What is a Continuation Pattern?

Key Highlight

• Continuation patterns indicate a temporary pause or consolidation in price before it resumes its original course.

• Traders use them to identify potential entry or exit points and make informed trading decisions.

• Triangles (symmetrical, ascending, descending), flags, pennants, and rectangles are common continuation pattern examples.

• Continuation patterns can be useful, but they are not always reliable, and trends may reverse rather than continue.

Continuation Pattern Meaning

The continuation pattern is a chart pattern commonly used in technical analysis. After a brief consolidation period, these patterns suggest the price will continue its trajectory. In order to manage risk effectively, traders use these patterns to identify potential entry or exit points.

Types of Continuation Patterns

In financial markets, continuation patterns occur in several forms. Here are a few of them:

1. Triangles

Triangles represent a convergence of price ranges, with higher lows and lower highs. It is this converging price action that creates a triangle formation. Triangles can either be symmetrical, ascending, or descending. Triangle continuation patterns vary in their duration, but they always have at least two swing highs and two swing lows.

• Symmetrical: A downward sloping upper bound and upward sloping lower bound in price makes for a symmetrical triangle formation.
• Ascending: An ascending triangle has an upper bound that is horizontal and a lower bound that is upward sloping.
• Descending: A descending triangle is defined as a triangle with horizontal upper and lower bounds and a downward slope.

2. Flags

During a pause in the trend, flags appear when the price decreases within a small range between parallel lines. In the middle of a trend, there is a pause that results in a flag-like appearance. Flags are also short in duration and may be slanted upwards or downwards.

3. Pennants

The shape of a pennant is similar to that of a triangle, but it is smaller. They are formed by a few bars only. When a pennant has more than 20 price bars, it is considered a triangle. However, this should not be considered a thumb rule. In a mid-trend, the pattern forms when prices converge and cover a relatively small range.

4. Rectangles

There is often a pause where the price moves sideways, bound between parallel support and resistance lines. It is possible for rectangles or trading ranges to last for short periods of time or for several years. There is a regular occurrence of this pattern, which can sometimes be observed in an intra-day or long-term manner.

Bullish Continuation Candlestick Patterns

A bullish continuation candlestick pattern indicates the continuation of an ongoing bullish trend. The patterns provide insight into the market sentiment and the potential strength of the buyers. The following are a few common bullish continuation candlestick patterns:

• Bullish Engulfing Pattern

In this pattern, a small bearish candlestick will be followed by a significant bullish candlestick that engulfs the previous candle. There is a shift in momentum and a possibility that the upward trend will continue.

• Three White Soldiers

There are three long bullish candlesticks with small or no wicks in this pattern. This indicates strong buying pressure and a continued upward trend.

• Bullish Harami

A bullish harami pattern appears when a small bearish candlestick is followed by a smaller bullish candlestick entirely within the range of the previous candle. There is a potential reversal of the last bearish sentiment and a continuation of the bullish trend.

Bearish Continuation Candlestick Patterns

Conversely, bearish continuation candlestick patterns signal that a bearish trend is likely to continue. The patterns reveal market sentiment and the potential strength of the sellers. Here are a few commonly observed bearish continuation candlestick patterns:

• Bearish Engulfing Pattern

It occurs when a small bullish candlestick is followed by a large bearish candlestick that engulfs the previous candle. There may be a shift in momentum and a continuation of the downward trend.

• Three Black Crows

Three consecutive long bearish candles with small or no wicks form this pattern. It indicates strong selling pressure and a possible continuation of the downtrend.

• Bearish Harami

A bearish harami pattern is formed when a small bullish candlestick is followed by a smaller bearish candlestick within the previous candle's range. It suggests a possible reversal of the last bullish sentiment and a continuation of the bearish trend.

Working With Continuation Pattern

Trading is easier if you know the common patterns. Patterns of continuation provide a certain logic to price moves, so they often lead to trading opportunities you wouldn't find otherwise.

In spite of this, the pattern is not always accurate. It is for this reason that a combination of patterns should be used before making any trading decisions. There may be a continuation pattern during a trend, but the trend may still reverse.

Traders may also be able to breach the bounds slightly once they have recognised the pattern on the chart, but the breakout may not occur fully. This is known as a false breakout. It can occur several times before the pattern breaks and a continuation or reversal occurs. The popularity and easy visibility of rectangles make them highly susceptible to false breakouts.

It is also possible for patterns to be subjective. In terms of defining or drawing patterns in real-time, one trader's perspective could differ from another. It might seem tricky, but it can provide traders with a unique perspective on the market. A pattern is mostly about skills that you develop over time by recognising and looking for them. Triangles, flags, pennants, and rectangles are examples of continuation patterns in the stock market

Conclusion

A continuation pattern, such as flags, pennants, rectangles, and flags, can provide insight into what the markets might do. They usually appear between trends and indicate a continuation. However, for the trend to continue, the pattern must break out in the right direction. Although continuation patterns can help traders make trading decisions, they are not always reliable. It is common for a trend to reverse instead of continuing and multiple false breakouts to occur when the pattern is developing.