3 trend continuation patterns. Forex patterns and trend-trend continuation chart patterns in the form of Japanese candlesticks
Continuation patterns are different types of price consolidation phases that occur within long-term trends. As the name suggests, the continuation pattern is expected to end with a price movement in the same direction that preceded its formation.
Triangles
Triangle is an area of price consolidation, the boundaries of which are crossed. The Forex triangle can serve as a sign of a reversal or, more often, a trend continuation. A small triangle 10 to 15 percent of the previous trend is usually a trend continuation pattern. Many up and down trends are broken up by such triangles, much like phrases are divided into parts by commas. Large triangles, whose height is a third or more of the previous trend, usually turn out to be reversible changes. And finally, some triangles turn into a regular price corridor.
Triangles can be divided according to their angle into three large groups: symmetrical, ascending and descending.
1. Symmetrical triangle
The upper and lower lines of a symmetrical triangle go with the same slope: that is, if the upper line is inclined at 30 degrees to the horizontal, then the lower one is also inclined at 30 degrees. The symmetrical triangle reflects the equality of the strengths of the bulls and bears and is more likely to mark a continuation.
- Forex technical analysis is a rather difficult way to study the forex market, but with all this, you cannot get away from using it.
2. Ascending triangle
Has a relatively flat top border and a rising bottom border. The flat upper boundary shows that the bulls remain strong and can push prices up to the same highs, while the bears are weakening and cannot push prices down as low as before. An ascending triangle is more likely to end with an upside breakout.
3. Descending triangle
Has a relatively flat bottom border, and its top border goes down. The flat bottom line shows that the bears remain strong and lower prices to the previous level, while the bulls are weakening and cannot raise prices as high as before. A descending triangle is more likely to end with a descending breakout.
Volume falls as the triangle ages. If it rises as prices move up, then an upward breakout is more likely. If volume increases as prices approach their lows, a breakout is more likely to be downward. A true breakout is confirmed by a spike in volume that is at least 50 percent off the five-day average. From the triangle, you can calculate the minimum price level for the next market move. Measure the height of the triangle from the base and stand vertically from the point where the triangle was broken.
Flags and pennants
Flags and pennants are narrow and short-term (for example, one to three weeks) consolidation phases within trends. A technical analysis pattern is called a flag when it is bounded by parallel lines and a pennant when the lines converge.
A pennant with a slope opposite to the trend serves as a continuation pattern... An old saying goes: “ The pennant is raised in the middle of the mast”, That is, the rise is likely to last as long after the pennant as it did before it. A pennant tilted along a trend indicates that the trend is about to reverse. Pennants may look like triangles, but they differ in time: a triangle takes much longer to form.
Flags and pennants usually reflect pauses in a strong trend. In other words, these patterns are usually followed by price movements in the same direction that preceded their formation. A breakout of the border of a flag or pennant can be seen as confirmation that the trend is continuing and as a signal to trade in the direction of the trend. Since breakouts usually occur in the direction of the main trend, it makes sense to open positions during the formation of a flag or pennant, without waiting for its breakdown. This approach provides more favorable conditions for entering the market, and without a significant deterioration in the percentage of profitable trades.
After a breakout from a flag or pennant, the lower point of the model (in the case of an uptrend) can be used as a defensive stop. Significant breakout outside the flag or pennant in the opposite direction to that expected, i.e. against the main trend, can be viewed as a signal of a potential trend reversal.
Flags and pennants are usually directed in the opposite direction of the main trend. If a downtrend forms during an uptrend, place a buy order above the last high of the peak to catch the upside breakout. A rising flag in an uptrend is a sign of an ongoing redistribution of power and a downtrend is more likely. A sell order should be placed below the last low in the flag. In a downtrend, the opposite should be done.
Flags or pennants that form near the top of a trading range can be particularly important bullish signals. When a flag or pennant forms below the upper border of the trading range, it indicates that the market is not retreating, although it has reached the area of strong resistance - the top of the range. Such price behavior has upward consequences and suggests that the market is gaining momentum for a final upward push. In general, the longer the trading range, the greater the potential significance of a flag or pennant forming near its upper boundary. For the same reasons, flags or pennants that form near the lower end of a trading range are important honeymoon patterns.
