Patterns are everywhere in life. If you think about it, recognizing patterns helps you make sense of the world. As a trader, seeing and understanding patterns can give you an advantage. Over the last two decades, I’ve used patterns to earn millions in profit.**
Continuation patterns are yet another type of chart pattern you should study and put to use in your trading.
Want to learn how to trade these patterns and more? Join the Trading Challenge today. Now, let’s talk about continuation patterns.
Table of Contents
- 1 What Are Continuation Patterns?
- 2 4 Continuation Patterns Every Trader Should Know
- 3 Key Tips for Coming Up With Your Continuation Patterns Trading Plan
- 4 The Bottom Line
What Are Continuation Patterns?
As a day trader, I use technical analysis most of the time. l look for price support and resistance, breakouts, morning panics — which you can see on a stock’s chart. As you continue to study, you’ll begin to see patterns on the charts.
A continuation pattern is when the trend in the price action is broken by a period of consolidation and then the trend continues. During the consolidation period, there are common ‘shapes’ visible on the chart.
Why does the price go through a period of consolidation?
It has to do with supply vs. demand and it also relates to taking profits or cutting losses. These are what cause market fluctuation. Each trade has two sides, right? Let’s say there’s some awesome news catalyst that causes a clean spike of a stock. Maybe the company announced higher-than-expected earnings plus a deal signed with a much bigger company.
At some point during the spike, some traders will close out their positions to take profits. So you might get 5 minutes of selling. The price drops a small amount. Not to be outdone, some traders jump in and start to buy again. They believe the stock will keep moving the direction of the trend. So the next candle is an upward price trend.
This period of consolidation can last anywhere from several minutes to several weeks. The price tends to stay within a range and the range forms one of the shapes I’ll show you later in this post. After the consolidation period, the trend continues in its original direction. At least that’s the theory.
Here’s a simple example. Say there’s been steady upward price movement on a stock all morning. Then, in the early afternoon, there’s a period of sideways price action. Trading volume drops and the price stays in a small range. Then, there’s a late afternoon spike in volume and the price continues its upward trend.
Some traders don’t consider short term patterns to ‘count’ as continuation patterns. Whatever. That’s a bunch of self-serving BS. Patterns happen in all different time frames.
You might see a flag pattern on a one-year daily candlestick chart but it’s not clear on a one-month or 15-minute chart. The best swing trader I know looks for pattern formations in different time frames in order to confirm his trading thesis.
Benefits of Using Continuation Patterns
Why do continuation patterns matter? Because they can give you an idea of future price action for a stock.
Before I go any further, it’s important that you know that this isn’t an exact science. Consolidation periods don’t always turn into continuation patterns. There are reversal patterns, too.
The good news is, I teach my students rules (and some of them come up with their own rules) to trade by. And as long as you follow the rules and stick to your trading plan, you’re better prepared to tackle whatever the market throws your way.
4 Continuation Patterns Every Trader Should Know
Now let’s check out the top continuation patterns used by many traders.
Keep in mind that I trade and teach day trading (as opposed to long-term investing or swing trading), so the examples I show will be based on shorter time frames. But you could pore over a few longer-term charts (like a one-year chart with daily candles) and see these patterns in those time frames, as well.
The point is for you to be able to recognize the patterns, learn how to plan a trade around the pattern, and then use them to your advantage.
By the way, I recommend using Japanese candlestick charts. I use candlestick charts when I trade because I like all of the information contained in the chart. They also make it easy to see continuation patterns.
Rectangles form when the trend, either up or down, stops temporarily. Price action consolidates within parallel support and resistance lines. Then, after the period of consolidation, the trend continues in its original direction.
Example of a Rectangle Continuation Pattern
Take a look at the Cronos Group, Inc. (Nasdaq: CRON) chart below. The parallel blue lines show where the trend paused before continuing on. There’s an argument to be made for this as an example of a wedge or even a triangle depending on how you draw the lines. Don’t let that get in the way of the point.
