Understanding trend continuation patterns can help you improve your skills in forex trading. So how do we identify them and use them to look for trading opportunities?

In forex trading, there are several approaches that you can use, and one of them is technical analysis. In technical analysis, trading opportunities can be identified by analyzing statistical trends from the chart, such as price movement and volume.

From the seemingly random chart, traders are supposed to spot certain price patterns. They can be used to find key support and resistance levels, as well as to signal that the trend is either going to reverse anytime soon or will continue in the same direction as the previous one.

One of the most useful patterns that every trader should know is called the trend continuation patterns, which suggests that the price will continue to move in the same direction after a continuation pattern completes.

Trend Continuation Patterns

Think of it as a road trip. You start driving, but every once in a while you have to take a break to, let's say, fill your gas or buy some snacks. And then after that, you jump back into the car and hit the road again. Similarly, in the price continuation pattern, after consistently going in a certain direction, the price may take a "pit stop" and change direction. However, this is only temporary because the price will resume its previous trend right after it breaks out of the continuation pattern.

Contents

  • Understanding Trend Continuation Patterns
  • The Basic Structure
  • Types of Trend Continuation Patterns
    • The Flag Patterns
    • The Pennant Patterns
    • The Triangle Patterns
    • The Rectangle Patterns
  • 5 Steps Trading with Continuation Patterns
  • Conclusion

There are several continuation patterns that are typically used in technical analysis. The patterns can either be in a bullish or bearish trend and can help you find the right trading opportunity if you know the right way.

Understanding Trend Continuation Patterns

A continuation pattern is called as such because the price tends to continue the previous trend after it breaks out of the formation. Continuation patterns tend to be the strongest when the trend leading to the continuation pattern is strong, and the continuation pattern itself is relatively small compared to the trending waves.

Suppose the continuation pattern takes a while to complete and almost as big as the trend that preceded it. In that case, it may be a signal of increased volatility, a larger move against the trend, or a lack of conviction in the trending direction.

Therefore, it is riskier to consider it as a continuation pattern. Also, the wave that followed the continuation pattern can start going up only slightly and then forms another continuation pattern, breaking out again several times. If this happens, it shows that the market players are hesitant to dramatically push the price, so the trend is less reliable.

The Basic Structure of Continuation Patterns

Every continuation pattern basically consists of four important pieces:

  • Old Trend – the trend at the beginning of the price movement.
  • Consolidation Zone – a constrained area indicated by set support and resistance levels.
  • Breakout Point – the point at which the price changes direction and breaks out from the consolidation zone.
  • New Trend – the trend that formed after the continuation pattern completes. The new trend will continue moving in the same direction as the old trend.

The structure of a continuation pattern

Different Types of Trend Continuation Patterns

Essentially, there are several different shapes of continuation patterns. Each consists of the same four aspects as mentioned above, so at first glance, all of them may look somewhat similar.

The only real difference that you can see is in the consolidation zone. You may later recognize that the consolidation zones of some continuation patterns have support and resistance levels that converge as the pattern forms. In contrast, others have the support and resistance levels that remain parallel.

1. The Flag Patterns

The flag pattern is one of the easiest trend continuation patterns to spot. It basically consists of several large candlesticks that would form a long "flagpole" and a small "flag" called the consolidation zone. The pattern can either be bullish or bearish. You can check the color of the candlesticks that formed the flag to determine the direction of the trend. If it's going upwards, then the new trend will continue to go that way, and vice versa.

Typically, flag patterns are related to price movements that resulted from the news. The price will drop or rise dramatically after a strong trend and then followed by continuation.

Illustration of upward flag pattern

Illustration of downward flag pattern

The following insights are useful to trade with flag patterns:

  • Before you open a position, make sure to wait until the formation of the consolidation zone is complete.
  • A bullish flag pattern indicates a signal to enter a long position, whereas a bearish flag pattern indicates a signal to open a short position.
  • In a bullish flag pattern, it makes sense to open a long position after the upper boundary of the consolidation zone is broken. If you enter at the market price, you should open after the breakout candlestick closes above the resistance level. But if you're opening a pending order, the buy stop should be placed a little above that level. The same principle applies to the bearish flag pattern, but in the opposite direction.
  • The profit potential for the flag continuation pattern is around 80-100% of the flagpole size.
  • Place the stop loss beyond the opposite level of the consolidation zone.

