Continuation Pattern: Overview, Types & How To Trade

The price may correct and rebound from some level It can be another common method of analysis — use of supports and resistances, a trend line, and then slowly pick up the trend. In the Price Action trading methodology, trend patterns are not as crucial as reversal patterns. This is explained by the fact that the trend can develop in different ways, there are many angles to consider. Traders use patterns to limit the exposure of the market and find more accurate etnry/exit points. As such, patterns may either increase profits, limit risks, or make your trading more efficient by reducing the time spent on research. Chart patterns are used as a way to explain the activities of buyers and sellers by displaying the forces of supply and demand in a visual form.

1. It consists of a U-shaped cup, followed by a slight price move downward – the handle.
2. Example above is a megaphone providing trend reversal opportunity from bearish side to bullish side.
3. Chart patterns rely on the eye to discern sometimes subtle or irregular shapes, meaning traders might “see” patterns that are not actually there.
4. The targeted exit point is calculated by measuring the range of the triple bottom and traders keep this as the minimum exit point.
5. The first two patterns show the measurement technique for coming up with an estimated profit target.
6. The side-by-side white lines gap continuation pattern features a similar 3-candle arrangement as the upside Tasuki gap, but the third candlestick follows the direction of the last two.

What are the Benefits of Chart Patterns?

Traders reduce whipsaws from false breakouts by requiring additional confirmation beyond the initial break. The hourly and 4-hour time frames are too short for most chart patterns to fully take shape and complete. The breakout was confirmed with strong volume and a gap up open the following day. GEECEE held above the 265 level on the retest, confirming it as a new support area. This successful breakout from all-time highs often leads to further upside as new investors take notice and existing shareholders add positions.

Trading Strategies Using Trend Continuation Patterns

Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading, and only those with sufficient risk capital should consider trading. To learn how to confirm the trend using chart patterns, look at the image below. The psychology behind this pattern is that after a substantial downside, investors think the stock is oversold and undervalued, causing a small relief rally as some buyers come in. However, the overall negative sentiment is still trend continuation patterns dominant in the market, and this brief rally fails quickly as the forces of the prevailing downtrend take over again. Stops are placed above the candlestick setup that validated the entry or above the upper trendline.

This traps the breakout buyers, as the market moves in the opposite direction of their expectations. For traders who spot this pattern, the typical entry would be after the second retracement on confirmation of the upturn. Initial profit targets are set near previous resistance levels or at the height of the drives.

Place the stop loss just below the candlestick pattern that confirmed the trade entry. As the image notes, it should be “a few points below the candlestick pattern that confirmed a long trade.” This approach allows for minor price fluctuations while protecting against significant reversals. The stop loss placement aligns with the market structure defined by the chart pattern, balancing protection with room for the trade to develop. Chart patterns exhibit a degree of accuracy in predicting price reversals, with a 2000 study by Bulkowski attributing an 89% success rate to the head and shoulders pattern.

Why Trend Continuation Matters in Trading

1. Additionally, a bearish engulfing pattern at the second top provides further confirmation of bearish momentum.
2. The bullish rectangle indicates the continuation of the uptrend at the end of the consolidation period, while the bearish rectangle, on the contrary, signals the resumption of the downward movement.
3. The image shows this projected range as a blue shaded area extending upwards after an upward breakout.
4. Variety in continuation candlestick patterns means different gaps or market pauses from which to read sideways market movement.
5. The sideways consolidation provides the pause while allowing the shorter term moving averages to catch up to the price.
6. The double-top pattern reflects a shift in market sentiment from bullish to bearish.

Price gaps up and closes above the previous gap down, indicating an aggressive shift of momentum from bearish to bullish sentiment. Such patterns are traded aggressively at the close of the gap up candle, assuming that the trend is likely to continue on the upside without any further consolidation. Once it breaks, the power of sellers is lost, and buyers start to accelerate their buying positions.

Using Trend Confirmation in Your Trading Strategy

An ascending triangle has a horizontal top side and a rising bottom side, with the reverse true for descending triangles. A triangle will initially appear similar to a pennant on a price chart, but there are subtle differences. If you’re eager to learn more about classical chart patterns, explore our dedicated Academy article for in-depth insights and expert guidance. Over time, it has been shown that certain structures or shapes, when applied to a chart, preempt a certain result for the asset being analyzed.

The period of price consolidation within the rectangle forms a number of minimums and maximums, which are approximately equal in height. You can see what the descending triangle looks like in the picture above. We describe all the pattern in detail later on, meanwhile, just get familiar with a visual look for the overall understanding. Moreover, the demand for verification introduces a subjective and interpretive component that can be difficult, particularly for new traders. It requires a thorough comprehension of market mechanics, as well as the ability to distinguish between genuine and false signals. Continuation, one type of gap among others like breakaway and exhaustion.

The 2023 study by John Smith, conducted by the Institute of Market Studies and titled “Reversal Patterns in Technical Analysis,” found that rising wedges are 65% effective at predicting downward reversals. The bull pennant is very similar to the bull flag in shape and has the same market prediction. A stop loss is placed below the low of the pattern since the breakout was on the upside. Today the traders should pay attention to the Retail sales in Canada.

All trades presented for customer compensation should be considered hypothetical and should not be expected to be replicated in a live trading account. All accounts in the WeMasterTrade program may represent simulated accounts or copied accounts. The three peaks will be distinct and at approximately the same price level, with some minor variation. The valleys between the peaks tend to be roughly at the same level as well.