Notice the price range was tested several times both top and bottom before the upward trend continued.
The wedge is another continuation pattern that’s pretty easy to see on a candlestick chart once you get some practice. Look for a flat support line on one side of the wedge. Depending on whether it’s a bullish or bearish wedge, the opposing support or resistance line approaches the flat line at an angle.
Examples of Wedge Continuation Patterns
Check out the Hemp Americana, Inc. (OTCMKTS: HMPQ) chart below. This chart is interesting because there was a morning panic several days in a row. The first two days, the selloff was followed by a wedge-shaped consolidation. The third day it was more of a rectangle.
Flags are pretty easy to see because the initial price movement — the trend — is steep. This flagpole is followed by the flag which usually slopes in the opposite direction. After the flag, the trend continues.
Another thing you might notice with flags: price action on the breakout or breakdown after the flag is similar in range to the movement before the flag. For example, if the flagpole is a rise of 20 cents per share, then after the consolidation it would be reasonable to expect another movement of roughly 20 cents.
This is important because it gives you some idea of possible entry and exit points. It helps you plan your trade and know how to cut losses quickly if the trade goes bad.
Example of a Flag Continuation Pattern
In the Cara Therapeutics, Inc. (Nasdaq: CARA) chart below, the flag continuation pattern is a clear consolidation moving the opposite direction to the trend. Notice how the continuation after the flag is practically identical in height/price range as the original flagpole.
There are a few varieties of continuation patterns in a triangle shape. The triangle can be symmetric or asymmetric. It can be sloping up or down depending on the trend. Sometimes they’re called pennants.
Example of a Triangle Continuation Pattern
Check out the New Age Beverage (Nasdaq: NBEV) chart below. The downward trend is broken by the triangle shaped consolidation period. This one is pretty obvious. The key point to understand is that during the consolidation period, the highs and lows begin to converge.
Key Tips for Coming Up With Your Continuation Patterns Trading Plan
Number one on the list when it comes to trend continuation patterns: they all trade in a similar manner. What I mean by that is, even though the shapes are different, they are all consolidation periods that interrupt the trend.
The different shapes might provide you with expectations about entry and exit points. But the idea is the same. One more thing: The shapes aren’t always perfect. Don’t force the trade if the shape looks off — it might not be a continuation.
At the same time, you don’t have to wait for the perfect symmetrical triangle or rectangle to appear on the chart. You might be waiting forever. Better to understand the psychology of what’s happening — the opposing buy and sell forces at play — and then use that to your advantage.
Once the period of consolidation happens, look for confirmation of trend continuation.
It doesn’t matter if you’re planning your trade around bullish or bearish trend continuation patterns or some other pattern; your trading plan must have entry and exit points, stop losses, the reason you think the stock will behave the way you hope, a news catalyst …
… and more.
You need to plan every trade this way. My student Tim Grittani has page after page of spreadsheets with every detail of every trade he’s made or planning to make. That’s why he’s my most successful student: he makes a plan and then executes it.**
Don’t Trade Too Big
You don’t have to be making money all the time. You don’t have to be trading constantly. I suggest you learn to trade less and profit more.
Here’s another one: You don’t have to trade big to build your account up. To be clear, you shouldn’t try to trade big until you have a lot of experience. There’s no point! Would you try to learn anything else in life by going big right from the beginning?
Trading big when you’re not ready only puts you at greater risk. Instead, work on making small gains and if you take losses make them as small as possible. Learn how to trade by trading small. Learn to cut losses quickly.
Small Gains Add Up Over Time
This is one of the most beautiful things about trading penny stocks. You can educate yourself. Focus on training. Study up. Then you can start by trading small positions and build up your account over time.** They add up.
The more small gains you get over time, the more experience you’ll have. Then you can consider taking larger positions. But for now, trade small and win as often as possible. If you join the Trading Challenge you’ll have a chance to network with other traders who’ve been in a similar position to you. You can ask them how they got from there to where they are now.
