Regardless of your trading style, technical price charts are reflective of all the fundamental and technical factors that affect the price of a given digital asset. They are therefore part and parcel of trading.
Random as price action may appear, hinting price patterns form all the time, irrespective of time frames. These formations can be reversals. Better still, some may indicate momentum exhaustion, and yet others may point to a trend continuation.
In essence, a trend continuation pattern is a formation that gauges the likelihood of the original trend continuing. They are pauses or consolidations, visible in a pronounced trend, helping traders make sound decisions. Often, these patterns are narrow-ranging and specific, forming in the middle of a determined trend.
Here are a few common trend continuation patterns:
- Ascending Triangle
- Descending Triangle
- Asymmetrical Triangle
Let’s delve deeper:
Distinctive from other trend continuation formations, a flag forms in a strong trend. Irrespective of the direction, a flag formation has a sloping and angled body with a long pole. The pole is the direction of the prevailing trend.
The angled and negative or positive sloping rectangle is the “Flag” and represents market pauses. This gives this price action pattern a flag-like appearance, hence the name.
Trading flags is pretty straightforward. With a definite trend direction, the target is usually the pole height. The height points to a target price after the end of the trade pattern. Usually, the flag body include five waves, with prices breaking out of the pattern in the fifth wave.
Flags are associated with strong breakouts. To gauge the strength of the breakout, traders should assess the depth of the body, the angle of the inclination, and the number of preceding waves. The sharper the angle of the slope, the stronger the anticipated breakout.
From experience, analysts recommend trading this type of trend continuation pattern only after a confirmed breakout.
The pennant formation looks like a flag but is triangular in shape. Pennant formations are said to be flying at “half-mast,” since they appear at the halfway mark of a dominant trend. Even so, the difference between a pennant and a flag formation is that a pennant moves in a narrow range and is preceded by an almost perpendicular price expansion.
Additionally, when a pennant forms, trading volumes tend to contract, only increasing after the breakout. While this is not a strict rule per say, pennants consist of less than 20 candlesticks.
This differentiates them from triangles and flags. For this reason, pennants look like a small triangle on a long pole (candle).
A variation of a flag, a pennant is made up of a body and a pole. Similar to a flag, the pole height indicates the target price after a five-wave breakout from the body.
That means prices tend to move a distance equal to the pole height moments after the breakout. Even so, pennants are associated with mild volatility with limited price fluctuations, unlike flags and triangles.
The other continuation pattern is a triangle formation. On the chart, it looks like a usual triangle and is made up of highs of various heights, depending on the type. However, triangles usually form toward the end of a dominant trend. Depending on the existing trend direction, triangles can point to a strong or weak continuation signal.
There are three types of triangles:
- Ascending triangles
- Descending triangles
- Symmetrical triangles
At any moment of a trend, a symmetrical triangle is a strong indicator of trend continuation. They are usually made up of four to six reversal points, necessary for the actual shape of the triangle to form.
Depending on the prevailing trend, this is how triangles can assist traders in making sound decisions:
If an ascending triangle appears on a bearish trend or a descending triangle appears on a bullish trend, then the underlying momentum is weak. There must be additional confirmation for trend continuation.
Conversely, an ascending triangle on a bullish trend or a descending triangle on a bearish trend are strong continuation signals.
Triangles are formed through the same principles as the abovementioned formations and give the same results:
- A classic triangle has five waves. However, if it has more waves, the movement will likely be stronger after the breakout.
- Price breakouts from the first or second section of the triangle hint at a strong momentum. Similarly, price breakouts from the last third of the triangle are weak and the swings short-lived.
After the formation breakout, the price will cover a distance equal to the widest part of the triangle formation.
Identifying these trend continuation formations takes time. After all, pattern searching is not a science. The more you work with technical analysis patterns, the easier you can spot them. They are not only good trading signals but can also help project feasible price targets.Overall, this will help traders trade successfully.
But if you have no experience, you should remember this rule: If you see and understand the price chart formation clearly, it will definitely work.