Trend Continuation Patterns

When you look at the price chart, you will most likely see a major trend and a bunch of random movements; or are they random? Truth be told, some of them are random, but others form well-known patterns and you can predict the future movement of the price within the trend.

Here we will discuss the continuation patters. They are figures, formed by the movement of the price and can indicate a continuation of the general trend. One can say that the signal is complete, when the pattern is fully formed and the price then breaks the pattern in a specific manner. You can spot patterns in all time frames – 30 minutes, one hour, even daily and weekly charts. Now, let’s dig into four of the most common continuation patterns.

Flag

The Flag is a figure that could be formed from the candle bars of the price chart and it indicates a brief pause or correction in the general trend. The classic Flag is has two main components: a flag pole and the flag itself. Now let’s take a look at the image; it should give you a pretty nice understanding of the classic Flag figure.

The image does not indicate it very well, because we zoom-ed it so you can easily see the flag, but the major trend is actually going upwards. So, we have successfully identified the trend and now we notice a huge candle bar in the direction of the trend. This bar could be our flag pole, but it is too soon to tell. Then we notice a slight number of small bars; these bars form the flag. In order for this figure to be legitimate, the flag bars need to:

• Move in a direction either opposite to the trend or horizontal.
• They have to from a parallel channel, which is made of our well-known strong levels – support and resistance.

Both of these conditions must be in place, or else the figure is invalid. Now, that we have identified the flag, what can we expect? Notice the red solid line that indicates the flag pole; when the price breaks the resistance level, we expect it to move upwards and in this situation we buy (in the direction of the major trend). We expect the size of the new move to be the same as the size of the flag pole; you can see the target level in the image. However, notice that this cannot be 100% accurate, so don’t aim for 100% of the pole’s size.

Keep in mind that this is a chart figure; this means that sometimes a flag figure can be created from multiple bars. For example, the flag pole might not be just one big bar, but a combination of several bars in the same direction (the trend’s direction); or the flag bars might be little bit bigger. The important part to remember is that the pole should be in the direction of the trend and the flag bars, should be either horizontal or counter-trend and they should form a channel with parallel support and resistance levels.

Flag Characteristics

• The flag is always counter-trend or horizontal.
• The flag’s borders are parallel.
• This figure is brief; this is not a long-term figure.
• The size of the flag is smaller than the trend.

Triangles

A triangle is another chart figure that is widely used in the technical analysis. Basically this is a flag, but this time there isn’t a flag pole. These figures prove to be very useful in predicting a possible trend continuation. Furthermore, the triangles are used to illustrate the corrections or the retracements in the general trend so that the traders could benefit, if they recognize the figures, of course. These patterns are used in almost every financial market: Forex, Stocks, Commodities, etc. Depending on their form, the triangles can be symmetrical, ascending or descending.

Symmetrical Triangle Pattern

The first thing you should do (as you have probably guessed) is to find the general trend of the price. In the sample image, the trend is obviously going upwards. Then you should look for any retracements, because we cannot expect a continuation figure, without corrections in the general trend. All of the triangles and the symmetrical in question must be made from at least four waves. Take a look at the image and you will quickly notice the 5 waves that form the symmetrical triangle. You need to recognize at least 5 waves, because otherwise the figure is incomplete and inaccurate. In our example, the fifth wave actually breaks the resistance line and this is the signal we are waiting for. Once you have identified the triangle, you have to be patient and wait for the signal; it could take 5, 6, 7 or more waves to break the triangle. Once the price breaks the resistance level, this is a signal that there will be a strong movement in the direction of the general trend; or in our case – buy.

Ascending and Descending Triangles

These two triangles are nothing more that slight variations of the symmetrical triangle. The only difference is that in the ascending triangle the resistance line is horizontal; whereas in the descending, the support line is horizontal. Every other signal and condition is exactly the same as the symmetrical triangle. In the image, you can see a classic example of an ascending triangle. The general trend is upwards and the resistance line is horizontal. All we have to do now is to wait for the price to break the resistance and we can buy.

Characteristics of the triangle patterns

• Strong resistance and support levels.
• At least five waves are needed for each triangle.
• Open a new order when the price breaks the appropriate strong level, but put the stop loss near this level.
• The market’s volume decreases when the triangle is being formed and increases when the price breaks the support/resistance line.
• The price inside the triangle moves either counter-trend or horizontally.
• The traders’ target is the amount of pips from the beginning of the resistance to the beginning of the support lines of the triangle.

Pennants

The pennant is a slightly modified triangle. To be honest, it is a triangle – a retracement from the general trend and at least five waves. The only difference is that the pennant is formed from 20 bars at most. Think of the pennant as a baby triangle – the same characteristics and condition, in a smaller package.

Characteristics

• The pennant is retracement figure, it always moves in the counter-trend direction.
• Most of the time the pennant looks like a mini symmetrical triangle.
• The target and the stop loss rules are the identical to the triangles.

Wedge

The wedge is another chart figure that is extremely similar to the well-known triangles. If you have read the information on the triangles above, you already know that the price inside the triangle moves either counter-trend or horizontally. The only difference is that the price inside the wedge moves in the direction of the trend. This may sound confusing at first, but take a look at the image. Remember the triangles? One of the triangle’s lines should be either horizontal or counter-trend. The wedge’s lines are all pointing in the same direction – either upwards or downwards, but they are not parallel. If you notice parallel lines, this could indicate a possible flag, but not a wedge.

Take a look at the sample image. You can see that the trend is going downwards and that there is some kind of a triangle. The difference is that both lines are pointing towards the same corner of the chart – upper right. Beside this slight modification, the conditions and single principles are exactly the same as with any other triangle.