Continuing trend patterns, or consolidation patterns, can be found when a sideways trend or period of consolidation occurs after a prolonged uptrend or downtrend. In such cases, you can find a certain pattern, a pattern that will help to predict the direction of the asset price in the future and even predict its ultimate goal - the price that the market will reach after the pattern breaks out and the trend continues after consolidation. Finding a classic pattern on a chart can be difficult, though. Moreover, sometimes the model does not always coincide with the expected one. On this we can recall the minus of technical analysis - the element of subjectivity.
Continuation patterns are as follows:
- triangles
- rectangles
- pennants and flags
Patterns occur in both uptrends and downtrends.
Triangles are divided into three types - a triangle with a flat top, a triangle with a flat base, and an isosceles triangle. For example, a triangle with a flat bottom is a struggle between bulls and bears, when the price of an asset on a rebound from the bottom remains at approximately the same level, and on a rebound from the upper side of the triangle (top), the price decreases each time. I also note that the more reliable the model is, the closer the price approaches the apex of the triangle, without making a breakout. An ideal triangle is considered when the price touches its sides three times, and breaks out on the fourth.
It follows from all this that the option must be purchased on a rebound from the side of the triangle, or upon a breakout. At the same time, you can determine the target price. In case of a breakout, the target price is approximately equal to the height of the unused side of the triangle, that is, the side that is not a “wall”, the price does not bounce off it.
But there are also certain cases when the price breaks through the triangle, goes in the right direction, but then reaches a certain limit and abruptly changes the direction of movement. In an uptrend, this situation is called a "bull trap", in a downtrend, it is called a "bear trap".
Rectangles
Pure rectangles represent support and resistance levels. That is, the price reaches this level, tries to overcome it, and then either bounces off and goes in the opposite direction, or breaks the level. If the price has broken through the level in the direction of the trend, then we should expect its continuation. If the price breaks the rectangle in the opposite direction of the trend, then this situation is considered a strong trend reversal pattern. Sometimes, after a breakout, a correction or retracement period should be expected. In this case, the price tries to check the “broken” level, say, resistance, which after the breakout turned into a support level.
The target price, as in the case of triangles, is calculated as the height between the "walls" of the pattern.
Flags and pennants
The flag and pennant are very difficult to identify on a chart. They mainly occur in high-volatility markets after a sharp increase or decrease in prices, forming a flagpole. It should be noted that the volume should decrease during the model's operation. In terms of the shape of the flag and pennant, the flag looks like a downward parallelogram, and the pennant looks like a downward triangle.
The most common trend continuation patterns are "flag" ("flag ") and " pennant " ("pennant These chart patterns are identified and analyzed on a bar “bar” price chart (Fig. 14.12).
"Flags" and "pennants" are formed only within the trend, are a sign of a trend correction confirming its continuation ("the trend is accompanied by ups and downs"), and are formed as two parallel straight lines drawn above and below downtrend in an uptrend or rising in a downtrend daytime bars. The slope of the "flag" is always directed in the direction opposite to the main price movement.
Rice. 14.12. Graphic models "flag" and "pennant" on the chart of shares of OJSC "LUKoil"
It is noticed that after the completion of the correction (completion of the formation of the "flag" pattern), the subsequent rise or fall in prices will be at least equal to the average value of the bars in the pattern (numbers 1 and 2 in Fig. 14.12). This property of the "flag" is reflected by the saying "the flag always rises to the middle of the flagpole" and if the trend stops the emergence of the "flag" or "pennant" patterns, then the investor needs increased attention, as the strength of the trend is depleted. The duration of the formation of models is from four to 10-12 days.
Graphic model "triangle" are quite common, but identifying them requires certain skills. There are three types of triangles - symmetrical, ascending and descending. All of them refer to trend continuation patterns, and their identification on the price chart indicates the continuation of the trend in which they originated. The triangle pattern forms within the current trend and lasts two to six seven weeks. A schematic model of a symmetrical triangle forming on an uptrend is shown in Fig. 14.13.
