Chart patterns are often hidden in plain sight within the random movements of the price of a stock. Identifying these patterns can help you predict the future price movements and take favorable positions in trading. Chart patterns can be bullish, bearish, or continuation patterns.
The continuation patterns usually happen during the middle of a trend – be it during an uptrend or downtrend. A continuation pattern is said to be complete when the stock finishes forming the pattern and then breaks out of it. Once the breakout happens, the prevailing trend (be it uptrend or downtrend) will typically remain.
The top 4 continuation patterns you must know about are:
Here is a brief overview of each of them…
Triangles are one of the reliable continuation chart patterns. Here, price continues to converge, eventually breaking out. There are three types of triangles – ascending triangle, descending triangle, and symmetrical triangle.
- Ascending triangles usually have a flat top and an upward slant.
- Descending triangles usually have a flat bottom and a downward slant.
- Symmetrical triangles have both a downward and upward slant.
The target price of the pattern breakout or breakdown would be usually the breakout/ break down level plus the difference between the base of the triangle and lowest/ highest point.
The figure below shows an ascending triangle pattern.
During an uptrend or downtrend, whenever the price seems to be bound between two parallel lines, it forms a rectangle pattern. Here, price action would reach two almost-identical highs and lows. Rectangle pattern is also sometimes referred as a consolidation area, congestion zone, or trading range. Whenever this trading range is broken, the stock breaks out or breaks down from the rectangle pattern. A breakout usually signifies bullishness while a breakdown signifies bearishness.
The figure below shows a rectangle pattern.
A flag pattern, especially a bullish flag, is not easy to identify by novice investors. This is because the pattern is quite deceptive. In case of the bullish flag, the price would be trading down temporarily, but the pace would be quite shallow. Many investors would think that it is the end of the prevailing bullish trend, while it may be actually signaling the beginning of another bull run.
The bullish flag is characterized by parallel lower highs and lower lows while there is a clear prevailing uptrend. Whenever the upper parallel is breached, the breakout happens.
The figure below shows a bullish flag pattern.
A Pennant is quite similar to a flag pattern. However, the price range would be smaller, giving it a pennant like appearance. Eventually, the converging price would break out or break down, leading to the continuation of the prevailing uptrend or downtrend.
The figure below shows a pennant pattern.
These 4 chart patterns are quite useful for traders, especially in Forex. However, always remember that chart patterns are said to be confirmed only once the relevant line breaks – never before it.