Chart patterns are often used in technical analysis to determine price changes and directions. These patterns are usually divided into those that indicate that a market trend will continue, those that predict a trend reversal and those which could go either way. In this article, you will learn about continuation chart patterns and what to keep an eye on while trading them. Reversal chart patterns and bilateral chart patterns are covered in other articles.
While chart patterns are powerful tools for finding good entry and exit points, relying solely on them to conduct trades is not advisable. Many other factors have to be taken into consideration, and misinterpretation is always a risk.
If you are new to chart patterns, you might want to read the introductory article on chart patterns, which covers a lot of the basics, before returning to this article.
CONTINUATION CHART PATTERNS ESSENTIALS
- Continuation chart patterns indicate the continuation of a current market trend (bullish or bearish).
- The best-known continuation chart patterns are:
- Flag: bull flag and bear flag,
- Pennant: bull pennant and bear pennant,
- Wedge: rising wedge and falling wedge,
- Cup and handle and inverted cup and handle.
Continuation chart patterns
Continuation chart patterns can be observed as a cool down period before an up or down trend continues. When the patterns are fully formed and confirmed, the price is expected to continue moving in the same direction as it has been before the pattern appeared. Bullish continuation patterns are thus formed during uptrends, and bearish continuation patterns during downtrends.
Flags
The bull flag pattern formation consists of a flagpole and a flag.
The pattern starts with a strong vertical price surge accompanied by high volume. This way, a flagpole is formed. The bigger the price surge, the more bullish the pattern. The pattern is concluded with a flag_,_ which represents a slow and steady price correction after the initial move upward. The flag is mildly tilted downward, with a tight trading channel. After the flag is completed, the price is expected to continue to climb up. The initial price surge of a bull flag should occur with significantly higher volume than the concluding price correction.
The bear flag pattern is actually an inverted bull flag, as it points in the opposite direction, and thus predicts a bear trend continuation.
Firstly, a sudden decrease in price happens, forming a bearish flagpole. This drop should be accompanied by high volume. Secondly, a flag is formed, representing a slow price correction in an ascending trading channel. At the end of the flag, the price is expected to continue falling.
Pennants
The bull pennant is very similar to the bull flag in shape and has the same market prediction.
It starts with a massive price surge supported by high volume. This forms a pole. A bull pennant is formed to conclude the pattern. The pennant takes the shape of a symmetrical triangle and is not tilted downward, unlike the flag. At the end of price consolidation in a pennant, the price is expected to continue rising.
The bear pennant is an inverted bull pennant, signifying a bearish continuation.
The pattern starts with a sudden price fall with high trading volume, forming a pole, followed by a price consolidation in a tightening symmetrical triangle, forming a pennant. After the pattern is completed, the price is expected to continue falling.
Cup and handles
The cup and handle is another bullish continuation pattern, although it can rarely also occur as a reversal pattern. It consists of a U-shaped cup, followed by a slight price move downward – the handle.
When the cup is fully formed, a slight decline in price happens – the handle. After this correction, the price should rebound and continue climbing higher – the pattern is completed and confirmed.
The inverted cup and handle is a bearish continuation pattern, although it can sometimes also signify a trend reversal. Its shape is basically a mirror image of the cup and handle pattern.
The pattern starts with a cup in the shape of an inverted “U.” At the end of the cup, there is an upward movement in price, forming a handle. When the price is rejected at the top of the handle, the pattern is completed and the price should continue falling to confirm it.
Wedges
The rising wedge is a bearish pattern, where the price is slowly and steadily climbing, while forming higher highs and higher lows between ascending trendlines. As the trading zone tightens at the end of the wedge, the sell off happens at the end of the pattern, which is confirmed by high volume.
The falling wedge is a bullish pattern, where lower highs and lower lows are formed between descending trendlines while the price is slowly and steadily falling. After the wedge is formed, the price should break out higher, confirmed by high volume.
Designed through years of meticulous observation by expert traders and investors, chart patterns tend to reliably predict how the market will behave in the future. The tricky part is interpreting a pattern. The slightest differences in pattern shape and timing can lead to diametrically opposite outcomes. Years of practice are usually required to be able to reliably spot patterns and make sound investment choices based on them.