A Guide to Continuation Patterns

Continuation candlestick patterns, which form the basis of one of the most popular strategies used by traders on a daily basis, signal that the prevailing trend is likely to continue after a temporary pause is finished and the breakout is confirmed. Continuation formations are the opposite of reversal patterns. 

In this blog post, we will look at five main continuation candlestick patterns - triangles, flags, pennants, rectangles, and the cup and handle. Our goal is to look at the structure of these patterns, how they work, what the message that they are sending is, and share a simple but effective trading strategy based on the continuation patterns.

The Features of Continuation Patterns

The underlying idea behind the continuation pattern is that the likelihood of the trend continuing in the same direction is higher than the chance of a reversal taking place. For instance, the buyers are in control of the price action as long as the uptrend is taking place i.e. there is a series of the higher highs and higher lows. 

Hence, the side that has been in control so far has a higher chance of winning the upcoming matches than the side that has been on the losing side. After a strong move to one of the two sides, the price action starts to move sideways i.e. on a temporary pause. This period is ended once there is a confirmed breakout in the direction of a previous trend. 

We divide continuation patterns in bullish and bearish continuation formations. The bullish continuation pattern occurs when the price action consolidates within a specific pattern after a strong uptrend. The continuation of a trend is secured once the price action breaks out of the consolidation phase in an explosive breakout in the same direction as the prevailing trend. 

The bearish continuation pattern works in the same fashion, with the difference being in the price action trading in a downtrend. The consolidation phase usually appears midway through the downtrend, after the sellers take a breather before continuing in the same direction.

The temporary pause - which can appear in the form of a triangle, rectangle, flag, a cup and handle, or a pennant - helps us to determine the activation of a specific pattern, and therefore identify the entry, stop loss and take profit.

If, on the other hand, the breakout takes place, but the price action reverses afterwards and returns to the inside of the rectangle, pennant, flag, or a triangle, we have registered a failure to continue in the same direction, the so-called “failed breakout”.

For this reason, it is important to follow the following list of steps to minimize the chance of getting on the wrong side of a trade. 

• Strong trend - In order for a continuation pattern to be activated there should be a strong trend identified in the first place. 

• Temporary pause - As outlined above, this pause can take form in many different ways, but the most popular are flags, pennants, rectangles, and triangles. 

• Breakout - Arguably the most important feature of a pattern. Without a strong breakout in the same direction as a prevailing trend, the continuation pattern is not activated. It also helps us determine the entry, take profit and stop loss. 

The Benefits of Continuation Patterns

The continuation patterns help us format our trade. You may be sure that the price action will continue in the same direction after the temporary pause, however, the continuation pattern helps us identify the exact entry, take profit, and stop loss. The stronger the trend before the pause was, the stronger the breakout should be.

It's also important to note that not all continuation patterns will result in the extension of the same trend. Nothing is fully certain in trading and you will witness many patterns that look like continuation, but end up as reversal formations. If the trend reverses and breaks out of the consolidation phase without a breakout in the same direction as the overall trend, our pattern was in a draft mode and it never got activated.

Hence, the failure to move in the same direction is also the biggest limitation of these types of patterns. For this reason, it's important to consult other technical indicators to make sure that multiple sources are indicating that the trend is very likely to continue soon. 

Types of Continuation Patterns

As outlined earlier, we divide continuation patterns into bullish and bearish formations. Many different types of chart patterns are considered to have a role in facilitating a continuation of the same trend, but these five patterns are widely accepted as the most effective continuation chart patterns.

Triangles

There are three types of the triangle pattern - ascending, descending, and symmetrical. The ascending triangle is a bullish formation that occurs in a mid-trend and signals an impending continuation of the existing trend. It consists of two converging trend lines, where the upper (resistance) trend line is flat, or nearly flat, while the lower trend line (support) is ascending. It signals that the price action is consolidating with the higher lows pushing  for a breakout to the upside.

The descending triangle is a bearish formation that occurs in a mid-trend. It usually takes place in a downtrend, and it signals that the impending breakdown will continue the overall bearish trend. Unlike the ascending and descending triangles, which are continuation patterns, the outcome of the symmetrical triangle is difficult to predict, as the breakout can occur in both directions. 

Rectangles

The rectangle pattern is similar to a triangle formation as the price action occurs in between two trend lines. However, unlike the triangle, these two trend lines are not converging, but rather trend in parallel. Hence, the consolidation takes place in a rectangle before the breakout takes place.

There are two types of rectangles - bullish and bearish rectangle patterns. The bullish version occurs in a mid-trend, while the price action trades within an overall uptrend. As such, the chances of a breakout are higher since the overall environment is bullish. The bearish rectangle forms within a downtrend as the sellers take a breather before pushing to break the rectangle to the downside. Both formations are classified as continuation patterns as they facilitate an extension of the prevailing trend.

Flags

This type of formation occurs after an explosive move upwards or downwards. The price action moves in a very steep manner - the flagpole - before the consolidation phase takes place. This phase occurs within two parallel lines, before the breakout in the direction of a prevailing trend.

The bullish flag occurs during an uptrend. After an initial bullish move, the price action consolidates within the two parallel lines before breaking out higher. 

The bear flag facilitates the extension of a downtrend. After a brief consolidation period in a slight uptrend, the sellers re-assume control with a breakdown of the flag.

Pennants

This continuation pattern is very similar to the flag. Both start with a strong, explosive move up or down. Unlike the flag where the price action consolidates within the two parallel lines, the pennant is a triangular pattern that helps the price action to consolidate. It looks like a triangle, although the symmetrical triangles are larger and take more time to develop.
 

The bearish pennant is a continuation pattern that helps extend the downtrend.

The bullish pennant occurs in an uptrend. After the consolidation phase, the buyers are able to push the price action higher to extend the prevailing bullish trend.

The Cup and Handle 

This type of a continuation pattern is not as common as the previous four. It is quite difficult to identify, but it is still effective and classified as a continuation pattern. It is named “a cup and handle” as it resembles a cup and handle, as the cup is in the shape of the letter U, while the handle has a slight downward drift.

The price moves in an uptrend before it starts correcting lower (in the form of the letter U). Once the handle is broken to the upside, the second leg of the bullish trend is initiated.