Continuation Patterns are patterns that exist within a trend at prices where the market consolidates before moving on in the direction of the original trend. There are several main consolidation patterns, all of which follow the same simple rules.
– The price will move decisively in one direction before running into support/resistance
– The price will consolidate for a time and create the continuation pattern
– The price will break through the support/resistance and signal a continuation of the previous trend.
There are several continuation patterns and the articles would start from the Triangles.
Triangles can best be defined as converging trendlines. Based on this fact alone, traders can draw two immediate conclusions regarding triangles:
1. As they converge, volatility contracts; this suggests a breakout is on the horizon.
2. Once one of the triangle’s trend lines is broken, traders can expect the market to breakout in that direction.
Triangles can be divided into three main types: ascending, descending and symmetrical.
The descending triangle is a triangular consolidation zone that has a hypotenuse sloping downward at the top of the triangle. Beneath the hypotenuse is a straight trend line. Generally, when the market breaks through this trend line, it is seen as a signal that sellers have the momentum in the market, and that shorting may be a good opportunity as a result. Accordingly, it can reasonably be stated that the descending triangle usually appears in a downward trending market and signals a continuation of the downward trend.
As you might expect, the ascending triangle usually appears in an upward trend – and signals the continuation of the upward trend. The ascending triangle is essentially an inverted descending triangle; it has a hypotenuse that moves upward with time, above which is a straight trend line that traders are eyeing carefully as a key resistance point. When this confirmation of that resistance has broken is received, it can be a signal that buyers have taken control of the market – hence making it an ideal time to buy.
In the chart below, USD/CHF formed an ascending triangle over 5 days before the release of an important economic data. The price tested the resistant level 1.2545 for three times before breakthrough. On the hypotenuse side, the buying momentum pushed the support level further up which formed the converging ascending triangle. Once the economic data was released, the price broke the resistance and shot further up.
The converging triangles, no matter descending or ascending, represents the psychology of traders on the market. Before the breakout, traders are not sure which direction the price will go, they are trading with great caution, and thus, reflected by the narrow trading range before the breakout. The range will get narrower as traders are getting more cautious before the final breakout. Once the direction of breakout is conformed, the followers will enter the market following the direction, which forms the strong momentum after the breakout.
Ultimately, the important signal provided by the triangle is not the shape, though. The signal is provided by the direction of the breakout from the triangle, which signals a continuation or sometimes a reversal of the trend.
The symmetrical triangle has two equal sides sloping towards each other at the same angle. It favors neither a downside nor an upside breakout. As a result, traders should look for it to signal a continuation of the move in the original direction; or, in other words, the move of the overall trend.
In the chart below, USD/CHF formed a large symmetrical triangle over a six-month period before breaking above resistance to the upside. It was difficult to know which direction the price would breakout. Traders can pay attention to the original trend and trade along the direction of the overall trend.
The trade signal provided by a symmetrical triangle should come as no surprise, since it is a rising support line and a descending resistance line converging as the chart moves to the right. Eventually one of these technical levels must be broken, at which point the trader operates just as if the line were a simple trend line. Breakouts from a triangle that has become narrow can be decisive, because buying or selling interest has accumulated while the price has consolidated.