Understanding market trends enables traders to place successful entry and exit orders. Continuation patterns can help confirm the existing market trends and find the right timing for you to place orders. In this article, we delve deeper into the top continuation patterns.
What are continuation patterns?
A continuation pattern indicates if the current market trend is going to continue in the same direction or not. They help identify ideal exit/sell or entry/buy price levels in the market. The patterns suggest that a short-term price movement will resume and follow the same direction in the long-term.
- A continuation pattern in an uptrend signals that the prices will continue increasing in the long-term
- A continuation pattern in a downtrend signals the prices to continue decreasing in the long-term
Continuation patterns occur on all types of time frames like hourly charts, daily charts, weekly charts and yearly charts.
Key elements in a continuation pattern
Existing market trend
The existing trend is the one where the currency pair prices are currently trending before a new pattern forms. When forming a continuation pattern, the current trend provides traders with an expected future market direction.
Future market trend
The future market trend is the same as the existing or old market trend after the continuation pattern has occurred. This provides traders with the ideal entry or exit price levels. If the future or new market trend is an uptrend, it provides traders with buy signals, and if it is a downtrend, it provides traders with sell signals.
Consolidation area
The consolidation price area is when the currency pair prices trade in a specific zone for some time. The price range is between the support level (the level where the falling prices stop falling and start increasing) and the resistance level (the level where the rising prices stop rising and start decreasing).
Breakout level
The breakout level is where the currency pair’s price changes direction and breaks out of the support or resistance level.
Types of continuation patterns
1. Pennants
Pennant patterns are formed during a huge move in the price of the currency pair. This large move is then followed by a consolidation zone where currency pairs trade between a range before breaking out in the same direction as the initial price move.
- If the large price movement was in the upward direction, the prices would continue increasing after the breakout
- If the large price movement was in the downtrend direction, the prices would continue decreasing after the breakout
2. Flags
A flag pattern occurs when the currency pair price witnesses a sharp upward or downward movement making the flagpole, and then trade between its support and resistance levels, making the flag’s body. Both of these trends are short-term trends. Thereafter, the currency pair prices witness a breakout in the same direction as the previous trend and start trading in the upward or downtrend direction in the long term.
- If the flagpole is created during an uptrend, the currency pair prices continue increasing after the breakout
- If the flagpole is created during a downtrend, the currency pair prices continue decreasing after the breakout
3. Triangles
A triangle pattern is a continuous consolidation pattern that occurs during the middle of a market trend and helps traders identify where the currency pairs are headed in the future. It consists of the currency pair prices narrowing in the short term, followed by a continuation according to the initial trend.
- If the currency pair prices narrow down after an uptrend, the prices continue to increase after the breakout
- If the currency pair prices narrow down after a downtrend, the prices continue to decrease after the breakout
4. Rectangles
A rectangle pattern is formed when the prices move strictly between the currency pair’s support and resistance levels. The particular pattern indicates that there is no trend currently. But as soon as a breakout occurs, the prices start trending according to the initial trend (that occurred before the consolidation period) and out of the rectangle.
- If the rectangle is formed after an uptrend, the prices break above the resistance level and start increasing
- If the rectangle is formed after a downtrend, the prices break below the resistance level and start decreasing
5. Cup and handle
The technical price pattern, cup and handle resemble exactly its name – a cup and a handle. The cup is a shape of a ‘u’ or inverted ‘u’, whereas the handle is either a continued downtrend or uptrend. In this pattern, the prices slowly start decreasing or increasing, followed by an opposite trend direction in the short-term, before a breakout occurs in the initial trend’s direction.
- During a downtrend, the currency pair prices decrease in the short term before increasing for a short period of time, followed by a downtrend breakout
- During an uptrend, the currency pair prices increase in the short term before decreasing for a short period of time, followed by an uptrend breakout
6. Wedges
Wedges are chart patterns that are formed by converging price lines. Both the price lines move in the same direction, almost parallel to each other before a breakout occurs. These lines are drawn by connecting a currency pair’s high price points and low price points.
- If a wedge occurs after a downtrend, the price breaks below the support level to continue decreasing
- If a wedge occurs after an uptrend, the price breaks above the resistance level to continue increasing
Top 12 continuation patterns in forex
1. Ascending triangle
An ascending triangle is a bullish continuation pattern that is created by joining the higher highs and higher lows of the currency pair prices. The two lines joined together form a triangle with a price breakout in the upward direction. It provides traders with ideal long or buy signals.
2. Descending triangle
A descending triangle is a bearish continuation pattern that is created by joining lower highs and lower lows of the currency pair prices. The two lines joined together form a downward sloping triangle with a price breakout in the downward direction. It provides traders with ideal short or sell signals.
