What are Continuation Patterns?

Continuation patterns are a type of chart pattern that forms during a temporary pause in an existing market trend before it resumes. These patterns suggest that the forex market is taking a breather and consolidating before continuing in its current direction.

Traders and analysts use continuation patterns to make informed decisions about buying or selling currency pairs. When a continuation pattern and any associated trendlines are identified, traders can use them to set stop-loss orders and profit targets.  

Read on for more information about continuation patterns, how to identify them and how to trade forex using them to help manage your risk and maximize your trading returns. 

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How Do Continuation Patterns Work?

Continuation chart patterns are often used in forex technical analysis to predict the continuation of a trend in a currency pair’s exchange rate. These classic chart patterns generally occur during a temporary pause in the forex market’s direction for a currency pair that is then followed by a continuation of the prevailing trend. 

The most common continuation patterns include flag patterns, pennant patterns, rectangles and triangle patterns. While wedges are typically considered a neutral pattern, they can be a continuation pattern if they progress against the direction of the prevailing trend. 

The key to identifying a continuation pattern is to look for a consolidation period followed by a breakout of one of the pattern’s trendlines. This move signals that the market will continue to trade in the direction of the original trend.

Continuation chart patterns can help forex traders identify the potential exchange rate direction and momentum of a currency pair by providing useful clues about future forex market movements, including when they should occur, the direction they should take and the extent to which they should travel. 

Forex traders can use these continuation patterns in conjunction with other technical indicators to identify potential entry and exit points for trades. By understanding the potential direction and momentum of a currency pair, currency traders can make more informed decisions about where to enter and exit trades and how to manage trading risk.

When analyzing and identifying continuation patterns, the trading volume, nearby support or resistance levels and pattern duration are important factors to consider. By taking these key factors into account, traders can confirm these patterns so they can identify potential trading opportunities. Each of these factors is described further below:

Trading Volume

Trading volume measures the number of trades that occur in a given time period. While this number can be somewhat challenging to assess for the decentralized forex market, some useful volume metrics to use when analyzing continuation patterns can be obtained from the currency futures market and from online forex brokers. Forex traders should pay close attention to the volume of trades that occur during each phase of a continuation pattern since they should display particular volume characteristics. For example, a flag pattern will typically show high volume during the flagpole formation, followed by reduced volume during the flag’s consolidation phase. Volume should again spike upward when the market ultimately breaks out of the pattern. 

Support and Resistance Levels

Nearby chart points are important when analyzing continuation patterns because they can provide clues about where the forex market has accumulated notable supply or demand. For example, if a continuation pattern forms near a significant resistance or support level, it may suggest that the market is taking a pause to gather enough steam to break beyond orders placed near that level so it can continue its prevailing trend once the pattern completes. Traders can use this information to identify potential entry and exit points for trades.

Pattern Duration

Continuation patterns can appear on charts of any timeframe, but their significance to a trader will depend on their size and depth. Longer-term patterns tend to be more reliable and typically result in bigger follow-on movements once a breakout occurs. The pattern’s duration also matters because it can provide clues about the strength of the trend. When the exchange rate finally does break out of the continuation pattern, this represents a substantial sentiment shift. If the pattern’s duration is longer, those trading in the direction of the trend will need to push harder to break the market out of the pattern, so a stronger move will generally occur once the breakout happens. A short-duration pattern may thus indicate a weaker trend, while a longer-duration pattern may suggest that the trend is stronger and more likely to continue. 

5 Types of Continuation Patterns

Several different types of classic continuation chart patterns exist, including triangles, flags, pennants, rectangles and some wedges, as well as various candlestick pattern forms that suggest the market’s trend will subsequently continue. Schematic diagrams of each of the classic forex chart patterns are shown in the image below. 

These chart patterns are identified based on their shape and structure and can provide currency traders with valuable information about the future direction of a currency pair’s exchange rate. More information about each type of classic continuation pattern appears below. 

