A continuation chart pattern is a price action arrangement that happens between an upward or downward trend. The patterns are mostly used in price action and technical trading strategies in forex trading. In this article, we will look at some of the best continuation chart patterns in forex trading and showcase some examples.
What is a continuation pattern in forex?
To understand what a continuation pattern is, it is important to look at what a trend is. In forex, a trend refers to a situation where a currency pair is rising or falling in a certain period of time. The opposite of a trend is known as ranging or consolidation. The USD/ZAR chart shows an uptrend and a downtrend.
Example of a trend
Therefore, when a continuation pattern happens, it usually sends a signal that the currency pair will resume the original trend.
The opposite of a continuation is reversal pattern. When a reversal pattern happens, it tends to send a signal that the original trend is about to end. As such, if you had bought a currency pair and a reversal pattern will warn you to either exit or initiate an order in the opposite direction.
Ascending triangle pattern
Triangles are some of the most popular chart patterns in the market. As the name suggests, triangles are three-lined patterns that happen when there is an indecision in the market.
There are three main types of triangle patterns in the forex market – ascending, descending, and symmetrical triangles.
An ascending triangle is a bullish continuation pattern that happens in an ongoing trend. It forms when a rising currency pair finds resistance at a key level. The resistance line is drawn by drawing a horizontal line that connects at least two levels.
After finding the first resistance, the price usually drops as some buyers exit. However, since the trend is still bullish, the price does not decline significantly. Buyers return, push the price higher, and hits the original resistance level. The price then drops but reverses slightly above the original low. In the end, a series of higher lows is formed, becoming the hypotenuse of the triangle pattern.
In most cases, the ascending triangle will break-out higher as the price reaches its level of confluence. There are several ways of trading this pattern. The most common is to place a buy stop slightly above the level of resistance. As such, if indeed there is a bullish break-out, the buy stop trade will become the new market order.
While there is no rule about where to place a take-profit, many traders measure the distance of the widest part of the triangle and set the take profit there.
A good example of an ascending triangle continuation pattern is in the AUD/NZD chart below. The chart shows that the pair found strong resistance at 1.0830. It then formed a series of higher lows. Therefore, while a bullish break-out has not yet happened, there are high chances that it will.
Ascending triangle example
NB. An ascending triangle pattern can often be confused with double and triple top patterns that are usually bearish. This is partly why it is important to use a limit order. Also, a strong bullish breakout is usually confirmed by using volume.
Descending triangle pattern
A descending triangle is another popular continuation pattern in forex. It is the exact opposite of an ascending triangle. It forms when a currency pair finds strong support and attempts to reverse. The support is seen as a floor where the price of a currency pair struggles to move below.
After hitting the support, the price tries to bounce back but more sellers come in and push it to the level of support. After reaching the support, it rises for a while until more sellers come back and push it back to the support level. The hypotenuse of the descending triangle pattern is drawn by connecting these high points.
A descending triangle usually ends with a bearish breakout when the support and the descending lines converge. Like in the rising triangle, most traders usually use a sell stop order slightly below the support level. As such, in case the bearish breakout happens, the sell-stop will become a new market order.
The USD/ZAR chart below is an example of a falling triangle pattern. As you can see, after reaching a multi-year high, the pair started to drop. It found major support at the 16.3240 level.
After this, the price started to rebound but it struggled to move above 17.76 level and it retested the support level. The price bounced back again and then struggled to move above 17.2692. As the diagonal line and the support converged, the price broke-out lower.
Descending triangle example
The benefits of using a descending triangle pattern is that it is easy to identify, tends to be easy to identify, and it forms on all chart types, including hourly and daily.
Cup and handle pattern
A cup and handle is a continuation pattern in forex that takes several weeks or months to completely form.
The pattern starts when a currency pair or any other financial asset is in an uptrend. After rallying for a while, the price finds a major level of resistance and starts declining. This decline is usually not a sharp correction. Instead, it drops gradually until it finds a major level of support. After doing this, the price then starts to rise gradually as bulls attempt to retest the first resistance level.
After a while, the price will likely retest the original resistance level. In this stage, the currency pair has already completed the cup part of the pattern.
In the next step, the currency pair will form the handle part. In reality, a cup has different types of handles. Therefore, at this stage, the price will either consolidate and form a small handle or decline sharply to form a longer handle pattern. In the final stage, the price will break-out higher and continue with the original uptrend.
The idea behind this pattern is relatively easy to grasp. First, the currency pair is rising when it finds a strong resistance and starts to decline. This happens as some of the original buyers start to question the rally. The price drops slowly since there is no strong selling pressure.
