May 18, 2018

Continuation Patterns in Western Technical Analysis

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Continuation patterns take a shorter time to build

Many continuation patterns imply a time of rest before the market resumes its prior trend. In other words, these patterns indicate that the sideways price movement on the chart is just a pause in the prior trend and the next movement will be the continuation of the direction preceding the formation.

The pattern is considered complete when after its formation the trend breaks out of the pattern and continues with the previous trend. This is the main feature that distinguishes continuation patterns form reversal patterns.
Another difference is the time duration. Reversal patterns take a longer time to be formed and represent major trend changes. Continuation patterns on the other side, are classified as intermediate patterns and usually take a shorter time to build. But they can appear on all time frames, from a tick chart to a weekly chart.

Major Continuation Patterns

Triangles are defined as a converging of the price range, with lower highs and higher lows. This kind of price action creates a triangle formation. If the price continues to converge, it will reach the apex of the triangle and the closer the price gets to the apex, the narrower the price action becomes.

An ascending triangle is bullish and a descending triangle is bearish, while the symmetrical triangle is a neutral pattern. This does not mean that a symmetrical triangle has no forecasting value. It is a continuation pattern, which helps technical analysts to make predictions based on the prior trend and assume that the latter will continue.

Triangle formation: 3 patterns to distinguish

The symmetrical triangle has 2 converging trend lines, with the lower line ascending and the upper line descending. The dotted line on the left measures the height of the pattern and is named the base. The point where 2 lines intersect is called the apex.

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Symmetrical triangle

An essential requirement for the formation of this triangle pattern is 4 reversal points (points 1, 2, 3, 4 on the example above). That means, while drawing the converging trendlines, each line must be touched at least twice.
A symmetrical triangle is referred to as a period of consolidation before the price breaks out of the trendlines. If the break is above the upper trend line this signals the start of an upward trend. On the opposite, a break below the lower trendline signals the beginning of a downward movement.

The ascending triangle is a bullish pattern which shows that the price will go higher upon completion. The pattern is composed by 2 trend lines: a flat horizontal line and a rising lower line. The price moves between these 2 trend lines until it breaks out to the upside. The breaking of the upper line signals the completion of the base and indicates a bullish trend.

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Ascending triangle

The ascending triangle usually manifests in an uptrend and it is considered a continuation pattern, but once in a while, it may appear in a downtrend. So it is not unexpected to see an ascending pattern to develop at the end of a downtrend.

The descending triangle is a bearish pattern, which is formed by a declining upper line and a flat bottom line. Although it is a continuation pattern mostly found in a downtrend, sometimes the descending triangle can be seen in an uptrend. The bearish signal is made when the price breaks out of the lower trend line and shows the continuation of a downside trend.

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Descending triangle

The rectangle pattern is quite similar to the symmetrical triangle but has flat trend lines instead of converging ones. It represents a pause in the trend during which prices move sideways between 2 parallel lines. It is mostly considered as a consolidation zone or a congestion area.

A bullish rectangle normally gets formed in an uptrend and signals a trend’s upward direction. On the contrary, a bearish rectangle is formed in a downtrend and signals a trend’s downward direction.

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Rectangle pattern

The importance of volume

A higher volume indicates a higher degree of intensity or pressure. Volume is one of the most important factors in HitBTC trading. Chartists always analyze the upward or downward movement of the volume. Usually, volume bars are shown at the bottom of the chart.

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Example of volume at bottom of a HitBTC bitcoin chart

Chart patterns are confirmed by volume

Volume is used to confirm chart patterns and trends. Any price movement is more significant if accompanied by a relatively high volume than if accompanied by a weak volume.

When the trend is upward and prices are moving up, volume should increase, and conversely, in a downtrend volume should decrease.

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Volume and trend

Volume precedes price in technical analysis

If prices are trending higher, it becomes evident there is more buying than selling pressure. Technical analysts think that volume precedes price, meaning that the loss of downside pressure in a downtrend or upside pressure in an uptrend shows up in the volume figures before it is revealed in a reversal of the price trend. Volume is used by technicians to gather indications of upcoming trend reversals. If the volume starts to decrease during an uptrend, it shows that the upward trend is about to end.

In this post, we explored some major continuation patterns used in Western technical analysis. We also emphasized the importance of volume in trading. Next time we will look deeper into typical continuation signals found in Japanese candlestick charting.

Source: Technical Analysis Explained (by IFC Markets)


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