As is obvious from Fig. 14.13, the formation of a symmetrical triangle begins with the peaks numbered 3 and 5 being lower than the previous peaks, and the bottoms are slowly rising. At first glance, this price behavior indicates the end of the uptrend, and only an analysis of this price model allows us to draw a more reasonable conclusion. To do this, two straight lines are drawn along four points of local extrema - two peaks 1 and 3 and two bases 2 and 4, the intersection point of which is called "vertex" ("apex"). These lines act as a support line (line 2-4) and a resistance line (line 1-3). To make the figure complete, a perpendicular is dropped from vertex 1 (" base" – "base") to line 2-4. The result is a "symmetrical triangle lying on its side". The formed model covers the period of price consolidation, when, after a rapid rise or fall, market participants stop and evaluate their positions.
If in the interval from 1/3 to 1/4 of the height of the ascending symmetric triangle the price breaks the upper line 1–3, then the uptrend will continue, if no breakdown does not occur, then the price will move to a sideways trend or even a trend reversal will occur. At the same time, it is possible to estimate the minimum value of further price growth after the breakdown of the line 1–3. To do this, a perpendicular rises from the breakdown point h, equal to the size of the base. Its top will be the desired minimum value of the rise in prices. Another method allows you to identify the direction of price movement. For this, in our case, a line is drawn from point 2 in the direction of line 2–4. The corridor formed in this case is directed towards the price movement. The analysis of a symmetrical triangle formed on a downtrend is carried out in a similar way.
Let's consider the formation of a symmetrical triangle using the example of prices for shares of OJSC "LUKoil" (Fig. 14.14). In early May 2006, after a long rise, the company's shares began to fall sharply. Their fall stopped on May 22, and the same rapid rise began. As a result of subsequent price changes, a "symmetric triangle" pattern was formed (tops 2–4 and bottoms 1–3). The significant range of price fluctuations in the triangle led to the fact that the magnitude of the price drop after the completion of the pattern was also significant.
Rice. 14.13. Scheme of the graphical model "symmetric triangle"
Rice. 14.14. Symmetrical triangle on the price chart of OJSC "LUKoil", May-June 2006
ascending and "descending triangles". As the name suggests, these patterns are formed on an uptrend and a downtrend, respectively. Although these triangles are a kind of symmetrical triangle, at the same time, with their help, unlike a symmetrical triangle, it is possible to accurately determine the development of a trend. The diagram of the ascending triangle is shown in Fig. 14.15.Rice. 14.15.
An ascending triangle is formed on an uptrend when the rise in prices temporarily stops. An ascending triangle is built, like a symmetrical one, along four points - two vertices (points 1 and 3 on the diagram) and two bases (points 2 and 4). In this case, the upper line 1–3, which acts as a resistance line, is usually close to horizontal, and the perpendicular to line 2–4 dropped from top 1 completes the formation of the "right triangle" pattern. The horizontalness of the upper line is explained by the continued high activity of buyers, which ensures the subsequent rise in prices, therefore, the ascending triangle is considered a "bullish" pattern.
A breakout by the closing price of the upper line of the triangle is considered to be a signal for the completion of the pattern. In turn, a descending triangle is a mirror image of an ascending triangle in a falling market and is considered a "bearish" pattern. The formation period for both models is from 2 to 10 weeks.
Graphic model "expanding formation" or " expanding triangle " Is a price change model, conventionally referred to as triangles. It arises when two strong groups of "bulls" and "bears" are formed in the market, consisting largely of private investors, each of whom wants to turn the market in its own direction. The model is relatively rare and is characterized not by the convergence of the sides of the triangle, as described above, but by their divergence. In other words, this model describes the state of the market when "bulls" and "bears" begin to "swing" this market, increasing and decreasing prices in waves.
At the same time, the volume of trade also increases, i.e. the market becomes spontaneous. The pattern forms at the top of an uptrend. This is a bearish pattern as it ends with a trend reversal; the fall of the market (Fig. 14.16). The model consists of two or three consecutive vertices (in the diagram 1.3,
5) and two or three bases (2,4,6). The model formation period is 6-10 weeks.
Graphic model "diamond" or "rhombus". Sometimes referred to as a "diamond formation". The model consists of two triangles - an expanding one and the next symmetrical one (Fig. 14.17). It occurs at the top of the market and forms within 4-10 weeks. In the first half of the model, trade volumes consistently increase, and in the second, they decrease. This pattern is rarely formed and is considered complete when the price breaks the lower side of the symmetrical triangle.
