Forex trading has much to do with trends. To ride them, traders look for trend continuation patterns. To fade them, they ignore continuation patterns and focus on reversal ones. There aren’t many continuation patterns technical analysis provides. But those that exist are enough for the right positioning.
Any journey into continuation patterns technical analysis offer should start from dividing the approaches. The Western and the Japanese approach.
They differ in many ways. Moreover, the last one only recently became known to the Western world.
But, in the meantime, they complete each other. As such, a perfect trader must know them both.
A retail trader’s favorite chart is the candlesticks one. Well, Japanese candlestick techniques offer some great continuation patterns.
Furthermore, the Japanese approach deals with trend continuation patterns in different ways than the Western one. Not that the Western approach is wrong.
On the contrary. Classic continuation patterns form the Western technical analysis approach.
Even trading theories consider continuation patterns. The Elliott Waves Theory deals with various triangular formations that signal a trend’s continuation.
In this article, we’ll cover:
- Trend continuation patterns generalities
- Bullish and bearish flags
- Main Japanese continuation patterns
- Wedges as continuation patterns
- The ascending and descending triangle pattern
- Triangles as the most significant Elliott Waves pattern
The aim is to cover both the theoretical part and the practical one. We’ll present plenty of examples of continuation patterns technical analysis offers with transparent trading setups.
After this article, only open a time frame. Anyone you like.
Next, pick a trend. It doesn’t matter if it is bullish or bearish.
Finally, look for market consolidations. For these market, consolidations represent nothing but trend continuation patterns.
Continuation Patterns Generalities
This is as straight as it gets. A continuation pattern shows the trend will move in the same direction.
Or, it’ll resume by the time the consolidation ends. For when the market moves or a trend starts, it won’t go in a straight line.
It takes time to breathe. This may be because of several reasons.
For instance, lack of liquidity. And, few market participants.
This goes for the Forex market well. The Asian session is a session where the prices barely move.
As such, continuation chart patterns form most of the times. It doesn’t mean always, but more than often, the market will consolidate.
Statistically, well over sixty percent of the time, the market consolidates. Therefore, trend continuation patterns appear.
Another explanation comes from the Elliott Waves Theory. Even in an impulsive wave, Elliott said, there are two corrections.
However, no matter the impulsive wave’s direction, the corrections end up being continuation patterns technical analysis gives.
In plain English, the Forex market forms continuation patterns before resuming a trend. Hence, trending conditions must exist first.
It builds energy before the next step. And when it breaks, the trend resumed.
Both technical analysis approaches (the Western and the Japanese one) have something to offer to the technical trader. That is:
- Clear entries
- Stop loss
- Measured move (take profit).
As such, a Forex retail trader can go by, only trading trend continuation patterns. Think of it for a minute.
To make a profit in this business, you won’t need to know all trading theories. Or, concepts. And all indicators.
One approach will do the trick. However, master it and integrate it with a money management system. That is if you strive for the best results.
Classic Trend Continuation Patterns – The Western Approach
The oldest technical analysis patterns come from the West. Even if time passed, and the way we look at markets changed, they still work.
We can say, they stood the test of time. And, for a good reason.
There are so many currency pairs and time frames; you’ll end up having plenty of trade setups. Why not making trading easy as easy can be?
For a trend continuation pattern to exist, the price action must meet two conditions. First, a trend should be in place. And second, a consolidation to be underway.
The way the price action acts within the consolidation area, tells us the pattern’s nature. Throughout time, traders looked at all possible structures.
However, the Forex market has an ever-changing character. Therefore, the trading tools will change too.
Bullish and Bearish Flags as Trend Continuation Patterns
As the name suggests, a flag shows continuity. Bullish and bearish flags represent continuation patterns. As such, the price breaks higher or lower after the flag ends.
Despite the general belief, a flag has three, not two parts:
- The pole
- The flag
- And the measured move
Out of the three, like it or not, the third one matters the most. It is not part of the flag per se. But, if wrongly interpreted, it’ll lead to losses.
As such, traders must consider it first. Even before trading the flag.
Here’s an example. The EURUSD pair traveled the whole summer in a bullish trend. A strong one.
