Trend Continuation Patterns

Flags, Pennants, Triangles

The basis of successful trading is understanding fundamental market patterns. Patterns such as flags, pennants and triangles are used to determine or confirm the continuation of the price movement.

In our previous articles [1] [2], we’ve looked into the trend reversal patterns. Now,we’d like to talk about how trend continuation patterns are formed, identify their key features, and consider trading strategies or convenient entry points for profitable trading with this technique.

Flags and pennants

Both flags and pennants possess similar features and signal the continuation of a trend.

Formation

The flag pattern can be formed both during an upward or downward price movement. A bullish flag is formed during an upward trend and is defined by the higher and lower borders “containing” the price within a short-term corrective downward movement. A bearish flag is formed during a downward movement and is characterized by a short-term corrective upward movement.

The pennant pattern is formed in a similar way, but more often during a sharp and almost vertical growth of the price. After the sharp price jump, consolidation comes and the pennant occurs, which signals a continuation of the price movement. The pennant represents a narrowing channel inside which the price remains squeezed for some time.

Trading the patterns

As the flag pattern is formed, one can expect the price to break through the channel’s border and continue its movement in the direction of the trend. In this case of, a bullish flag breaking the resistance level signals the beginning of the formation of the figure. Depending on your trading strategy, you could open a trade at the breakout above the resistance level. But if you prefer a more steady and low-risk approach, it is suggested to wait for the retest. This way, entry into the position can be made at breakdown or retest of resistance level. When a bearish flag is formed, a breakout near the lower border of the channel is expected, so entry into a short position should be made while breaking below or retesting the support level.

Stop Loss can be set at the levels of the upper and lower limits of the bearish and bullish flags channel, respectively. Also, in order to minimize risks a Stop Loss can be set near the breakout boundary; this may, on the contrary, increase the chance of closing a position in case of a sharp price swing.

When a pennant is formed, a position should be opened during the break through the channel’s boundary (depending on the prior trend direction). A buy order may also be placed at the retest.

For example, when a pennant is formed after the upward movement, we expect a breakthrough, followed by the continuation of the upward trend. It is important to wait for the breakout of the upper border to open a trade. A Stop Loss in that case may be placed either below the resistance level, or near the lower border of the narrowing channel.

Useful tips

Flags and pennants are formed after sharp price movements and accompanied by a drop in trading volumes. The price movement after breaking through the pattern’s borders depends on the intensity of the previous movement. These figures can be formed on any timeframe and are often used for intraday trading.

Take Profit may be set at 60–80% of the “flagpole’s” height, i.e. the range of the previous price movement. Depending on your trading strategy, Stop Loss can be set in the middle of the channel, which would reduce the potential losses in case the price moves against your expectations. It is also worth noting that the formation of the flag and pennant only signals the possibility of market continuation, so we advise you to use additional indicators before making any trading decisions.

Triangles

This pattern comes in a range of flavors and indicates the continuation of the previous trend as well. Symmetrical ascending and descending triangles are simple figures and are often used for trading and analysing further market movements.

Formation

An ascending triangle is formed after an intensive upward price movement. The peculiarity of the ascending triangle pattern is the formation of a horizontal resistance level, which is most often broken at the tip of the figure.

A descending triangle is formed after an intensive downward movement and is characterized by a horizontal support level and fading price fluctuations. Breakout of the figure occurs most often at the tip of the pattern and is characterized by an impulsive fall in price.

A symmetrical triangle is a universal figure and can indicate both a continuation of a bullish and bearish trend. It is also worth noting that the appearance of a symmetrical triangle may indicate uncertainty in the market. For this reason, it is especially important to use additional tools for market analysis.

If an impulsive price growth preceded the formation of a symmetrical triangle, there is a high probability of upward price movement continuation.

Trading the patterns

Regardless of the type of a triangle, you can open a position at the breakdown of the figure, or on the retest of the triangle boundary.Although, it is recommended to set a Stop Loss at the breakout level.

Breaking through the boundaries of a symmetrical triangle is often accompanied by sharp price spikes, which can occur as a result of uncertainty in the market. When such a triangle is formed, a breakout of the boundaries can occur before the price is at the tip of the figure.

Take Profit of a symmetrical triangle is measured from the breakout level to the height of the widest part of the triangle. The further price impulse is calculated in the same way in case of the ascending and descending triangles.

Key features

• Triangles most often hold five waves;
• The stronger the price is “squeezed” in the triangle, the more intense will be the impulse of the price movement after the breakout;
• A decline in trading volume while a symmetrical triangle is formed can indicate an uncertainty in further market movement;
• An ascending triangle can form in a bear market and in some cases it can signal a bullish movement;
• In case of a symmetric triangle, if the price drop is accompanied by an increase in volumes, the probability of a breakout below the support level is high;

Conclusion

Trend continuation patterns are simple, yet vital to executing both short-term and long-term strategies. When using these patterns, apply Stop Losses to minimize the risk. Remember that a correct analysis of patterns is not sufficient to determine further price movement, so use additional tools when making trading decisions.