Check out my new website! Have most of the existing content there, in addition to weekly blogposts :)

Continuation Patterns

What is a Consolidation Pattern?

A pause in a stock's trend that provide a clue to the direction of the next market move. Consolidation patterns can be followed by either a continuation of the existing trend or a reversal of the existing trend.

Trend Continuation Patterns

Continuation patterns are consolidation patterns that suggest the next move move will be a continuation of the previous trend direction. The market should continue the same trend as that in force before the continuation pattern. It usually consist of a strong trending move followed by a brisk pullback move against the prevailing trend direction.

#1 Flag and Pennants

Resembles the rectangular shape of a drooping flag. In an uptrend, an upward thrust line would represent the flagpole, while the subsequent pullback swing will be the flag. This is known as a bull flag.

In a downtrend, a downward thrust line would represent the flagpole, while the subsequent upward pullback would be the flag. This is known as a bull flag.

Sometimes a flag is more triangle shaped, each bar shorter than and contained by the previous bar. This is called a pennant and can be traded similarly to a flag.

In a primary uptrend a flag or pennant mark a consolidation before the previous move resumes. The upper portion of the flagpole typically is characterised by higher than usual volume, while the flag/pennant pattern itself has typically occurs on relatively lower volume (see image left, top).

A breakout through the top of the flag/pennant on high volume signals a continuation of the uptrend.

(see image left, bottom)

Add (subtract) the length of the flagpole to the bottom (upper) right corner of the flag or pennant to predict how far up (down) the uptrend (downtrend) is likely to end.

How to trade a flag/pennant pattern

Entry: Even though flags suggest a continuation of the current trend, it is prudent to wait for the initial breakout to avoid a false signal. Traders typically expect to enter a flag on the day after the price has broken and closed above (long position) the upper parallel trend line. In a bearish pattern, the day after the price has closed below (short position) the lower parallel trend line.
Stop Loss: Traders typically expect to use the opposite side the flag pattern as a stop-loss point. For example, if the upper trend line of the pattern is at $55 per share, and the lower trend line of the pattern is at $51 per share, then some price level below $51 per share would be a logical place to set the stop-loss order for a long position.
Profit Target: Conservative traders may want to use the difference, measured in price, between the flag pattern’s parallel trend lines to set a profit target. For instance, if there is a $4.00 difference and the breakout entry point is $55, the trader would place a profit target at $59. A more optimistic approach would be to measure the distance in dollar terms between the pattern’s high and the base of the flagpole to set a profit target. For example, if the lowest price of the flagpole is $40, and the top of the flagpole is $65, and if the breakout entry point were $55, then the profit target a trader might expect to see achieved would be $80 ($55 plus $25).

Credit: Investopedia

#2 Triangle Patterns

Created in a consolidation period when each new bar is slightly shorter than the bar preceding it. Represents uncertainty and when a price breaks out from the pattern, it causes a strong extended move in the direction of a breakout. As triangle does not give a definitive direction of the breakout it can either lead to a) continuation of trend or b) reversal pattern if it failed.

Ascending Triangles: Relatively horizontal top while the bottom slopes upward. Signals the beginning of a strong uptrend. Lows get higher while the highs make it to about the same level each time prior to the breakout. Look for it in an uptrend.
Descending Triangles: Slopes downward to a relatively horizontal bottom. ~~Signals the reversal of an uptrend.~~ Highs get lower and lows make it to about the same level. Volume is higher at the beginning then decreases as the triangle forms, followed by a volume surge during the breakdown. Look for it in a downtrend

The longer the triangle, the greater the probability that the trend will reverse rather than continue. (Triangle continuation patterns are much shorter than triangle reversal patterns)

The two lines that form the triangle can be used as the support and resistance (for lower and upper bound respectively)

you dont wanna short if market tests the resistance multiple times > many people may set their stop loss there and this might lead to a breakout

https://www.youtube.com/watch?v=7XHDCj0yQ3c

https://www.investopedia.com/terms/d/descendingtriangle.asp

https://www.investopedia.com/terms/t/triangle.asp

Entry

Go long on the break of the highs

Or on the close of the breakout

Stop Loss

Nearest low prior to the breakout + buffer (average true range ATR, 1 ATR below)

Taking Profits

Find the length (in price) between the high and the low of the triangle and from start of breakout + length = take profit price

"Triangles are similar to wedges and pennants and can be either a continuation pattern, if validated, or a powerful reversal pattern, in the event of failure. There are three potential triangle variations that can develop as price action carves out a holding pattern, namely ascending, descending, and symmetrical triangles. Technicians see a breakout, or a failure (market breaks and closes below the trend line), of a triangular pattern, especially on heavy volume, as being potent bullish/bearish signals of a resumption, or reversal, of the prior trend. "

#3 Cup with Handle Pattern

This patterns often signals the start or continuation of a strong uptrend. The inverse can occur at the top as well.

How it forms:

Previous price advance stalls and sells off, and after the price will basically trade flat for an extended period of time with no clear trend
Right side of the cup: there should be a gradual bowl-shaped upward move back toward the peak of the previous selloff. Afterwards there should be a short, brisk pullback move representing the handle. The handle represents the final consolidation/pullback that often leads to a big breakout on the upside.
Handle should retrace no more than one third of the height of the right side of the cup. The smaller the retracement, the more bullish the formation and the more significant the breakout.

