The chart patterns that we use for price action trading could signal continuation of a price trend or a potential reversal. In this lesson, we will focus on these continuation patterns: triangles, flags, pennants and rectangles.
When identified on the chart, the patterns will signal traders to eventually open long or short positions with the direction of the trend.
Continuation patterns are considered relatively safe to trade; they signal a brief period of consolidation before the price continues in the previous trend.
Because these patterns keep recurring on the price chart, they can be applied to both forex and crypto trading. The price action patterns are especially useful for cryptocurrencies trading as most of the action is driven by technical set ups and analysis.
Another advantage of continuation patterns is that they occur across all time frames. Thus, traders can day trade as well as swing trade these patterns.
Let’s take a closer look at the continuation patterns we mentioned.
Triangle Chart Pattern
The triangle pattern is a price-action-based technical chart set up. It can form across any time frame and potentially signal a continuation to the previous trend on a break down in the same direction.
The triangle pattern is formed as prices tend to move sideways, and as a result, they form lower highs and higher lows leading to converging trend lines that look like a triangle. An important distinction about triangle patterns is that prices can breakout in either direction.
Therefore, traders should not be too hasty in entering a trade the moment they see a triangle pattern being formed.
Quite often, you find that in forex and crypto trading, prices can post a fake out before reversing trend and moving in the opposite direction. This can lead to the newly opened positions being caught out for a loss.
The GBPUSD chart above illustrates a triangle pattern breakout. To trade the triangle pattern, traders usually measure the first swing high and low points. The distance is then projected from the breakout, which marks the target level. The stops are usually placed at the recent swing high or low prior to the breakout.
Flag Chart Pattern
The flag patterns are the most famous continuation patterns and are usually the favorite among price action traders. A flag pattern is determined by a strong and sharp trend with little to no pullbacks. This is later followed by prices taking a pause as they drift in the opposite direction. This consolidation often leads to a flag-like pattern.
The breakout from the flag pattern, which is usually in the direction of the previous trend, signals a continuation of the trend. Traders use the swing high and low points that measure the sharp move in price. This is then projected from the breakout point that leads to the price targets. The stops are usually placed at the local highs prior to the breakout.
As illustrated above, a bullish flag pattern is visually distinctive as it looks like a flag, with the sharp rally representative of the flag post. On the other hand, a bearish flag pattern looks like a hockey stick.
Pennant Chart Pattern
The pennant pattern works like a flag pattern. The only difference is, instead consolidating to form a flag, prices consolidate into a minor triangle.
The pennant pattern is formed by the sharp rally or decline followed by short periods of consolidation that represents a triangle, hence its name. Pennant patterns are usually formed after strong moves in the price of a security.
As the chart above shows, the pennant pattern can be traded like a flag. Traders first measure the length of the strong move, which represents a rally or a decline, and the distance is then projected from the breakout. The stops are placed at the recent high or low that was formed prior to the breakout.
Rectangle Chart Pattern
The rectangle pattern is typically formed when prices are moving sideways and thus end up creating a range high and a range low. These can also be referred to as the support and resistance levels.
Rectangle patterns are more prominent in the stock markets: quite a few stocks tend to move sideways in a range over months and years. A breakout from the rectangle pattern typically signals the continuation of the previous trend.
However, like the triangle pattern, a rectangle pattern can also signal a reversal. Therefore, traders should remain cautious when trading the rectangle pattern.
A safe way to trade such patterns is to wait for price to make a higher low for an upside breakout or to wait for a lower high for a downside breakout.
In some cases, you can expect the price of the security to fall back to the resistance or the support level that was breached before continuing in the direction of the first breakout.
As the above GBPUSD chart illustrates, the rectangle pattern is traded by measuring the distance of the range, which is then projected to the direction of the breakout. Stops are placed at the recent high or low prior to a breakout.
As the price action patterns are formed across multiple time frames, traders can take advantage of the continuation patterns and either day trade or swing trade, depending on their preference. In most cases, the continuation chart patterns can be expected especially after a strong move by the markets.
These instances are usually triggered by some fundamental news that sends the markets into a strong rally or a decline. By determining the trend in the markets and understanding how these continuation patterns work, traders will be able to take advantage of these constantly recurring technical analysis set ups in both forex and crypto trading.