Second, the next part of the cup forms when the buyers start coming in. Third, consolidation or short reversal happens when the buyers start exiting. Finally, the bullish breakout happens when the market realizes that the reasons for the original uptrend are still valid.
Many traders usually measure the distance between the highest and lowest points of the cup. They then use this distance to place the take-profit.
A good example of a cup and handle pattern is in the EUR/USD pair below.
Cup and handle pattern example
The opposite of a cup and handle pattern is the inverted cup and handle. It forms when the currency pair is falling and it usually breaks out lower.
The benefits of using a cup and handle are that it is relatively easy to identify it and it is usually relatively accurate. The cons are that they tend to be rare and take a long time to form.
Bullish pennant pattern
A bullish pennant is one of the most popular continuation patterns in forex. The pattern forms when a currency pair in an uptrend finds some resistance. After a while, a tug-of-war happens between bulls and bears, leading to a small triangle-like pattern.
A bullish pennant has two main parts. First, it has a long verticle line that is known as a flag post. Second, it has a small triangle pattern, which is known as the pennant. The lower line of the small triangle is drawn by connecting the lower swings while the upper line is drawn by connecting the higher swings.
In most cases, following a bullish pennant pattern, the price will break-out higher since the original reason for the rally is still valid.
A good example of a bullish pennant is in the EUR/USD chart below. As seen, the pair was in an upward trend when it found a strong resistance at the 1.1426 level. The pair dropped to 1.1166 and then formed a small triangle pattern. You can also the flag post. The price then broke-out higher.
An important tool when using the bullish pennant pattern is the Fibonacci retracement. Ideally, you should ensure that the initial decline does not move below the 38.2% or 50% retracement levels. If it does, it could be a sign of a reversal.
The opposite of a bullish pennant pattern is known as the bearish pennant. It happens when a price in decline hits a barrier and starts forming a small triangle-like pattern. In most periods, the price usually breaks-out lower.
Bullish and bearish flags
Flags are also common continuation patterns in forex. Indeed, they are similar to the pennant patterns that we have highlighted above.
The only difference between a flag and a pennant is the shape of the upper part. While a pennant has a pointed shape, the flag has a rectangle shape.
The flag happens when a currency pair rises sharply. After this, the pair finds some resistance as bulls ponder the next moves. As they do this, a parallel channel emerges. This channel can be a small and brief pattern or it can take some time.
Also, the original decline should not move below the 50% Fibonacci retracement level. Therefore, in most periods, when it happens, the price will likely break-out higher.
An example of a bullish flag pattern is in the USD/JPY pair below. The pair jumped by 1.75% from 102.60 to 104.38. The price then found some support and declined to 103.50. After a while, a parallel pattern emerged. Ultimately, the price broke-out higher.
Bullish flag example
The opposite of a bullish flag is a bearish flag. It forms when a declining currency pair finds a strong support leading to a parallel channel as shown in the chart below.
Bearish flag example
There are several benefits of bullish and bearish flag and pennant patterns. First, unlike the cup and handle, these ones are relatively popular in the market. Second, the two patterns are easy to spot and use. Finally, they tend to be relatively easy to use.
The main con for the two continuation patterns is that they often give a false breakout. To avoid false breakouts, most traders use the concept of limit orders, where they place conditional orders above or below the key levels.
FAQs on continuation patterns in forex
How easy is it to spot forex continuation patterns?
It depends. Some patterns like bullish flags and pennants and triangles are relatively easy to identify.
Can I use technical indicators when trading continuation patterns?
Yes. Indeed, one of the easiest methods of avoiding false break-outs is to use several indicators. Some of the most popular technical indicators you can use are moving averages, MACD, and the Relative Strength Index (RSI).
What is a false breakout?
A false breakout is a situation where the price appears to move above a resistance or below a support level and then returns to the channel.
Can I use continuation patterns in other assets?
Yes. You can use these patterns when trading other assets like cryptocurrencies, stocks, and indices.
Which tools are helpful when trading continuation patterns?
Some of the popular tools that will help you when trading continuations are the Fibonacci retracement, Andrews Pitchfork, trendlines, and the Schiff pitchfork.
Summary
Continuation patterns are important tools used in price action trading. While there are other patterns like rounded bottom, the four we have identified here are among the most popular ones. They are all easy to identify and tends to be highly reliable. Still, no pattern is always accurate.
Therefore, you should always limit your losses by putting a stop loss or a trailing stop loss on your trades. Also, always size your trades appropriately and don’t overleverage.
