Continuation candlestick patterns are important elements in price action strategies and for making accurate predictions about the movement of the market.
Without knowledge of continuation patterns or chart patterns in general, the information on a chart could appear as random information to a trader. This is often the case for beginners who are not used to spotting continuation patterns in price movements and don't understand their significance.
Here's what makes continuation patterns important in trading and how you can use them to your advantage.
Major Continuation Candlestick Patterns
To know how to use continuation candlestick patterns, it is important to know the types to look out for. These are some of the major candlestick patterns traders work with:
1. Triangle Continuation pattern
This is a popular pattern that commonly appears on charts. The pattern is made up of higher lows and lower highs until it converges to form the pattern. The triangle pattern comes in three forms:
- Ascending triangle: This signals the continuation of an uptrend. For this pattern, the upper resistance line remains relatively flat as the lower support line rises until the two trend lines converge.
- Descending Triangle: This occurs in a downtrend and indicates that the prevailing trend will continue. Here, the support line remains relatively stable as the resistance line slopes downward as the two converge.
- Symmetrical triangle: Unlike the ascending and descending triangles, the symmetrical triangle is hard to predict as the breakout could happen in any direction.
It takes at least two swing highs and lows to create the triangle pattern. When a third or fourth swing high or swing low appears, a breakout is likely to occur. The triangle pattern is favored by traders because it works well with volatile forex pairs and is relatively easy to identify.
The pennant pattern takes a similar form to the triangle except that it is smaller. Pennant patterns tend to appear when the consolidation price range gets smaller. There are two types of pennant patterns:
- Bullish Pennant Pattern: The bullish pennant occurs in an uptrend. It consists of an upward flagpole, the consolidation period, and finally, a breakout as the price continues the uptrend. An accurate bullish pennant will have a correction of around 38.2%. The shorter the correction, the stronger the breakout and potential uptrend will be.
- Bearish Pennant Pattern: The bearish pennant pattern appears in a downtrend and indicates the continuation of such a trend. Like the bullish pattern, it consists of a flagpole (a bearish one in this case), a consolidation period, and an eventual breakout.
This pattern provides a sell signal and shows traders the best points to enter a sell position. In general, the pennant pattern is not complete until the breakout occurs because there is always the possibility of a reversal. But the pattern tends to be reliable, and it is easy to identify therefore we recommend that you learn the bear pennant pattern to implement in your trading strategy. It can also appear in different time frames and can be used for a price action strategy.
3. Flag Continuation Pattern
The flag continuation pattern is one of the easiest to identify. They generally last for a short time and do not contain any major price swings. There are two types:
- Bullish flag pattern: This appears in an uptrend and uses two parallel trend lines as opposed to the triangle or pennant. The consolidation phase of the bullish flag pattern should be 38.2% to 50% Fibonacci retracement of the flagpole. If it doesn't remain within this range, then it may not be a strong flag pattern.
- Bearish flag pattern: The bearish flag occurs after a strong downtrend and also consists of two parallel trend lines. Like the bullish pattern, the consolidation phase should be a 38.2% to 50% Fibonacci retracement of the flagpole. A shorter rebound results in a stronger breakout and potential downtrend.
The process for trading the flag pattern is the same as other continuation patterns. The pattern is only validated when the breakout happens, and when used as an advanced forex trading strategy, most traders wait until the price action retraces back to the broken channel before entering the market. This offers a better risk-to-reward ratio and strengthens the possibility of the trend continuing.
Using Continuation Candlestick Patterns
Continuation patterns occur as price action consolidates in an area before moving in its original direction. Unlike a typical chart pattern that is formed across 10 or more candlesticks, the continuation pattern forms across one to five candles.
Candlestick continuation patterns typically appear in a short-term trend and are characterized by sideways movements after a strong upward or downward trend.
These patterns are beneficial to traders because they provide logic or clarity to price movement and are one of the best forms of forex analysis. Including these patterns in your strategy can present you with more opportunities than if you decide to trade without them.
Plus, continuation patterns can be divided into bullish and bearish formations. The bullish continuation pattern appears when the price consolidates after a strong uptrend. The continuation is completed when the price action of an asset moves out of the consolidation area with a strong breakout.
On the other hand, the bearish continuation pattern occurs in a downtrend. After moving within the consolidation area, the price breaks out through the support zone and continues downward.
However, traders are aware that continuation patterns are not always reliable. It could turn out to be a reversal pattern and move in the opposite direction. It is also possible for the price to breakout slightly from the consolidation area, and this can happen several times.
Features of Continuation Candlestick Patterns
It is easy to mistake continuation patterns for false breakouts and reversals. To minimize the chances of getting it wrong, it is advisable to look out for the following:
- A strong trend: A strong upward and downward trend should be identified for a continuation pattern to be properly activated.
- Temporary consolidation: Price action pauses as the price consolidates. This pause could take the shape of a triangle, pennant, flag, rectangle, and more.
- Strong breakout: If there isn't a strong breakout in the direction of the existing trend, the continuation pattern is not properly activated and might reverse. It is important to set stop-loss orders close to the breakout point in case of a reversal.
Weak Continuation Candlestick Patterns
To know if a continuation pattern is weak, look out for these signs:
- Trending waves: if the pattern is as big as the waves of the preceding trend, it is a possible sign of reversal. It shows a gradual increase in volatility and a lack of conviction that could affect the trending direction.
- Strength of the retracement: a retracement move appears at the weaker end of a trend and moves against its direction. A retracement move in an uptrend will have more bearish candlesticks than bullish ones, and the same applies in a downtrend.
In the case of an uptrend, where the bearish candlesticks appear to be larger, it shows that sellers are gradually taking control of the market and buyers cannot absorb the pressure, and there may be a reversal instead of a continuation. However, this is not guaranteed to happen because the market tends to be unpredictable.
- A break at the support and resistance levels: The consolidation area happens within a major support and resistance level. Where a certain level is tested multiple times, it could result in a breakout.
For instance, where the support level is tested multiple times after a strong uptrend, there is a higher chance of a reversal occurring rather than a continuation. In the case of a downtrend, there is a possible reversal when the resistance level is tested multiple times.
Stop loss orders, take profit targets, and other order types in forex trading can be utilized for risk management. Continuation candlestick patterns are only relevant if they appear after the trend has started. It could be a reversal pattern if it appears closer to the end.
Traders are always looking for an edge to come out on top, and one way to do that is by utilizing continuation candlestick patterns.
They help to plan out potential entry, take profit, and exit points making it possible to take advantage of breakouts. However, it is important to confirm continuation patterns with other technical indicators to determine the strength of the breakout and the continuation of the trend.