Rice. 14.16. Expanding triangle or "expanding formation" diagram
Rice. 14.17. Diagram of the graphical model "diamond"
Graphic model "wedge" ("wedge ") can also be thought of as a type of triangle. It forms within an ongoing uptrend or downtrend and by its appearance confirms its continuation. A wedge forms within one to two months and is shaped like a symmetrical triangle tilted in the opposite direction of the trend. A sharp downward angle is considered a "bullish" pattern, since it is formed on an uptrend and confirms its continuation (Fig. 14.18).
A wedge, like other trend continuation patterns, is a stage in the development of a trend after a rapid rise or fall, during which market participants assess the trend. Typically, the wedge extends from 2/3 to 3/4 of its length before the breakout.
Graphic model "rectangle" represents a period in the development of a trend, after which the trend continues its movement. The pattern is a chain of successive ups and downs with the same amplitude that occur during the development of a trend. When analyzing, the analyst draws straight lines along the tops and bottoms of the figure, often parallel, which gave the name to the graphical model. Another name for the rectangle is "price corridor". The resulting figure can be parallel to the abscissa axis of the graph or slightly tilted. Refers to medium-term patterns that form within one to two months (Fig. 14.19).
Rice. 14.18. Scheme of the graphical model "wedge"
Rice. 14.19. Diagram of the "rectangle" graphical model on a downtrend
Rectangles of different lengths are formed on both uptrends and downtrends. Their occurrence is a consequence of the market struggle between two equal in strength groups of "bulls" and "bears". As a rule, after the completion of this struggle, the market continues to move in the direction of the previous trend. Based on the amplitude of price fluctuations h in the rectangle, you can estimate the minimum value of the subsequent price change after the breakout. To do this, as shown in Fig. 14.19, the height of the rectangle h transferred to the breakout point of the bottom line of the rectangle, which acts as a resistance line on a downtrend.
There is another way to measure the magnitude of future price changes after a breakout. It is used in case of excessively long sideways price movement in a rectangle. The length of the rectangle is measured and transported to the breakout point in the form of the height of the price change. In this case, it is assumed that the protracted struggle between "bulls" and "bears" leads to the accumulation of significant market energy, expressed in a strong jerk after a prolonged pause (Fig. 14.20).
Rice. 14.20. Scheme of price changes after the completion of the "rectangle" chart pattern on a downtrend
In Forex, a descending triangle appears when a currency pair is in a downtrend and tries to reverse. During this time, the currency pair is supported by sufficient demand from buyers to lock in the price, but at the same time it forms consistently lower highs. This leads to a drop in volatility as the price shrinks into a narrowing range. This forms the characteristic Descending Triangle.
After that, the market usually breaks out the lower border of the triangle. This pattern indicates a continuation of the trend, not a reversal.
In markets that are less liquid than Forex, traders usually only pay attention to patterns that cover longer periods of time (weeks or months).
However, in Forex, these patterns can appear and trade profitably at different time frames.
A descending triangle is classically a bearish signal.
Descending Triangle Formation.
A descending triangle is classically a bearish signal. Make sure the triangle is in a downtrend. It should have a flat or nearly flat pivot line at the bottom and a falling upper line, which is the resistance level. The price range should be narrowing. A decrease in volatility can be checked using the (Average True Range) indicator.
For the Descending Triangle pattern to be valid, price must form "teeth" that must get smaller and lower.
When you trade Sell, the first thing you need to do is confirm the downtrend. This is because a descending triangle usually appears as part of a small retracement wave during a stronger trend.
The structure itself does not have to be the whole trend or a large part of it. Use to confirm a trend.
Zooming in to check below and above the emerging Descending Triangle. If there is a strong support level nearby, then you should refrain from selling deals.
Descending triangle example on the chart.
As with the Ascending Triangle, there is a lot of subjectivity in the interpretation and presentation of the exact shape of the Descending Triangle, especially on small timeframes. Triangle patterns can appear throughout the trend. You can see them from the beginning of the trend to the middle, and then to the very reversal.
The descending triangle can be found in two different shapes.
1. The first is when the formation of a triangle ends with a strong bearish breakout. An example is shown in the figure below. This pattern is common in downtrends. An area of price consolidation is formed with a decrease in volatility.
