Continuation Pattern: Definition, Types, Trading Strategies

The Gestalt law of continuity—or continuation—refers to how the human mind naturally organizes visual elements into continuous and uninterrupted lines or patterns. Designers apply it to create interfaces that guide users’ attention and create a smooth flow of information. This article provides an introduction to continuation patterns, explaining what these patterns are and how to spot them. For a descending triangle, consider a stock trending downwards, repeatedly hitting support at $50 while forming lower highs at $60, $55, and $52. A breakout below $50 would indicate a continuation of the downward trend. Machine learning (ML) models offer advanced capabilities for improving pattern identification and execution accuracy.

1. Finally, sellers dominate and the price breaks support, reversing the former uptrend.
2. Alternatively, bulls could regain control and invalidate the pattern with a break above resistance.
3. You should carefully consider your objectives, financial situation, needs and level of experience before entering into any margined transactions with Blueberry Markets, and seek independent advice if necessary.
4. Observe how price retested to the broken support, formed a bearish candlestick pattern and created a short setup.
5. The Fibonacci ratios help quantify this mass psychology into defined price structures.
6. It has been prepared without taking your objectives, financial situation, or needs into account.
7. Traders must look for these formations as part of their technical analysis toolkit.

Continuation Patterns in Technical Analysis (Algo Trading)

Firstly, it shows a triple bottom pattern, which is a bullish reversal pattern indicating potential support and a possible trend change. Following this, there’s a break of swing lows, suggesting a possibility of trend reversal towards the upside. The Quasimodo pattern is a reversal structure used by price action traders across all markets and timeframes. It helps locate potential trend reversals and is widely employed in trending environments to ‘buy dips’ in uptrends and ‘sell rallies’ in downtrends.

How to Trade Trend Continuation Patterns

Continuation patterns are a chart feature which generally signals that the trend in which they form is due to continue playing out. Different shapes offer different signals based on the trend in play, continuation patterns with varying degrees of certainty depending on the circumstances. Continuation patterns can tell a trader what is more or less likely to happen to an asset’s trend based on current price action.

For instance, if a market is in an uptrend and a continuation pattern arises, it often suggests that the upward movement is likely to proceed after a brief consolidation phase. A bullish continuation pattern example is illustrated on the daily Facebook (Meta) stock price chart above. Cup and handle patterns are continuation patterns that signal continued bullish price trends after a breakout from the continuation pattern resistance level.

It helps create a visual flow that guides users from one element to another—and so helps user interactions with a digital product or service. German psychologists Max Wertheimer, Wolfgang Köhler and Kurt Koffka developed the Gestalt principles to understand how humans perceive the world around them. The law of continuity is observable in the real world in that the human eye follows the smoothest path when viewing lines.

For traders who spot this pattern, the typical entry would be after the second retracement on confirmation of the upturn. Initial profit targets are set near previous resistance levels or at the height of the drives. Traders exit either when profit targets are hit or if the new trend fails and the price drops below the stop loss. Price behaves in the form of waves, and the waves give rise to inner waves which guide the direction of the price behavior.

1. Continuation patterns can be used on varying time frames, such as hourly, daily, weekly, etc.
2. The three drives pattern reflects the psychology of the market participants.
3. Trend continuation patterns are invaluable tools for traders aiming to ride existing trends with more confidence and precision.
4. This will confirm the pattern as a bottom and signal the start of an uptrend.
5. Traders in financial markets are perpetually on the lookout for strategies to predict price movements and harness trends.
6. The rising wedge is a bearish pattern that forms when the price rallies between upward-sloping support and resistance lines that are converging.
7. This pattern can repeat itself constantly so it’s best to identify and react quickly, as many traders consider this chart pattern one of the most reliable and powerful patterns to trade.

Volume tends to decline during the formation of this pattern, indicating indecision in the market. Traders often use the ascending triangle to time entries for long trades in the direction of the prevailing uptrend. Stop losses are placed below the entry setup or candlestick setup, while profit-taking targets are set using the measured move projection.

Example of a Continuation Pattern in the Stock Market

The falling wedge pattern is a very similar phenomenon to the bullish pennant, with minimal differences between them from the point of view of price action in an uptrend. A wedge features steeper sloping price action, while a pennant is flatter. Pennants, wedges, triangles, flags and rectangles can all be applied to uptrends.

The three drives pattern refers to a price chart that shows three successive drives or impulses in the same direction, with each impulse typically being contained within the range of the preceding one. The 5 wave pattern reflects the mass psychology of optimism and pessimism. Wave 1 reflects initial optimism as the trend starts, and wave 3 shows extreme optimism and accelerated price movement as more participants join the trend. The final 5th wave reflects euphoria as buyers rush to get in before the trend ends. Harmonic patterns reflect the cyclic behaviors and emotions in the market as prices fluctuate from extremes back to a mean or equilibrium.

We can immediately see that the items lying on any of these lines are connected. If we were to add something else at the end of one line, we’d notice that this last item would be disconnected or perhaps even sitting outside the overall design. This will help us understand continuation, and you may probably recognize it right away as something that has struck you several times before. The law of proximity is very useful for allowing people to group ideas, concepts, etc. – it’s ideal for us to be able to recognize different clusters of items at a glance.

The market price begins to consolidate and pause in the middle of the bull trend which highlights market participants feel the price exhausted. During the consolidation phase, traders are cautious as they are unsure of the next trend direction. As the price rallies higher out of the pattern, traders are confident with renewed optimism that the market price will rally much higher.