a bearish flag. Prices were in a downtrend going into the flag and bounced back to test the upper resistance line. Prices fell therefore making it bearish.
Below is an example of a bullish flag pattern.
This formation is preceded by a flagpole, which we use as a measuring target of when price will break out from the rectangle.
In the example above you will notice a downtrend. We would have entered below the breakout point of the lower rectangle line looked for a price target that is the same length as the flag pole.