But, right before the recent top, it consolidated for a while. Considering the time frame and the daily chart, the consolidation took some time.
It was a consolidation. Because it formed in a bullish trend, the bias is that a continuation pattern will follow.
It turned out to be a bullish flag. Why bullish? Well, the trend is bullish.
Moreover, the expected break is bullish too. Hence, a bullish flag ends with traders buying the currency pair. Bullish continuation patterns are long setups.
What can we say about the flag above? Why the name of a flag?
First, it has a rectangular shape. Hence, the name.
Second, it slopes against the previous trend. Hence, the market consolidates. Trend continuation patterns technical analysis offers, do that.
Third, the price action appears within two lines. That’s all we need to identify the model.
Continuation Patterns Technical Analysis – How to Trade a Flag
Technical analysis books always show the pole of a flag. Moreover, they call it to be a major feature of it.
It is true. In this case, what would make the pole of it? Here it is.
But, the pole also represents the measured move. Therefore, one way to trade a bullish flag is to:
- Measure its pole
- Project it from the upper trendline’s break
- Place a stop loss at the previous lower swing
The setup looks like this.
Not bad for a trading setup, right? The risk-reward ratio looks fabulous.
The trend looks healthy. And, the market breaks higher.
What’s wrong with the picture? Nothing!
That’s how the original trading setup for such trend continuation patterns should be. Remember?
The trade must have a money management component. Namely, any trade must have a:
- Stop loss
- Take profit
- Risk-reward ratio bigger than 1:2, ideally.
But, in this case, the pair stopped rising. It did for a while and then turned. What’s missing?
Time. To be more exact, the time element.
For when a bullish flag forms, the time factor matters for the measured move. Not only that the price must reach the target. But, it should do that in a specific amount of time.
Namely, in the time it took the flag to form. What if time expires? And, the take profit didn’t come?
That’s easy. Just exit the trade.
Back to the EURUSD example. With the money management levels in place, we only wait.
We wait for time to expire. If the take profit comes in due time, that’s great.
If not, that’s great too! We close the trade, book the profits (if any), and move on.
This is how to treat continuation patterns technical analysis offers.
Other Ways to Trade a Flag
Some traders are impatient. Especially if the flag forms on a time frame like this one.
As such, they draw the two lines on the lower time frames. Depicting the flag.
Next, they buy every time the price reaches the lower half of the rectangle. Or, of the flag.
This way, they add a few tens/hundreds of pips to the potential target. However, this is a risky approach.
It is risky because the flag may take its time. In this example, it took relatively little time to consolidate.
But, not rarely, the market simply drifts on and on and on…without breaking. Patience and discipline are key here.
Classic Continuation Patterns – The Ascending Triangle Pattern
What we presented earlier was a bullish flag. However, the rules and the way to trade a bearish one, are the same.
This reciprocity applies to ascending and descending triangles. Such trend continuation patterns often form in the forex market.
An ascending triangle chart pattern builds pressure to break. What’s the direction? Higher, of course, like the name suggests.
Such continuation patterns are so obvious, they’re hard to miss. Even if they form on the daily chart, like the AUDUSD chart above.
Since 2016 started, the pair jumped higher. Then, for more than a year, it formed an ascending triangle.
It was so obvious; all traders had to do was to buy the dips. Next, to keep an eye on the b-d trend line.
Or, on the gray area that shows the triangle’s resistance. For the triangle simply shows price building energy to break higher.
And, it did. It is no wonder it retested the resistance area and bounced. This is a perfect support and resistance play for technical traders.
A descending triangle chart pattern, on the other hand, is similar. Only that it forms in a bearish trend.
Because the market consolidates most of the times, trend continuation patterns like these form often. Therefore, we better be there to trade them properly.
Other Classic Trend Continuation Patterns – The Pennant
A pennant is similar to a flag. However, there’s a catch.
Instead of a rectangular consolidation, the pennant shows a triangle. Typically, it is not an ascending triangle chart pattern. But, a symmetrical one.
What does it mean? It just means that the two trend lines converge, almost symmetrically, towards the same point.
The way to trade it is similar to a bullish flag. Just follow those rules, both regarding price and time.