Flags

A flag pattern is a type of trend continuation that begins with a sharp directional price movement in the same direction as the prevailing trend. This move is then followed by a rectangular-shaped pattern that slopes sideways or against the prevailing trend’s direction.

The flag pattern is formed by a temporary consolidation in the exchange rate before the prevailing trend continues. The flagpole of a flag pattern corresponds to the initial strong exchange rate movement, while the flag itself is the subsequent consolidation period. 

In forex trading, flag patterns can be seen in both uptrends and downtrends. When a flag pattern appears in an uptrend, it may suggest that the exchange rate of the currency pair will continue to rise. In a downtrend, a flag pattern may indicate that the currency pair will continue to decline.

Pennants

Similar to flag patterns, pennants indicate a brief pause in a trend after a sharp move before the market continues in the same direction. A pennant pattern generally shows up as a triangular consolidation pattern that evolves between converging trendlines after a sharp initial flagpole move. 

Pennants typically indicate that a sharp increase or decrease may soon occur in the exchange rate of the currency pair, with the direction of that move expected to occur in the same direction as the pennant pattern’s initial flagpole move.

Rectangles

Rectangle patterns occur when the exchange rate of a currency pair moves in a horizontal trading range bounded by horizontal upper and lower trendlines that form a rectangular pattern. In forex trading, the appearance of a rectangle pattern indicates that a period of sideways consolidation is taking place in a currency pair before its exchange rate can continue in the original direction of the prevailing market trend.

Triangles

A triangle continuation pattern occurs when the exchange rate of a currency pair moves within a pair of converging trend lines that form a triangular shape. This pattern typically indicates a temporary pause in the current trend before the currency pair’s exchange rate can gather enough momentum to continue to move in the same direction. 

The three main types of triangular patterns are ascending, descending and symmetrical triangles. 

• Ascending triangle: A triangle of this type is characterized by an upper trendline situated at a horizontal resistance level and an upward-sloping support trendline. This pattern is considered a bullish signal, so the exchange rate should continue rising once the pattern breaks out above its resistance level. 
• Descending triangle: This triangle type has a horizontal support trendline and a downward-sloping resistance trendline. Since this pattern is interpreted as a bearish signal, the exchange rate would be expected to continue falling after the pattern breaks below the support trendline. 
• Symmetrical triangle: This triangle type has a pair of converging downward and upward-sloping trendlines that slope to a similar magnitude but in opposite directions. Since a symmetrical triangle is a neutral pattern, traders should wait for the exchange rate to break out of the pattern before taking a position based on it.

Forex traders can identify triangle continuation patterns on an exchange rate chart by looking for the converging trendlines and the horizontal or sloping trendlines that provide support and resistance. Draw to connect the highs and lows within the pattern to see the limits of the converging range that generally unfolds in five moves or waves before a breakout of the triangle pattern is seen. 

Support and resistance levels can be identified by looking for levels where the exchange rate has previously bounced off multiple times. Drawing two converging trend lines through the market’s support and resistance levels allows a triangle pattern and its type to be identified so that a suitable trading plan can be formulated. 

Wedges

Wedges are generally considered a neutral pattern by technical analysts because they can be either a continuation or a reversal pattern depending on whether the wedge moves in the direction of the prevailing trend or against it. 

These become a continuation pattern when the exchange rate of a currency pair moves in a narrowing range against the direction of the prevailing trend between two converging trendlines. 

When a falling wedge occurs in an uptrend, it may suggest that the exchange rate will continue to rise if it breaks out to the upside. When seen in a downtrend, a rising wedge may indicate that the exchange rate will continue to fall if it breaks the pattern’s lower trendline.

How to Trade a Continuation Pattern

Trading a continuation pattern involves first identifying the pattern and the prevailing trend before then taking a trading position and applying prudent risk management techniques. Some basic steps you can follow when trading a continuation pattern include:

Identify the Continuation Pattern Type

You can look for patterns on a currency pair’s exchange rate chart that indicate a continuation of the current trend. Common continuation patterns include flags, pennants, triangles, rectangles and wedges that move against the prevailing trend. You should be able to identify and confirm the pattern using technical analysis tools like trendlines and transaction volume.