3. Bullish pennant
A bullish pennant pattern is an uptrend continuation pattern that is formed as a currency pair makes higher highs in the market. The currency pair price trades within a range for some time before breaking above the resistance level and continuing the uptrend. This pattern helps traders identify ideal long or buy signals.
4. Bearish pennant
A bearish pennant pattern is a downtrend continuation pattern that is formed as a currency pair makes lower lows in the market. The currency pair price trades within a range for some time before breaking below the support level and continuing the downtrend. This pattern helps traders identify ideal short or buy signals.
5. Bullish flags
Bullish flags are formed during an uptrend when the prices are continuously increasing before showing a slow consolidation in the short term. The consolidation period ends as soon as the currency pair prices break above the resistance level to continue the uptrend and provide traders with ideal entry signals in the market.
6. Bearish flags
Bearish flags are formed during a downtrend with the prices continuously decreasing before showing a slow consolidation in the short term. The consolidation period ends as soon as the currency pair prices break below the support level to continue the downtrend and provide traders with ideal exit signals in the market.
7. Bullish rectangle
Bullish rectangles are an uptrend continuation pattern in which the currency pair prices trade between their resistance and support levels in the short term before breaking in an upward direction. This pattern provides traders with the ideal price levels to place a buy order.
8. Bearish rectangle
Bearish rectangles are a downtrend continuation pattern in which the currency pair prices trade between their resistance and support levels in the short term before breaking in a downward direction. This pattern provides traders with the ideal price levels to place a sell order.
9. Bullish cup and handle
Bullish cup and handle patterns resemble a ‘u’ shape cup followed by a handle that is made from a series of falling prices. A price breakout occurs as the handle ends and prices start increasing again, following an extended uptrend. Traders receive a signal to enter buy positions at the end of the pattern’s handle.
10. Bearish cup and handle
Bearish cup and handle patterns resemble an inverted ‘u’ shape cup followed by a handle that is made from a series of increasing prices. A price breakout occurs as the handle ends and prices start decreasing again, following an extended downtrend. Traders receive a signal to enter sell positions at the end of the pattern’s handle.
11. Bullish wedges
Bullish wedges are an uptrend continuation pattern that is formed by lower lows and lower highs in the market. The prices begin to contract in the downward direction and trade between the support and resistance levels before reaching a point of breakout. After this point, the prices continue to increase again. This pattern provides traders with the ideal signals to enter a trade.
12. Bearish wedges
Bearish wedges are a downtrend continuation pattern that is formed by higher highs and higher lows in the market. The prices begin to contract in the upward direction and trade between the support and resistance levels before reaching a point of breakout. After this point, the prices continue to decrease again. This pattern provides traders with the ideal signals to exit a trade.
How to trade a continuation pattern
1. Identify the existing trend
The first step to trade a continuous pattern is to identify the existing trend, as it would provide you with an idea about the future market trend. If you identify an uptrend, prices are most likely to break above the resistance level, and if you identify a downtrend, prices are most likely to break below the support level.
2. Look for the period of consolidation
The period of consolidation is when the currency pair prices trade between their support and resistance levels for some time before breaking in a downward or upward direction. When currency pair prices break below the support level, it confirms a downtrend, and when they break above the resistance level, it confirms an uptrend.
3. Identify ideal entry or exit levels
Once the currency pair prices have traded in the consolidation zone for some time, it is time for you to identify the ideal entry (buy) or exit (sell) levels in the market before the breakout. During an uptrend, the ideal entry level is at the resistance level, and during a downtrend, the ideal exit level is at the support level.
4. Place the order before the breakout
Place the entry or exit orders as per the existing trend before the breakout occurs to make the most of the continued trade. You can also place stop-loss orders right at the breakout level.
5. Monitor markets thereon
After you have made an entry or exit decision, keep monitoring the markets thereon in order to closely analyze where the currency pairs are headed in the future. If the pattern continues in the same direction, you can hold onto the trades. However, if you feel the market can potentially reverse, make a trading decision opposite to what you had initially decided. This means, place an exit order if you entered a buy trade during an uptrend and place an entry order if you placed a sell trade during a downtrend.
Start trading continuation patterns today and place ideal entry or exit orders
Continuation patterns definitely help traders make a decision on whether they want to exit a trade or enter it. The patterns help confirm the trade’s future direction based on its existing direction. Start trading with our platform today to get hands-on trading experience with all the tools, techniques and strategies required to place successful trade orders.
Disclaimer:
- All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. Traders should carefully consider their objectives, financial situation, needs, and level of experience before entering into any margined transactions.