Other things to note:

Longer to evolve and complete than triangle patterns
On daily stock chart, it can extend from 1-6months
Substantial volume on the breakout above the top of the handle is necessary
Development of the cup should be gradual. If the shape of the cup is too sharp or too quick, it is not a good consolidation within the long-term uptrend.

Characteristics that determine a Cup-with-handle pattern

The stock price rise leading up to the left cup lip is at least 30%
The cup duration is between 7 and 65 weeks. Skilled traders prefer to see a cup with at least 5 months in length with 6 months being ideal
The cup depth ranges from 15% - 35% of the price at the lip
The handle duration is between 1-2 weeks, minimally one week
Handle carries a downward volume trend
Handle forms in the upper half of the cup on the right side
The buy signal on the cup-with-handle pattern comes when the prices closes above the right cup rim on significant volume breakout
Handles shorter than 23 days show better performance after the breakout than those that are longer
The volume should also be a U-shaped pattern

Japanese Continuation Patterns

Windows are the most important gapping pattern. The rest are less essential patterns.

#4 Windows

Also known as gaps in Western TA
Continuation signals
Windows can be used as support and resistance areas
Two types of windows, bullish (rising window) and bearish (falling window)
Only if there is space between the shadows can it be considered a window (overlap of shadows is not a window)
If one window is broken, the next window (below/above depending) can be used as the next support/resistance area
Japanese TA: After 3 up or down windows, the market is likely to be too overbought/oversold.
No matter how many windows there are, the trend is still intact until the most recent window is closed

4a Rising Window

Bullish Signal
Price gap between the prior's session high and the current session's low
Look to buy on dips (when prices fill the gaps)
Support zone for pullbacks
For large windows, key support area is bottom of the window

4b Falling Window

Bearish Signal
Price gap between prior session's low and the current session's high
Sell on bounces (when prices fill the gaps)
Resistance zone for pullbacks
For large windows, key resistance area is top of the window

#5 Tasuki

Combination of two candle lines that gap higher or lower
Two candles in the tasuki should be about the same size
Both types are rare, the window is the important part

5a Upward Gapping Tasuki

A rising window followed by a white candle and then a black candle
Black candle opens within the real white body and closes under the white candle's real body
If the market closes under the bottom of the window, the bullish outlook of the upward gap tasuki is voided

5b Downward Gapping Tasuki

A falling window followed by a black candle and then a white candle
White candle opens within the black real body and closes above the black candle's real body
If the market closes above the top of the window, the bearish outlook of the downward gap tasuki is voided

#6 High-Price and Low-Price Gapping Plays

After a sharp advance, for the market to consolidate their gains

6a High-Price Gapping Play

Group of small real bodies after a strong white candle
Follows up with a confirmation by a rising window
Voided if the market closes under the rising window that completes the gapping play

6b Low-Price Gapping Play

Group of small real bodies after a strong black candle
Follows up with a break to the downside via a falling window
Voided if the market closes above the falling window that completes the gapping play

#7 Gapping Side-by-Side White Lines

A rising/falling window followed by two white candles.

Upgap side-by-side white lines

An upward-gapping white candle followed the next session by another similar sized white candle with about the same opening. It is a bullish continuation pattern.

Downgap side-by-side white lines

A downward-gapping white candle (shown by a falling window) followed by another similar sized white candle with about the same opening. It is viewed as a short covering which ends with the prices lowering further.

Risk/Reward Profile

Risk: Low of the white candle for rising three methods

High of the black candle for falling three methods (shorting)

#8 Rising and Falling Three Methods

A continuation pattern where the trend before the method should continue once the method is completed. Resembles the Western Bear/Bull Flag or the pennant formation.

Small real bodies can be any color, but ideally the opposite color of the first long real body
Ideally three small bodies, but between 2 and up to 5 small real bodies is fine
First and last candles have the strongest volume of all the sessions that make up the pattern
Can be used to reinforce support/resistance levels

8a Rising Three Methods

A long white candle
Followed by a group of falling small real body candles. Ideally three but can be 2 > if they hold within the long white candle's high-low range (includes holding within the shadow). Black color is most ideal for the small candles
Strong white real body with a close above the first day's close. Ideally it should open above the close of the previous session.

8b Falling Three Methods

A long black candle
Followed by about three small rising candles whose real bodies hold within the first candle's range (including shadows)
Strong black candle which opens under the prior close and then close under the first black candle's close

[Market should be a downtrend]

Separating Lines

Same open as the previous opposite color pattern
A rare pattern

The opening gapping significantly higher/lower to open at the previous session's opening price proves that the bears/bulls have lose control of the market.

Bullish Separating Line

Black candle followed by white candle with the same open
Normally appears during a rally

Bearish Separating Line

White candle followed by black candle with the same open.

Other Things to note about Windows

Usually between the window and another pattern, the window tends to take precedence
The rising/falling window are the most important parts, the other candles afterwards not so much

Last Updated: 12 December 2021

Page updated

Google Sites

Report abuse