Continuation patterns are chart formations that signal a pause in the current trend before the price continues moving in the same direction. These patterns help traders find optimal entry points to join an existing trend. In this comprehensive guide, we will cover the most important continuation patterns and how to trade them effectively.
What Are Continuation Patterns?
Continuation patterns form during a pause or consolidation within a larger trend. They represent a temporary rest before the trend resumes. Unlike reversal patterns that signal a change in direction, continuation patterns suggest the prior trend will continue.
Key concept: Continuation patterns form when traders take profits after a strong move, creating a period of consolidation. Once this consolidation ends, the original trend typically resumes with renewed momentum.
Types of Continuation Patterns
1. Flag Patterns
Flag patterns are short-term consolidation patterns that form after a sharp price move. They look like a small rectangle that slopes against the prior trend.
Bull Flag Characteristics
- Forms after a strong upward move (the "flagpole")
- Consolidation slopes downward against the trend
- Parallel trendlines form the flag
- Breakout occurs upward in the direction of the trend
- Volume decreases during flag formation
Bear Flag Characteristics
- Forms after a strong downward move
- Consolidation slopes upward against the trend
- Parallel trendlines form the flag
- Breakdown occurs downward continuing the trend
- Volume decreases during flag formation
2. Pennant Patterns
Pennants are similar to flags but have converging trendlines instead of parallel ones. They look like small symmetrical triangles forming after a strong move.
- Bull pennant: Forms after a strong upward move, breaks out to the upside
- Bear pennant: Forms after a strong downward move, breaks down
- Duration: Typically shorter than flags (1-3 weeks)
3. Wedge Patterns
Wedges are continuation patterns with converging trendlines that both slope in the same direction. They differ from triangles because both lines angle the same way.
Rising Wedge (Bearish)
Both trendlines slope upward, but the lower line rises faster. This pattern typically breaks downward, making it bearish even though it slopes up.
Falling Wedge (Bullish)
Both trendlines slope downward, but the upper line falls faster. This pattern typically breaks upward, making it bullish even though it slopes down.
4. Rectangle Patterns
Rectangles are consolidation patterns where price bounces between horizontal support and resistance levels. The breakout direction determines whether it is a continuation or reversal.
- Price oscillates between clear support and resistance
- Multiple touches on both levels validate the pattern
- Breakout usually continues the prior trend direction
How to Trade Continuation Patterns
Step 1: Identify the Prior Trend
Continuation patterns only work in the context of a trend. First, identify whether the market is in an uptrend or downtrend before looking for these patterns.
Step 2: Spot the Pattern Formation
Look for the consolidation phase with the appropriate structure:
- Flags: Parallel trendlines sloping against the trend
- Pennants: Converging trendlines forming a small triangle
- Wedges: Converging trendlines both sloping in the same direction
- Rectangles: Horizontal support and resistance
Step 3: Wait for the Breakout
Never enter before the breakout is confirmed. Wait for:
- A candle to close beyond the pattern boundary
- Volume to increase on the breakout
- Follow-through in the breakout direction
Step 4: Enter and Set Stops
- Entry: On the breakout or on a pullback to the broken trendline
- Stop loss: On the opposite side of the pattern
- Target: Measure the flagpole or pattern height and project it from the breakout
Price Target Calculation
Flag and Pennant Targets
The target is calculated by measuring the flagpole (the initial move before the pattern) and adding it to the breakout point.
Bull Flag Target Example
- Stock rallies from $50 to $60 (flagpole = $10)
- Flag forms between $58 and $56
- Breakout occurs at $58
- Target: $58 + $10 = $68
Wedge and Rectangle Targets
Measure the height of the pattern at its widest point and project that distance from the breakout.
Volume Analysis
Volume provides important confirmation for continuation patterns:
- During pattern formation: Volume should contract/decrease
- On breakout: Volume should expand significantly
- After breakout: Healthy volume supports the continuation
Pro tip: A breakout without volume confirmation has a higher chance of failing. Always check volume before entering a trade.
Common Mistakes to Avoid
- Trading against the trend: Continuation patterns work best in the trend direction
- Entering too early: Wait for the breakout to be confirmed
- Ignoring volume: Volume should confirm the breakout
- Setting incorrect targets: Use the measured move technique
- Forcing patterns: Not every consolidation is a valid pattern
Continuation vs Reversal Patterns
Understanding the difference is crucial:
- Continuation patterns: Form within trends, suggest trend will continue
- Reversal patterns: Form at trend extremes, suggest trend will change
- Context matters: The same pattern can be continuation or reversal depending on where it forms
Track Your Pattern Trades
Pro Trader Dashboard helps you log and analyze all your chart pattern trades. See which patterns work best for your trading style and improve your performance.
Summary
Continuation patterns are powerful tools for trading with the trend. Flags, pennants, wedges, and rectangles all represent temporary pauses before the trend continues. The key is to identify the prior trend, wait for the pattern to form, confirm the breakout with volume, and use the measured move technique for targets. With practice, these patterns can significantly improve your trend-following trades.
Want to learn more about specific patterns? Check out our guides on rectangle patterns and symmetrical triangles.