2. The second form is a smooth continuation of the downtrend. It differs in that after the formation of the triangle, the trend resumes without serious breakdowns. The figure below shows such an example.
Breakout direction and strength.
After the Descending Triangle completes its formation, there is no way to know exactly how and when the bearish breakout will develop.
One of the popular ways is to wait for the close of a candlestick that breaks the lower support line. This creates a specific input signal.
As with other triangle patterns, the size and orientation of the pattern is a useful guide for determining the possible size of a breakout and is used to determine stop loss and take profit targets.
How to use the Descending Triangle in trading?
When trading the Descending Triangle, expect a breakout shortly after completing its formation. At this point, volatility contracts the most, and the market is ready for a new surge in activity.
The total take profit is set according to the depth of the triangle pattern. Suppose the distance from the highest point to the lowest point is 200 points. Take profit is set equal to or slightly less than this value.
Triangles are technical breakout patterns. Therefore, if there is no fundamental reason to hold the position, it is better to close the position if the bearish breakout did not occur.
You should also use no more than ¼ of the total length of the triangle to set the order expiration date. For example, if the triangle takes 8 days, it means that the expectation of a breakout is no more than 2 days.
When trading the Descending Triangle, you can use pending orders. They can be placed below the support level (lower triangle line).
You can get acquainted with other models of graphical analysis
Continuation patterns usually mean that the period of price stagnation depicted on the chart is nothing more than a pause in the development of the mainstream and that the direction of the trend will remain the same after they are over.
This is how they differ from the patterns reflecting the reversal (reversal) of the main trend.
Another criterion for distinguishing between reversal and trend continuation patterns is the duration of their formation. It usually takes longer to plot reversal trends. Continuation patterns are shorter.
Triangles.
Triangles are usually classified as symmetrical, ascending and descending, as well as an expanding triangle and a Diamond or Diamond formation.
An ascending triangle is considered a bullish pattern, while a descending triangle is considered a bearish pattern. Both the ascending and descending triangles differ significantly from the symmetrical one. Regardless of at what stage of the trend they are formed, these models very clearly predict the market situation.
In contrast, the symmetrical triangle is a neutral pattern. This does not mean, however, that the development of market dynamics cannot be predicted using a symmetrical triangle. On the contrary, since it belongs to the trend continuation patterns, the analyst can determine the direction of the previous trend, and then draw a completely logical conclusion that it will continue.
It is argued that due to the lack of an unambiguous affiliation with bullish or bearish patterns, the symmetrical triangle lacks predictive value. This statement is not entirely true, as this type of triangle usually indicates the resumption of the trend after a pause. Thus, it is clear that the symmetrical triangle is still capable of producing a reliable prediction.
Symmetrical triangle.
Typically, a trend continuation pattern. It marks a pause in an already existing trend, after which the trend resumes. Although, in the general case, a symmetrical triangle can be both a continuation pattern and a reversal pattern. The direction of the market movement is usually determined by the direction of the price breakout outside the pattern.
Fig. 1. An example of a symmetrical triangle in an upward market. The pattern is considered complete when the closing price is fixed outside either of the two support or resistance lines that form a triangle pattern. The vertical line on the left is the base of the model, and the point on the right where the lines converge is the top.
The minimum requirement for each triangle is four anchor points. To draw a trend line, as we remember, you always need two points. Thus, in order to draw two converging lines, each of them must pass through at least two points.
There are two ways to measure a symmetrical triangle. One is to measure the height of the bottom (AB) and project this distance vertically from the breakout point C or from the top. Another way is to project up a line parallel to the bottom line of the pattern from the top of the bottom (point A). An example of a Head and Shoulders pattern for a market top.
Ascending triangle.
The top side of the triangle is horizontal and the bottom rises upward. This pattern means that buyers are more active than sellers. Such a pattern is considered bullish and usually ends with a breakout of prices beyond the upper line.
Fig. 2. Ascending triangle. The pattern is considered complete when a significant exit of the closing price beyond the resistance line is recorded. The breakout should be accompanied by a sharp increase in volume. The upper resistance line turns into a support level during subsequent price drops. The minimum price reference is determined by measuring the height of the triangle (AB) and projecting that distance upward from the breakout point C.
