Continuation Pattern

A continuation pattern is a recognizable chart pattern denoting temporary consolidation during a period before carrying on in the original trend's direction. Traders can use such a pattern to decide when to enter or exit a position and generate returns in the short term.

Such a pattern offers some logic to an asset's price action. Traders can prepare a trading plan and reap the benefits offered by the common patterns. Technical analysts utilize different types of continuation patterns as a sign that the asset's price trend will remain the same. A few of them are pennants, rectangles, flags, and triangles.

• A continuation pattern is a chart pattern that indicates the direction of movement of a financial instrument's price will remain the same even when the continuation pattern is complete.
• Some continuation patterns are flags, pennants, rectangles, and triangles. In addition, these patterns have sub-types, such as bullish and bearish. Hence, one must know each before using a continuation pattern to trade financial instruments.
• A key difference between continuation patterns and reversal patterns is that the latter indicates a trend reversal, while the former signals that the price trend will continue after a temporary halt.

Continuation patterns are chart patterns formed within a trend signaling a continuation of the original trend. It indicates that an asset's price will keep moving in the same direction. One must remember that every pattern of this kind does not lead to a price trend's continuation. In other words, the patterns are not completely reliable — false breakouts and trend reversals can occur.

Usually, one can rely on such patterns the most if a strong price trend is moving into that pattern, and the trending waves are relatively large compared to the pattern. For example, a financial instrument's price increases significantly and breaks over the triangle pattern, continuing to move upwards.

If the trending waves are almost as large as the pattern, it indicates higher volatility, more significant moves against the price trend, and insufficient conviction in the trend's direction. However, one must note that these indications are all warning signs, not positive signals.

The most popular trading method for this type of pattern involves waiting for the continuation pattern to form, drawing trendlines around the pattern, and entering a trade if the asset's price breaks out of that pattern's prevailing trend direction.

Individuals must remember that various steps are involved in trading such a pattern. Let us look at them.

1. Identify the previous trend direction, for example, whether the price was rising or falling before the triangle pattern's formation.
2. Spot the continuation pattern.
3. Identify the breakout point.

One must note that a few traders will only decide to take trades when the breakout materializes in the prevailing trend's direction.

Let us look at the different types of continuation patterns.

#1 - Triangles

Triangles occur when the price action in a financial instrument, for example, a stock, becomes increasingly compressed. These are of different types — symmetrical, descending, and ascending triangles. The ascending one is a bullish continuation pattern, whereas the descending one is bearish. That said, symmetrical triangles can be bearish or bullish.

A TradingView chart of an ascending triangle is given below, where there are ascending lows and highs together, forming a triangle that shows a bullish trend. This means the market has the potential to go up in the future.

Source

In the chart below a clear descending triangle is visible, with descending highs. The lows are more or less ranging at the same level. This is forming a triangle that is moving towards a lower trend in the future. 

Source

Given below is a symmetrical triangle where the ascending lows and the descending highs are clearly visible, forming a perfect triangle. But later, the market goes for a breakout upwards, and thus there is an uptrend. So this kind of triangle can show a down move or an up move in future.

Source

#2 - Rectangles

Traders can identify this pattern easily by the price action bounded by the parallel support and resistance lines. Also known as consolidation zones or trading ranges, rectangles can be bearish or bullish.

 In the chart below, a rectangular pattern is formed in which the market is moving in a range. This continues for quite some time and then shows a positive breakout. The support and resistance lines drawn on the highs and lows will clearly show the rectangle.  

Source

#3 - Pennants

Pennants are similar to triangles but significantly smaller. The latter has swing lows and highs, with the price oscillating back and forth. In contrast, a pennant often appears as a consolidation or a small price range that becomes increasingly smaller with time. This pattern appears after sharp price decreases or increases, showing that the market rests before breaking out again.

 In the chart below, there is a clear pennant formation that shows a positive breakout at the end. It looks similar to a triangle but its time period is typically lesser than that of a triangle. 

Source

#4 - Flags

Flags are like pennants. They establish a small trading range right after a significant decrease or increase in price. One can identify this pattern by the price action moving between two parallel trendlines sloping down (bearish flag) or up (bullish flag).

The chart below shows a flag and pole, where, at the end, there is a positive breakout because a positive flag is considered a bullish pattern. 

Source

Let us look at this continuation pattern example to understand the concept better.

Example #1

With the crypto market becoming increasingly bearish, Solana coin has been subject to a correction phase for more than seven days. From $23.9, the price plunged 15.4% to $1.61. This drop in coin price shaped a bullish continuation pattern called a falling wedge. This pattern provides a bullish technical setup, which can help traders to undermine this price correction phase. Once prices reach the wedge pattern's peak, the buyers will likely break through the overhead trendline, signaling the ongoing correction's end.

Example #2

Suppose John, a trader, was looking to capitalize on an opportunity in the market to earn returns in the short term. While tracking stock in his watchlist, he noticed a sharp increase in the security price before consolidation started between two parallel lines.

Observing the chart, he was convinced it was a bullish flag pattern. So, he entered a long position. His decision proved correct as the consolidation phase ended, and a breakout in the prevailing trend's direction materialized.

Let us look at this continuation pattern chart to understand the concept better.

Binance Coin generated steady returns throughout January 2023. In early February, it broke above the resistance level of $315. This resistance level has been noteworthy since November 2022. Hence, a rise in price above that level hints at more gains.

Over the first week of February 2023, the Binance coin recorded several higher lows. Simultaneously, it was subject to resistance at $330 at various times. However, it failed to break out. This led to the formation of an ascending triangle pattern. Before its formation, the coin was trending higher. This chart pattern is a bullish continuation pattern; analysts expect a breakout to reach a minimum of $348.

Understanding the meaning of continuation and reversal patterns can be challenging for individuals new to trading. However, they can clearly understand the concepts and avoid confusion if they know how they differ. In that regard, individuals must consider the critical differences between continuation and reversal patterns.

This has been a guide to what is Continuation Pattern. We explain it in detail with its chart, differences with reversal patterns, examples, and types. You can learn more about from the following articles –

• Death Cross
• Trend Trading
• Momentum Indicator