What Is a Continuation Pattern?
A continuation pattern in the financial markets is an indication that the price of a stock or other asset will keep on moving in a similar course even after the continuation pattern finishes.
There are several continuation patterns that technical analysts use as signals that the price trend will proceed. Instances of continuation patterns incorporate triangles, banners, pennants, and rectangles.
Understanding the Continuation Pattern
A continuation pattern is marked as such on the grounds that there is a slight inclination for the trend to go on after the pattern finishes, expecting the right setting of price action.
However, not all continuation patterns will bring about a continuation of the trend. For instance, the price might reverse the trend subsequent to forming a triangle or pennant.
Continuation patterns will more often than not be most dependable when the trend moving into the pattern is strong, and the continuation pattern is relatively small compared to the trending waves. For instance, the price rises strongly, forms a small triangle pattern, breaks over the triangle pattern, and afterward keeps on moving higher.
Warning Signs of a Weak Pattern
On the off chance that the continuation pattern is nearly basically as big as the trending waves that went before it, it is viewed as showing increased volatility, a lack of conviction in the trending course, and bigger moves against the trend, which are all warning signs as opposed to green lights.
Something else to know about is a small trending wave that is followed by a continuation pattern. On the off chance that the price inches higher, forms a continuation pattern, then inches higher, then forms a continuation pattern, that scenario is less convincing and less solid than a strong move higher that forms a continuation pattern.
The last option shows strong buying strength. The former shows buyers are reluctant to push prices higher forcefully.
The most common continuation pattern trading technique is to trust that the pattern will form, draw trendlines around the pattern, and afterward enter a trade when the price breaks out of the pattern toward the overall trend.
Types of Continuation Patterns
Some common continuation patterns incorporate triangles, pennants, banners, and rectangles. Below are portrayals of these continuation patterns.
A triangle happens when the price action in a stock or other security turns out to be increasingly compacted. There are three types of triangles: ascending, descending, and symmetrical.
An ascending triangle is formed by rising swing lows making an ascending line when they are associated. The swing highs all arrive at a comparative level, making a horizontal trendline when they are associated.
In a descending triangle, the swing highs are declining, forming a descending slanting trendline when they are associated. The swing lows arrive at comparative levels, forming a horizontal trendline when associated.
A symmetrical triangle has descending swing highs and ascending swing lows. This makes descending and rising trendlines which combine toward one another.
It takes something like two swing highs and two swing lows to make the trendlines important to draw a triangle. A third, and some of the time even a fourth, swing high as well as swing low is common before a breakout happens.
Pennants are a form of a triangle, yet a lot smaller. While triangles have swing highs and lows as the price sways to and fro, a pennant will frequently show up as a small price range or consolidation that gets even smaller after some time.
Pennants are gone before by sharp price increases or diminishes and show the market is sitting down before breaking out once more.
Flags are like pennants. They form a narrow trading range after a strong price increase or reduction. T
The difference is that banners move between parallel lines, either ascending, descending, or sideways, while a pennant takes on a triangle shape.
Rectangles are a common continuation pattern that show a respite in the price trend with price action moving sideways. The price action is bound between horizontal support and resistance levels.
Trading a Continuation Pattern
There are several steps engaged with trading a continuation pattern.
The initial step is to distinguish the prior trend bearing. For instance, was the price expanding or decreasing before it formed a triangle pattern?
The next steps are to recognize the continuation pattern and find the breakout point. A few traders will possibly steer trades on the off chance that the breakout happens in a similar bearing as the overarching trend.
For instance, in the event that the predominant trend is up, they will buy assuming the price breaks out of the pattern to the upside. Different traders will steer a trade in the breakout course even on the off chance that it conflicts with the overarching trend. These are lower chances trades, however pay off assuming the trend is turning around heading.
When a breakout happens, a trade is steered in the breakout course. For instance, in the event that the price breaks over a pennant, a stop loss is set just below the pennant low. A stop-loss order is put just outside the pattern on the contrary side from the breakout.
Setting a Price Target
A profit target can be laid out in view of the level of the continuation pattern. For instance, on the off chance that a rectangle is $2 in level (resistance price minus support price), and the price breaks to the downside, the estimated price target is the support price minus $2. Assuming that the price breaks higher, add $2 to the resistance price.
A similar concept applies to triangles. Add the level of the triangle from the breakout point assuming the price breaks higher. Subtract the level of the triangle from the breakout point assuming that the price breaks lower.
For pennants and banners, measure the price wave leading into the pattern. Assuming the price breaks higher, add that measurement to the lower part of the banner/pennant to get an upside profit target. Assuming the price breaks lower, subtract the measurement from the highest point of the banner/pennant.
The major drawback to trading continuation patterns and chart patterns, by and large, is the risk of a false breakout. A false breakout happens when the price moves outside of the pattern however at that point moves right back inside it or out the opposite side. For this reason stop losses are utilized to control risk.
While trading a continuation, consider the strength of the price move prior to the pattern forming. Strong moves will generally be more solid.
The continuation pattern ought to likewise be a relatively small part of the prior trending wave. The bigger the pattern relative to the wave that went before it, the less solid it is. It might in any case act as a continuation pattern, however the increased volatility and increased movement the other way of the trend is a warning sign.
Numerous traders search for expanding volume when the price breaks out of a continuation pattern. In the event that there is little volume on a breakout, there is a greater probability that it will fail.
Illustration of a Continuation Pattern in the Stock Market
The chart of Amazon Inc. (AMZN) shows three pennant/banner patterns. The first is a pennant, and the next two are banners.
The initial two patterns show the measurement technique for thinking of an estimated profit target. The profit target is just an estimate. It doesn't mean the price will arrive at that level, or that it will slow down at that level and not continue further.
The third model shows the breakout point, which in this situation signals to buy. The buy signal bearing likewise lines up with the recent uptrend.
A stop loss is set below the low of the pattern since the breakout was on the upside.
The level of the wave into the pattern is measured and afterward added to the lower part of the pattern to give a profit target. This is an estimated profit target, and can be helpful for measuring the potential risk/reward of a trade.
Traders may likewise wish to utilize a trailing stop when a breakout happens.
- A continuation pattern shows a slight propensity at a cost trend to go on in a similar heading after a continuation pattern works out.
- Continuation patterns are typically taken advantage of by steering a trade in the breakout heading, which ought to likewise be the trend course.
- Not all continuation patterns will bring about a continuation of the trend. Many will bring about inversions. Traders trust that the breakout will see which it will be.