Understanding continuation patterns

The most common continuation patterns used in Forex technical analysis consist of flags, pennants and gaps. These classic continuation chart patterns generally indicate or help confirm that the major trend will probably continue.

Continuation patterns differ from the primary reversal patterns, such as the head and shoulders top and bottom pattern for example, which indicate that a change in the overall direction of the trend may occur.

Flags

Flags represent a brief period of consolidation seen after a steep up or down move. The price action forms a pattern with parallel boundaries slanting either up or down. The pattern indicates a pause in the general trend before the market continues to trade in the trend’s original direction.

Flags

Figure 1: This schematic diagram depicts a bullish flag continuation pattern showing the consolidative trading range. White arrows illustrate the significant upwards flag pole move before the consolidation and the measured move that follows the trading range breakout.

Flags tend to “blow” contrary to the trend, so a downtrend would typically have an upward blowing flag, while an uptrend would have a downward blowing flag. Flag formations are usually accompanied by a decrease in volume and are followed by a sharp move up or down with increased volume.

Furthermore, flag patterns have a measured move objective equal to the length of their flag pole (the preceding steep move) projected in the same direction from their eventual breakout point.

Pennants

Pennants give the overall impression of a short symmetrical triangle, and they generally form during brief periods of consolidation seen after a large move in either direction.

Pennants

Figure 2: This schematic diagram depicts a bearish pennant continuation pattern with its triangular consolidation period. The pattern’s sharp initial downward move and following measured move are illustrated with white arrows.

Pennants form between converging trend lines like triangles, but usually for a shorter period of time like flags. Also like flag formations, they provide an indication that the preceding trend will continue in the original direction.

Furthermore, pennant patterns have a measured move objective equal to the length of their flag pole (the preceding steep move) projected in the same direction from their eventual breakout point.

Gaps

Gaps usually come about after a period when no trading has occurred like immediately after the weekend. Nevertheless, they can also arise in the middle of a fast trading session as exchange rates shift sharply in a price vacuum to adapt to new information.

A down gap on a chart would occur when the high of a bar’s trading is lower than that of the previous bar’s low, while an up gap would be characterized by having a bar’s low price be higher than the previous bar’s high.

Gaps come in three main types: breakaway gaps, continuation gaps and exhaustion gaps. Only the first two types are considered continuation patterns, and they are usually traded by positioning with the trend on a pullback to the gap region.

On the other hand, exhaustion gaps tend to indicate the last gasp of a trend before a market reversal occurs. These gaps have the reputation for getting filled.

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