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Recently, another in the series of the Bybit Engage discussions took place in our Telegram group, and our Bybit Ambassador from Spain, Chingad0r, shared his thoughts on continuation patterns.
What Is a Continuation Pattern?
A continuation pattern is an indication that the price of a stock or asset will continue its previous trend after breaking out of the continuation chart pattern in question. They are like a ‘pit stop’ in the middle of a price trend — taking a breather if you will! Let’s take a look at some of the most common continuation chart patterns.
Flag
A flag is a short-term continuation pattern indicating the mid-point of a longer trend. It is similar to a pennant chart pattern (see next pattern) with a relatively shorter consolidation. It appears after a fast, sharp, and vertical movement, which is known as the ‘’flagpole’’.
Initially, the break-out occurs when there is a substantial increase in volume that acts as confirmation of the move. Later, the formation of the flag is aligned with a drop in volume until break out.
The consolidation period is where the actual flag is formed, due to profit-taking by traders that entered before the sharp movement, and traders who missed it but still think about an opportunity to enter the trade.
The flag usually resembles either a parallelogram or rectangle that tilts in the opposite direction of the flagpole.
“Time to join the party” Signal
If the price breaks towards the direction of the flagpole, and out of the parallelogram or the rectangle formed during the congestion area in the flag.
The longer the consolidation phase takes, the more chance that the momentum which pushed the initial price disappears and the flag pattern fails.
Usually, this should be along with an increase in volume, otherwise, this would a mean a higher risk of failure.
Target price
Usually, traders assign the length of the flagpole and add it to the breakout point in the direction of the flagpole as the minimum target.
Always keep in mind overall support and resistance levels on the chart to detect potential weakness and exit with partial profit.
Pennant
A pennant is also a short-term continuation pattern, and is similar to the flag but resembles a small triangle instead of a parallelogram. It appears after a fast, sharp and vertical movement.
The consolidation period is also similar to the flag, in that it is formed by profit-taking by traders that entered before the sharp movement, and traders who missed it, but still think about an opportunity to enter the trade.
Also like the flag, the break-out occurs when there is a substantial increase in volume that acts as confirmation of the move.
Later, the formation of the pennant is aligned with a drop in volume until break out.
“Time to join the party” Signal
If the price breaks out of the pennant towards the direction of the previous sharp movement.
Usually, this should be along with an increase in volume, otherwise, this would mean a higher risk of failure.
Target price
Usually, traders assign the length of the sharp movement before the pennant as the minimum target.
Always keep in mind overall support and resistance levels on the chart to detect potential weakness and exit with partial profits.
Rectangle
This is formed when the price of an asset oscillates between a support and resistance line several times, touching them, thus creating a channel. Usually, the support/resistance lines are horizontal, and also can slope upward or downward. Either horizontal or sloping lines must be parallel lines.
It is required to have at least 4 points for a rectangle (two points touching the upper resistance, two points touching the lower support).
“Time to join the party” signal
When the price goes beyond either support or resistance, trade in direction of the breakout.
Breakout is validated if volume increases on it, at least 33%-50% higher at the breakout, or it could be a false breakout.
Stop Loss should be inside the rectangle.
Target price
The height of the rectangle projected in the direction of the respective breakout is the minimum price.
The maximum price projection is the width of the rectangle from the first point to the breakout, projected from that point of breakout in its direction.
Symmetrical triangle
This appears during an uptrend or downtrend with a series of higher lows and lower highs.
Consecutive lows in the support trend line joining and consecutive highs in the resistance trend line converge in two trend lines with a certain symmetry.
The symmetrical triangle means indecision with balanced forces of supply and demand in the market.
If the price is pushed up, the market addresses it with sells, and otherwise if pushed down, the market addresses it with buys.
Usually, volumes drop while this pattern is formed. The price will break out of the triangle along with an increase in volume, towards the direction of the preceding trend.
“Time to join the party” signal
There is a clear signal if the price breaks out of the triangle towards the direction of the previous trend between 50%-75% of the triangle.