In the forex market, bullish and bearish flags form more often than pennants. Both are important continuation patterns technical analysis offers.
Other Classic Continuation Patterns – Wedges
Forex traders know wedges as reversal patterns. They have all the right to believe so.
In fact, most of the times, a falling wedge breaks higher. And, a rising wedge breaks lower.
Moreover, they act as clear reversal patterns. They appear at the end of bearish, respectively bullish trend.
However, in some cases, wedges are great trend continuation patterns. In fact, one of the most intriguing continuation patterns technical analysis offers comes from a wedge.
The Elliott Waves Theory has a name for such a wedge. A running correction.
Check the chart above. A classic rising wedge forms.
Moreover, it breaks lower. Everyone goes short.
It proves to be the wrong move. As it wasn’t a reversal pattern. But, a continuation one.
Japanese Trend Continuation Patterns
The Japanese approach to technical analysis is slightly different. Mostly, it shows reversal patterns.
However, one of the most powerful technical concepts from Japan is a continuation one. And, it’s only a candle. A single candle.
Continuation Patterns Technical Analysis Offers – The Doji Candle
The name is Doji. And, it can be either a reversal or a continuation pattern. In both cases, it shows a powerful move will come.
In a way, it is a breakout candle. Think of an ascending triangle, for example.
The price pushes against resistance. And, it makes a series of higher lows. Eventually, the breakout comes. The resistance breaks.
The same with the Bollinger Bands indicator. Before a breakout, the bands contract.
A doji shows similar conditions. Before a break, the range narrows. The candle becomes smaller, and smaller until it breaks.
A doji candle is one of the most powerful continuation patterns candlesticks can offer. It is quite strange if you think of the fact that one candle has such an influence on trend continuation patterns.
The chart above shows three places where doji candles appeared. In all instances, the price broke higher.
A doji candle also shows uncertainty. It may end up being a reversal pattern.
As such, traders place a pending to buy a break. In this case, a pending buy stop order above the doji candles.
But, because a doji candle has such a small body, it doesn’t make sense to place the stop at the lows. In the Forex market, that’s similar with being stopped.
While a doji is one of the most powerful continuation patterns, the stop should be placed on the previous swing. Therefore, traders stay safe for wild swings destined to trip stops.
Windows as Continuation Patterns
A gap is a void between two candles. In the Forex market, a gap forms mostly over the weekend.
Or, when the market opens on Monday, it may gap. This is due to events over the weekend.
Not every Monday sees a gap. But, it is not seldom that critical gaps appear.
During the trading week, gaps don’t form. There’s enough liquidity to fill any order.
After all, this is the biggest financial market in the world.
As trend continuation patterns, the Japanese call gaps, windows. They show the strength of the previous trend.
The price pressure was so big that the market “gapped” at the opening. It should move in the same direction still.
The Westerner looks at gaps differently. Mostly, they interpret them as being mandatory to be filled.
Both approaches may be right. However, from this moment on, try looking at gaps as continuation patterns.
For a change, you’ll broaden your perspective. And, in doing that, you’ll find out windows work most of the times.
Continuation patterns form everywhere. If there’s a trend, the market will pause.
If it pauses, traders watch for trend continuation patterns to form. Just consider how many time frames and how many currency pairs exist, chances are you’ll find one anytime.
This article treated the most representative ones. The continuation patterns technical analysis traders use to find profitable trades.
Used as part of a money management plan, they offer a fabulous return. If the time element is part of the equation, the results improve more.
Traders should embrace losses as part of the trading game. No one can win forever. At least, not in Forex trading.
But, keeping them tight and under control, leads to bigger wins. And more significant gains come from market breakouts.
Hence, these breakouts, give traders a competitive wedge. This is where continuation patterns kick in.
No matter the approach, Western or Japanese, they show the same conditions. The price tries to break higher or lower.
And, it builds energy until it breaks.
Usually, there’s a reason for such a break. Nowadays, the idea comes from fundamental analysis.
When news comes out, the trading algorithms buy or sell, causing a break. Or, when a central bank changes the monetary policy, and so on.
But if continuation patterns technical analysis traders keep things under control, they don’t have to worry. After all, the worse it could happen is for the price to hit the stop loss.
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