Most of them made lots of small gains. They made a trading plan. They stuck to their plan and then cut losses quickly. They learned to let their winners run and other trading strategies to take profits along the way. These are all part of the skills I teach my students. You can learn them too if you’re willing to put in the time and stay dedicated.
Don’t Trust Promoters
These guys are straight-up scam artists. Don’t chase trades. Don’t let your ego get in the way. Don’t be jealous of other traders. And don’t trust promoters. They don’t have your best interest at heart. They promote stocks so the price will go up and then they dump to take profits.
It’s widely reported that 90% of traders fail. And one of the reasons many fail is because of these scam-artist promoters. Steer clear!
Don’t Trade Without the Right Knowledge
I’m shocked sometimes when I hear about newbie traders trying to teach people to trade. They think because they’ve turned a couple thousand into $10K that they’ve arrived and are ready to teach.
I’m nearly as surprised when I hear about some newbie blowing up an account because they have no idea what they’re doing. I shouldn’t be surprised any longer because this story happens over and over. Stop. Focus on your education. Study up.
You want to learn to recognize and trade continuation patterns? Study.
Gain Knowledge First
The vast majority of traders lose. I think my rules and patterns give you a significant advantage. I teach my students to think differently. Pretty much every year since I started I’ve been profitable.** Sure, I have losses (who doesn’t?), but they aren’t much. And when they happen, most of the time it’s because I’ve broken my own rules. The lesson to be learned: Gain knowledge first.
Don’t Trade Without Practice
This should seem obvious, right? I still have to mention it because I’ve seen some crazy things. Somebody comes along, watches a few videos, learns to recognize one or two patterns and then starts trading live. With real money.
This is the kind of action that ends in tears. Why would you trade with live money when you can practice first? This isn’t rocket science; it’s a learnable set of skills and body of knowledge. But it takes practice, it takes effort, and it takes dedication.
Practice Trading First
StocksToTrade — the proprietary trading platform I helped to create — has paper trading capabilities. You can practice trade to your heart’s content. You can paper trade the exact patterns I use a lot of the time (here’s how to do it).
You could spend the next month working on recognizing and practice-trading the continuation patterns I showed you. Then, after you’ve got it down to where you’re winning with practice trades more than half the time, you can give live trading a shot. Doesn’t this make more sense than losing your money?
I get a lot of people saying things like, “But Tim, I don’t want to pay the monthly fee just to paper trade. If I’m going to pay the fee then I want to trade live.”
That’s ridiculous! Stop! Spend a little money and time on your education. Jump in and trade live without study and practice and you’re going to learn some hard lessons.
Let’s face it: You’re probably going to learn some hard lessons even if you practice first, but at least you won’t blow up your account. Nearly all traders go through this. It’s called learning. But be smart about it.
Back to those continuation patterns…
I teach them (and more) as part of my Trading Challenge. But you have to study and put in the time. If you’re not willing to be dedicated, this isn’t going to work. I want the most successful students possible. I want dedicated students. The game is going on, with or without you. Are you in, or out?
The Trading Challenge isn’t about me giving you hot stock tips, although I do give alerts and share my watchlist. I show you all my trades — both winners and losers. But the Trading Challenge is more than that: You’ll learn skills you can use to trade for the rest of your life.
I want students who are willing to dig in and learn this stuff. Like my top student Tim Grittani. Like Mason Fecht. Like Dominic. Like all the students who’ve paid their dues and worked hard to get where they are. Are you dedicated? Are you willing to study and work hard? Then the Trading Challenge might be right for you.
The Bottom Line
Learning to recognize continuation patterns is foundational information. Take these four we’ve talked about today and go find some examples. They don’t have to be perfect, but you need to be able to see them pretty clearly.
Start building your foundation. Right now. Here are a few things to do every day: Build a watchlist. Make a trading plan. Keep a trading journal. Look for patterns.
Are you a trader? Do you use continuation patterns in your trading? Leave a comment below and tell me how it works for you. I want to hear from you!