Trend Continuation Patterns: Flags, Pennants, and Wedges Explained

Continuation patterns are powerful chart formations that signal a pause in the existing trend before it resumes. These patterns represent consolidation periods where the market catches its breath before moving further in the original direction. Understanding these patterns gives you excellent opportunities to enter trends with defined risk and strong reward potential.

What Are Continuation Patterns?

Continuation patterns form when price temporarily consolidates after a strong move. They represent a battle between buyers who want higher prices and sellers looking to take profits. When the pattern resolves, price typically continues in the direction of the prior trend with renewed momentum.

Bull Flag Pattern

The bull flag is one of the most popular continuation patterns. It forms during an uptrend when price pauses and drifts lower in a contained channel before breaking out higher to continue the trend.

Bear Flag Pattern

The bear flag is the inverse of the bull flag. It forms during a downtrend when price pauses and drifts higher before breaking down to continue the bearish move.

Pennant Pattern

Pennants are similar to flags but have converging trendlines rather than parallel ones. They form a small symmetrical triangle after a sharp move, showing brief indecision before the trend resumes.

Wedge Patterns

Wedges are similar to pennants but with both trendlines sloping in the same direction. There are rising wedges and falling wedges, and they can be either continuation or reversal patterns depending on the context.

Rising Wedge

A rising wedge has both trendlines sloping upward, but the lower line rises more steeply than the upper line. In a downtrend, a rising wedge is a continuation pattern that typically breaks to the downside.

Falling Wedge

A falling wedge has both trendlines sloping downward, but the upper line falls more steeply than the lower line. In an uptrend, a falling wedge is a continuation pattern that typically breaks to the upside.

Rectangle Pattern

Rectangles form when price consolidates between horizontal support and resistance levels. They represent a period where supply and demand are in balance before one side wins and price breaks out.

• Bullish rectangle: In an uptrend, expect an upside breakout
• Bearish rectangle: In a downtrend, expect a downside breakdown
• Entry: Trade the breakout in the direction of the prior trend
• Target: Height of the rectangle projected from the breakout point

Cup and Handle Pattern

The cup and handle is a bullish continuation pattern that resembles a tea cup when viewed on a chart. The cup is a rounded bottom, and the handle is a smaller consolidation before the upward breakout.

Key Rules for Trading Continuation Patterns

• Context matters: Continuation patterns work best when they form within established trends
• Wait for the breakout: Do not anticipate the pattern completion, wait for confirmation
• Volume is crucial: Volume should contract during consolidation and expand on breakout
• Time matters: Patterns that form too quickly or take too long may be less reliable
• Measure your targets: Use the flagpole or pattern height for profit targets
• Respect your stops: If the pattern fails, accept the loss and move on

Common Mistakes to Avoid

• Trading against the trend: Continuation patterns should be traded in the direction of the prior move
• Entering too early: Wait for the pattern to complete and break out before entering
• Ignoring volume: Breakouts without volume expansion are more likely to fail
• Wide stops: Keep stops tight within the pattern to limit losses if it fails
• Forcing patterns: If the pattern does not look clean, skip it
• Not taking profits: Use measured move targets and take profits when reached

Pattern Failure and What To Do

Not all continuation patterns work out. Sometimes price breaks in the opposite direction, turning what looked like a continuation into a reversal. Here is how to handle pattern failures:

• If your stop is hit, exit immediately without hesitation
• Do not average down or move your stop further away
• A failed pattern can become a trading opportunity in the opposite direction
• Keep a journal of failed patterns to identify what went wrong

Summary

Continuation patterns like flags, pennants, and wedges offer excellent trading opportunities within established trends. These patterns represent temporary pauses that allow you to enter trends at favorable prices with defined risk. The key to success is waiting for clear pattern formation, trading in the direction of the prior trend, and using volume as confirmation. Always set stop losses within the pattern and use measured moves for profit targets.

Ready to learn more? Check out our guide on trend reversal signals or learn about trend channel trading.