What Is a Continuation Pattern?
A continuation pattern is a consolidation pattern that forms after price trends up or down. A continuation pattern typically indicates the trend out of which the pattern forms will continue after the pattern has completed. There are several continuation patterns that can form. We will discuss the Bull/Bear Flag pattern and the Continuation Triangle pattern. We will look at a few examples of these patterns and discuss how to trade the patterns.
Where Do I Find Continuation Patterns?
Continuation patterns can be found on all trading instruments on all time frames. The best way to find one is, using the trading instruments and time frames you prefer, look for a place where price has pushed in one direction for a long distance, you can expect to find a consolidation pattern at that point. Watch the consolidation form, if it’s a continuation pattern, it will become obvious in time.
The following is an example of a Bull/Bear flag on the EUR/USD on the 4 hour time frame. The pattern has played out, but it can serve as an example of what to look for and how to trade it.
When a bull/bear flag forms, you will note that it often touches the 38.2% or 61.8% Fibonacci level before it breaks. In this case, note that the price reached up and touched the 61.8% Fibonacci level before dropping. Typically you would see the whole flag reach for the 61.8% before breaking the pattern, so this case is a bit unusual. The candle that stretched up to the 61.8% level closed below the 38.2% level, which I find very interesting.
As with any trading pattern, every time the pattern forms, a totally different group of traders will be in control with different goals, experiences and emotions, so the pattern will rarely play out exactly the same way.
Here we have an example of a continuation triangle on the GBP/JPY Weekly chart. This is another pattern that has a high probability of breaking in the same direction as the prior trend.
How Do I Trade Continuation Patterns?
Using the examples above, I will demonstrate the ideal places for entering positions on these patterns. Always remember to think in terms of probability. No pattern will always work out the way you expect. As I mentioned, there is always a different group of traders involved in each of these patterns, so they will not always play out exactly the same way.
Also remember that a line is never a line, it’s always a zone. Don’t expect the market to turn exactly on the pattern line. Expect that it could push through or not quite reach the line and set your stops and trade sizes accordingly.
Here is the example of a bear flag from on the EUR/USD 4 hour chart. Obviously, the flag is called a bear flag because it typically breaks to the downside. A bull flag will work exactly the same way, but will form after an uptrend and will be a down trend channel.
You can enter your position on the actual break of the flag with your stop loss on the opposite side of the flag. Price will sometimes “head fake” or push through the line and retreat and go back to the pattern again. If price has touched the 38.2% or 62.8% Fibonacci levels before the breakout, that will increase the probability of success. Typically you will want to target the prior low (or high) price.
In the case of the continuation triangle on the GBP/JPY Weekly chart, you can enter your trade when price touches the top of the triangle and put your stop just above the triangle (since this happens to be a weekly chart, be sure to make your stop large enough. You will be targeting over 1400 pips, so you will probably want to let this swing a couple of hundred pips before stopping out.)