Continuation patterns

In simple terms

Trends rarely move in straight lines. They pause, moving sideways or slightly against the trend, before sometimes continuing. Continuation patterns are names for the shapes these pauses make. The four most common are triangles, flags, pennants and rectangles.

Like all chart patterns, they describe what prices have done. Whether the trend actually continues is decided only by the breakout, and many breakouts fail.

The common shapes

Triangles. Price swings narrow between two converging trendlines.

• Symmetrical triangle: falling highs and rising lows.
• Ascending triangle: roughly level highs and rising lows.
• Descending triangle: falling highs and roughly level lows.

Flags. After a sharp move, called the pole, prices drift in a small parallel channel sloping against the trend. A bull flag slopes down after a rise.

Pennants. Like flags, but the pause forms a small symmetrical triangle instead of a channel.

Rectangles. Prices move sideways between roughly horizontal support and resistance, a trading range within a trend.

The same shape, two names

An ascending triangle in an uptrend is called a continuation pattern if the price breaks out upward. If the price breaks down instead, many books call the same shape a reversal pattern. A rectangle at the end of a long rise that breaks down becomes a "distribution" top; the same rectangle breaking up becomes a "continuation".

So the name is often assigned after the breakout. Labels that depend on the outcome cannot predict the outcome. The useful question beforehand is only: which way would a break be, and what would I do in each case?

Measured-move targets

Two conventions are common:

Defining patterns objectively

Because these patterns are easy to see after the fact, define them in advance:

• Minimum and maximum duration, for example a flag of 5 to 20 sessions.
• Required prior move, for example a pole of at least 15% in 10 sessions or less.
• Shape rules, for example rectangle highs and lows each within 2% of each other.
• Confirmation by a close beyond the pattern by a set amount, as the breakouts lesson recommends.

Volume

Traditional descriptions say volume tends to fall during the pattern and rise on the breakout. The volume analysis lesson looks at how much this really adds.

Why it matters

Continuation patterns are common in trading education, often with confident targets. Understanding that the same shape can break either way, that labels are often assigned with hindsight, and that targets are conventions helps you plan for both outcomes rather than betting on a name.

Limitations

Pattern identification is subjective; different rules find different patterns. Targets have no guarantee. Evidence from large, fairly chosen samples on the reliability of these patterns is mixed, and effects often shrink after costs.

Common mistakes

• Assuming a continuation pattern must continue.
• Treating targets as predictions.
• Seeing patterns everywhere without objective rules.
• Acting before a confirmed breakout.

Try it yourself

1. Write an objective rule for a bull flag, including the pole, the flag's duration and slope, and the breakout confirmation.
2. Choose five shares in advance and find every flag by your rule on daily charts over two years.
3. Record which broke upward, which broke downward and which reached the measured-move target.
4. Compare the results with the confidence of the descriptions you have read.