Determine the Direction of the Trend

You should determine the direction of the trend by looking at the recent exchange rate movements and using technical indicators like a moving average. If the continuation pattern is bullish, then you should look to take a long position on a pattern breakout, while if the pattern is bearish, you should look to take a short position when the market breaks out of the pattern.

Set Trade Entry and Exit Points

You can set your trade entry and exit points based on the classic ways to trade each continuation pattern. For continuation patterns, this generally involves waiting for a breakout and then taking a position in the direction of the breakout. Stops are generally executed if the market retraces back to cross its initial breakout point, while profits are taken at or near the pattern’s measured objective level. When setting orders, you may also want to take into account nearby support and resistance levels. The reading of key technical indicators such as moving averages, volume and momentum indicators can be used to confirm patterns and determine trade entry and exit points. 

Manage Risk

When entering and exiting positions, you should generally consider your overall trading strategy and risk management parameters. For example, you can manage your risk by using stop-loss orders to limit your losses if the trade goes against you. You should also use proper position sizing techniques to ensure that you do not risk more on a trade than you can afford to lose.

Monitor the Trade

You will then need to monitor the trade. You may also want to adjust your exit strategy as necessary, including possibly using trailing stops to protect profits that may accrue on the trade. Remember to remain aware of news or data releases that may affect the currency pair and be prepared to exit the trade if necessary should such events occur to avoid unpleasant surprises.

Continuation Pattern Trading Example: A Bullish Flag

As a more specific example of how to trade a continuation pattern, consider the way a trader might operate once they observe a bullish flag pattern forming on a currency pair’s exchange rate chart. This continuation pattern generally occurs during a brief pause in the market’s upward trend before the exchange rate continues in the same direction.

Bullish flag patterns start when the currency pair’s exchange rate experiences a sharp upward movement, which is known as the flagpole of the pattern. This move is then followed by a period of consolidation where the market takes a breather. During this phase, the exchange rate forms either a sideways rectangular or downwards-sloping shape between parallel trendlines that is called the flag of the pattern because it resembles the shape of a flag. 

Once they see this pattern form, a trader might draw trendlines to connect the highs and lows of the flag pattern to visualize its consolidation zone better and to know when a breakout has occurred. A typical technical trader interpreting this bullish pattern would view it as a sign that the uptrend is likely to continue, so they may plan on entering into a long position in the currency pair once the market regains enough upside momentum to exceed the upper trendline of the flag.

After taking a position based on the flag pattern, they might place their take profit level just below the pattern’s objective, which is computed by measuring the length of the flagpole and projecting that upwards from the pattern’s breakout point. A protective stop loss order would typically be entered under a support point situated safely below the breakout level in case the pattern fails. 

Should You Use Continuation Patterns to Trade Forex?

Continuation patterns can be a useful tool for forex traders who prefer to use technical analysis to identify potential trading opportunities, but they should generally not be used as the sole factor upon which to base your currency trading decisions. 

For example, you might want to consider using continuation patterns prudently in conjunction with other technical analysis tools like transaction volume and moving averages. You might also find it sensible to use fundamental analysis to make better-informed decisions when trading continuation patterns so that you can avoid market shocks that can cost you money.

Continuation patterns are not always reliable, so they may fail to predict the future direction of the market trend. In addition, trading based solely on continuation patterns can be risky because it is often difficult to predict the exact duration and strength of the trend. 

Remember to use proper risk and money management techniques when trading continuation patterns, such as setting stop-loss orders and appropriately sizing your positions to keep losses tolerable just in case the trend does not continue as expected. 

Also, since continuation patterns tend to be more reliable in trending markets where the market is moving in a clear direction, you might want to avoid using them in choppy or sideways markets. 

In general, continuation patterns are best used as a part of a larger trading strategy that may include other technical indicators, fundamental analysis and risk management techniques. You should also consider if using continuation patterns to trade forex fits well into your preferred trading style and level of risk tolerance.

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