scorecardresearchContinuation Pattern: What does it say about the stock's future price?

Continuation Pattern: What does it say about the stock's future price?

Updated: 11 Jul 2022, 07:57 AM IST
TL;DR.
Technical analysis chart patterns known as continuation patterns show that an item's price trend will continue after the pattern has ended. Let's discuss the types of continuation pattern in detail.
Candlestick Pattern

Candlestick Pattern

As the name implies, continuation patterns in technical analysis are chart patterns that demonstrate that the price trend of an item will continue after the pattern has ended. As a result, continuation patterns are seen as a halt in an asset's trend; a time period of consolidation before the trend resumes its trajectory. They can be bearish or bullish, with the latter indicating a continuation of an uptrend and the former indicating a continuation of a decline.

The key principle behind a continuation pattern is that there is a greater possibility of a trend continuing in the same direction than there is of it reversing. For instance, as long as there is an uptrend, or a string of higher highs and higher lows, the buyers are in charge of the price movement. The price action begins to drift sideways, or on a brief halt, after a powerful advance to one of the two sides. This phase ends when there is a proven breakout in the direction of a preceding trend.

READ MORE: New Investor? Learn what are flag chart patterns and how to trade with them

Types of Continuation Patterns

Triangles

Triangles are characterised as a price range convergence with higher lows and lower highs. A triangular formation is produced by the convergent price action. Triangles can be divided into three categories: symmetrical, ascending, and descending. There are always at least two swing highs and lows in the triangle continuation pattern, regardless of their duration.

Pennants

The price movement in a pennant continuation pattern moves between two convergent trendlines, like a triangle. They can either be bullish or bearish. Pennants often develop over a shorter period of time than triangles, which is a significant distinction between the two shapes. As a general rule, a pennant continuation pattern is regarded as a triangle if it has more than 20 bars or candlesticks.

READ MORE: Five bullish candle patterns you should know

Flags

As the name implies, these patterns are in the shape of a flag, with the trend acting as the flagpole and a continuation pattern in the shape of a rectangle moving against the preceding trend to indicate the consolidation phase that follows. They may be either bullish or bearish and are frequently observed in powerful uptrends and downtrends. When their waves (in the rectangular region) are compact, bounce up and down at equal heights, and bounce up to the height where the original trend ended, they act as an indication of a strong breakout.

Rectangles

The continuation pattern for a rectangle continuation pattern , as its name implies, is rectangular in form, with the value oscillating between two parallel trendlines. These continuation patterns do resemble flags when they follow an upward or downward trend, but they differ from flags in terms of the size or breadth of their pattern. Compared to a flag pattern, rectangle continuation patterns often span a considerably wider time frame due to which they are especially beneficial for long-term traders, like cryptocurrency traders.

Continuation patterns can help traders identify strong breakout trends before they occur, increasing their chances of earning high returns and lowering their risk. However, it's important to understand that continuation patterns are not always trustworthy; trend reversals and false breakouts might happen. Stop losses should thus be taken into account when trading using continuation patterns.

 

First Published: 11 Jul 2022, 07:57 AM IST