If the trend preceding the symmetrical triangle is an uptrend, the price should breakout to the top, and the other way round in case of a downtrend.
Breaking out in the opposite direction invalidates the signal. A breakout that occurs before or after the 50-75% range into the symmetrical triangle pattern will probably fail.
Target price
The projection of the widest part of the triangle, is added/subtracted to the breakout point, depending on the direction of the previous trend.
Alternative: parallel to the support is a trend line sloping down towards breakout, which is an extension towards the targeted price (the green line as demonstrated is the trend line, an uptrend, and the target price would be the length of the handle (pink line), in the direction of the green one).
Ascending Triangle
This is similar to the symmetrical triangle but the upper trend line is a horizontal resistance – usually bullish, so very reliable when the continuation pattern is about an uptrend. There are slightly more buyers than sellers.
The market becomes overbought and the prices initially drop. The buyers re-enter the market and prices return to the previous high, and selling occurs once more. Buyers then re-enter the market, but at higher prices than before. This results in a steady high but a series of higher lows.
Prices break through the resistance of high peaks formed, getting pushed higher with new buyers and increased volume.
“Time to join the party” signal
When price breaks out of the ascending triangle to the upside.
Should take place at around 66% of the triangle.
A breakout near the apex of the triangle invalidates the signal.
Target price
The projection of the widest part of the triangle added to the breakout point.
Alternative: parallel to the support is a trend line sloping down towards breakout, which is an extension towards the targeted price (see above chart for demonstration).
Descending Triangle
This pattern is similar to the symmetrical triangle but a lower trend line forms horizontal support. Usually bearish, so very reliable when continuation pattern is about a downtrend. Slightly more sellers than buyers. The market becomes oversold and prices initially climb. Sellers re-enter the market and prices return to the previous low, and selling occurs once more. Sellers re-enter the market again, but at lower prices than before. This results in a steady low but a series of lower highs.
Prices break through the support of lows formed, getting pushed lower with new sellers and increased volume.
“Time to join the party” signal
When the price breaks out of the descending triangle to the downside. Should take place at around 66% of the triangle. A breakout near the apex of the triangle invalidates the signal.
Target price
Projection of the widest part of the triangle subtracted to the breakout point.
Alternative: parallel to the support is a trend line sloping down towards breakout, which is an extension towards the targeted price (see above chart for demonstration).
Cup and Handle
Usually appears in longer timeframes (daily, weekly), and not so common short charts ( intra-day).
A bullish continuation pattern consisting of two parts: cup and handle.
A round bottom is formed after a series of subtle reductions in prices interrupting an uptrend, reaching later the previous level before the decline started.
Should form a consolidation area or relevant support area.
The decline should retrace between 1/3 of the previous advance and not more than 2/3 of the advance.
The handle is a trading range that forms a consolidation once the cup was finished.
Can be a bullish flag/pennant pattern, or also a short pullback.
The handle should be ideally about a 1/3 of the cup’s height (although if the market is volatile, this could be between 1/3 and 1/2, or in extreme cases, 2/3, which conforms with Dow Theory).
The shorter (in time and distance) the retracement in terms, the more bullish is the pattern.
The pattern is completed when price breaks resistance level formed by the peaks of cup’s borders.
“Time to join the party” signal
Long entry signal, when price breaks over resistance formed at top of the cup.
Should go along with an increase in volume, or could be a false break out.
Stop loss at lower 1/3 of the cup level, as price shouldn’t retrace more.
Target price
Projection of the cup’s depth to be added to the breakout point as a minimum price target.
Conclusion
Price charts can offer great insight but aren’t always a guarantee and on top of that, being used improperly can provide wrong signals. It is impossible to have a 100% accurate forecast. As with anything in trading, they should be used sensibly and with care.
* This content does not represent the views of Bybit. As such, it should be not be seen as trading and financial advice, it is merely an opinion. Trading is done at your own risk.
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