Ascending and descending triangles are a kind of symmetrical, but they have different prognostic functions. Notice that for an ascending triangle, the resistance line that limits the price range from above is horizontal, and the support line is moving up. This pattern means that buyers are more active than sellers. Such a pattern is considered bullish and usually ends with a breakout of prices beyond the upper line.
The measurement method for an ascending triangle is pretty simple. Measure the height of the model at its widest point and project the resulting distance upward from the breakout point. This is the point for determining the minimum price target.
Descending triangle.
A descending triangle pattern is a mirror image of an ascending triangle and is generally considered a bearish pattern. This pattern means that sellers are more active than buyers, and usually ends with a further fall in prices.
Fig. 3. Descending triangle. The pattern is considered complete when the closing price breaks out of the lower horizontal line. To measure, you need to determine the height of the triangle (AB), and then project it down from the breakout point (point C).
When considering triangles, you should pay attention to the time of their formation. Typically, a triangle is considered an intermediate pattern, as it forms within one to three months (for charts on a daily scale). A triangle that lasts less than a month is most likely not a triangle, but a different pattern, such as a pennant, which we will consider below. Triangles sometimes appear on long-term price charts, but they are more typical for daily charts.
Expanding triangle.
All of the triangle models we've looked at so far have formed within converging lines. The expanding triangle is built the other way around. In addition, in other types of triangular patterns, as the range of price fluctuations decreases, the volume decreases. In the case of an expanding triangle, volume increases along with the increase in the range of price fluctuations. This indicates that the market is going out of control; traders' actions are subject to emotion rather than common sense. This pattern indicates very high activity in the market of the general public, therefore it often appears at the end of the final phase of the main trend, that is, at the top or bottom of the market. Thus, an expanding triangle is still usually a reversal pattern.
Fig. 4. An example of an expanding triangle. Usually formed at the reversal of the main trend and differs in the above example with three rising peaks and two falling downturns. The pattern ends at the crossing of the second recession level. In the process of forming such a model, the direction of the conclusion of transactions is unclear. Fortunately, it is relatively rare. For a bear market, the picture will be symmetrical.
This pattern also contradicts the pattern of the trend we have considered, in which a breakout of the previous peak level usually indicates a resumption of an uptrend, while a breakout of the previous downturn level signals the start or continuation of a downtrend. A trader who uses up and down breakouts as signals for action can be faced with a number of false signals.
In the example shown in the figure, the model ends and a signal is received about the beginning of the main downtrend when the price movement from the third peak crosses the level of the second recession (point 6). Various filters are used to minimize false signals at such crossings. Because the pattern has three highs and two lows, it is sometimes referred to as a five-point trend reversal pattern. After the receipt of a bearish signal completing this top pattern, a reversal upward movement of prices may be observed, amounting to 50% of the previous segment of price fall, after which the bearish trend resumes.
The expanding triangle is a relatively rare pattern that, if it does arise, it is usually on the eve of a break in the main trend. For a bull market, it resembles an expanding triangle with three successively rising highs and two falling lows. The expansion of price fluctuations is accompanied by a gradual increase in trading activity. This formation ends at the crossing of the second recession level, which follows after the market reaches the third peak.
Diamond or Diamond Formation
Another relatively rare reversal pattern that combines two different triangle patterns - an expanding and a symmetrical one. The figure shows that the first half of the formation has the shape of an expanding triangle, the second half is symmetrical. The dynamics of volume generally corresponds to the price dynamics: in the first half of the formation, the volume increases, and then, as price fluctuations in the second half decrease, it decreases.
The lines bounding the figure first diverge and then converge to form a graphic pattern resembling a diamond. This is where the name of the model comes from. Most often it is a trend reversal model, and only occasionally a trend continuation model. The Diamond pattern ends with a breakout of the rising support line in the second half of the formation, with trading activity usually increasing.
Fig. 5. An example of a diamond. This is a trend reversal pattern that forms at the top of the market. At first it resembles an expanding, then a symmetrical triangle. The pattern ends when the lower, uptrend line is crossed.
The measurement technique with the diamond model resembles the already described methods of measuring the triangle models. Distance is measured strictly vertically at the widest part of the model and then projected downward from the breakout point. Sometimes there is a retracement of prices, reaching the lower resistance line, after which the downward trend resumes.
Flag and pennant.