2. The Pennant Patterns

Pennants are very similar to flag patterns. It also has a "flagpole" formed by a series of bearish or bullish candlesticks. Profit targets are also quite the same, approximately 80-100% of the flagpole. However, the differences between flags and pennants lie in the forms of the consolidation zones. While flags move between parallel lines that are ascending, descending, or sideways, pennants move and form a triangle shape.

In pennant patterns, the price may look like it's squeezed inside the triangle and the moment it closes in, it will spike again in the direction of the previous pattern. The sharp increases or decreases of the price show that the market is taking a breather before breaking out again.

So, instead of a horizontal rectangle like flags, we will have to wait for a breakout in the triangle-shaped consolidation zone. Once you spot this pattern, place a stop loss right beyond the opposite level of the pattern.

Illustration of pennant pattern

3. The Triangle Patterns

Triangle patterns are also common to be included in the continuation patterns but do not always indicate continuation. That is why they are often called the "servants of two masters" where the price can exit in any direction.

The patterns happen when the price action becomes more and more compressed. The triangles are considered a continuation pattern when the ascending or descending pattern coincides with the previous trend direction. There are three types of triangle continuation patterns: symmetrical, ascending, and descending.

  • A symmetrical triangle pattern has descending swing highs and ascending swing lows. The two lines then close into each other at the end.

Illustration of symmetrical triangle pattern

  • An ascending triangle is formed from rising swing lows which create an ascending line when they are connected. The upper boundary will be horizontal and the bottom one will be formed by upward-directed support.

Illustration of ascending triangle pattern

  • While in descending triangle pattern, the swing highs are declining, forming a downward sloping trendline when they are connected. So the bottom boundary will be horizontal and the upper one will be a downward-directed resistance.

Illustration of descending triangle pattern

We can identify if the triangle is categorized as a trend continuation pattern by ensuring these two aspects:

  • The ascending triangle is formed in a similar trend. In other words, if the upper boundary is broken out, it is a great opportunity to open a long position. The profit will be around 80-100% of the width of the triangle. Remember to place the stop loss beyond the opposite level of the pattern.
  • In contrast, the descending triangle should appear in a similar trend, in which the breakout of the support level will indicate a great selling opportunity. Stop loss and take profit should also be placed beyond the opposite level of the pattern.

4. The Rectangle Patterns

Another tren continuation pattern comes in the shape of a rectangle. The pattern basically shows a pause in the price trend with price action moving sideways. So, the consolidation zones are formed within horizontal support and resistance levels. The rectangle can be spotted either in a bullish or a bearish trend. As for the stop loss, it's recommended to put it beyond the opposite extreme of the pattern.

Illustration of rectangle continuation pattern

How to Trade Continuation Patterns in 5 Easy Steps

  1. First off, learn the pattern formation rules and look for many variations and examples of each type.
  2. The next thing to do is to find out the initial trend direction, whether it's going upward or downward before it forms a pattern.
  3. Then, identify the continuation pattern and look for the breakout point.
  4. In a continuation pattern, you would want to open a position if the breakout occurs in the same direction as the previous trend. So after finding the breakout point, it is time to enter your positions based on the previous sections' rules.
  5. Afterward, make sure to manage the risks by placing a stop loss just outside the pattern on the opposite side of the breakout.

When it comes to continuation patterns, the most significant drawback is false breakouts. It can occur when the price suddenly moves outside of the pattern but then suddenly moves right back inside it or out on the other side. Such conditions can be fatal to your prediction and can possibly make you lose money. That is why it is crucial to always pay attention to risk management by placing stop losses to your trade.

Conclusion

Understanding continuation patterns is necessary to determine the entry and exit points of your trade. It is quite a logical way of telling what's happening in the market and predicting the next price direction. It is worth mentioning that just like in any other trading strategy, it's not always 100% accurate.

So, make sure to try spotting trend continuation patterns and practice trading with them in the demo account first. Don't violate the risk management system that you build and don't easily get tempted when the price shows significant changes as it could be false signals. It would also be helpful if you use and combine other trading instruments to make a stronger and more effective strategy.