The flag and pennant patterns mark short pauses in a dynamic trend. Formation of these patterns on the chart should be preceded by a steep and almost straight line of price movement. They denote markets that, in their development up or down, seem to overtake themselves and therefore must stop and rest for a while before continuing to move in the same direction.
Flags and pennants are among the most reliable continuation patterns.
The flag resembles a parallelogram or rectangle bounded by two lines with a slope from the movement of the prevailing trend. In a downtrend, the flag should be pointing slightly up.
The pennant pattern can be identified by the two converging lines that bound the shape, and a more horizontal position. The pennant resembles a small symmetrical triangle.
Fig. 6. An example of a bullish flag. The pattern usually appears after a sharp movement in prices and marks a short pause in the development of a trend. The direction of the slope of the flag is opposite to the direction of the price trend. During its formation, the volume of trade decreases, and then, when the trend line is broken, increases. This pattern usually appears in the middle of a price movement.
Fig. 7. Bullish pennant. It resembles a small symmetrical triangle, but its duration does not exceed three weeks. This pattern is formed with a small volume. The movement of prices after its completion should repeat the distance traveled by prices before the appearance of the pattern.
Both patterns are forming against the backdrop of a gradual significant decline in trading volume. Both patterns are relatively short-lived and complete within one to three weeks (for daily charts). Completion of both patterns occurs when the resistance line, which limits the figure from above, is crossed during an uptrend. A break of the support line enclosing the figure below indicates a resumption of the downtrend. In both cases, the breakout of analytical lines should be accompanied by an increase in trading volume.
The measurement methods for both models are almost the same. Figuratively speaking, the model flag and pennant "take off from the flagpole to half the length of the mast." By "flagpole" is meant a sharp rise or fall in prices prior to the appearance of the pattern. "Half mast length" suggests that such small trend continuation patterns usually occur around the middle of a move. In general, the price movement after the trend resumes will cover a distance equal to the length of the "flagpole" or the length of the price movement before the formation of the pattern.
More precisely, measure the length of the previous price move from the point of the initial breakout, that is, from the point at which the new trend signal first appeared. A segment equal to the length of the previous movement along the vertical is projected from the breakout point of the flag or pennant and indicates the goals of the market movement.
Once again, let's name the most important features inherent in the flag and pennant models.
1. The emergence of such patterns is preceded by a sharp movement of prices in the form of an almost straight line, accompanied by a significant volume of trade.
2. Then there is a pause, and with a small volume, prices are kept at approximately the same level for one to three weeks.
3. The trend resumes with a sharp increase in trading activity.
4. Both patterns form approximately in the middle of the price movement.
5. The pennant has a shape similar to a small horizontal symmetrical triangle.
6. The flag resembles a small parallelogram tilted against the movement of the mainstream.
Wedge model.
In shape and duration of formation, the wedge pattern resembles a symmetrical triangle. Like the symmetrical triangle model, the wedge is easily recognizable by its two lines converging at its apex, but the wedge is distinguished by a significant upward or downward slope of both lines forming the figure. Typically, the wedge lines up against the direction of the mainstream. A down wedge is considered a bullish pattern, and an up wedge is considered a bearish pattern.
Fig. 8. An example of a bullish down wedge. The pattern is formed by two converging lines and is directed downward, opposite to the development of the mainstream.
Fig. 9. An example of a bearish wedge. The bearish wedge is directed upwards, against the direction of the dominant downtrend.
Wedges are most often formed during the development of an existing trend and, as a rule, are patterns of the continuation of the trend. However, sometimes, very rarely, they can also form at the top or bottom of the market, signaling an imminent trend reversal. However, this happens very rarely.
Regardless of where this pattern is formed - in the middle or at the end of the price movement segment - it is always necessary to be guided by the rule that an upward wedge is a bearish pattern, and a downward wedge is a bullish pattern.
As a rule, such a pattern, before the breakout, manages to cover two-thirds of the distance to its peak, and sometimes even reaches it (the ability to go all the way to the peak also distinguishes it from a symmetrical triangle). As the wedge forms, the volume should decrease, and then, upon a breakout, it should increase. In a downtrend, a wedge forms faster than in an uptrend.
The material presented is a synopsis of the relevant sections of the book: John J. Murphy. Technical analysis of futures markets: theory and practice. - M .: Sokol, 1996.