Candlestick patterns are the building blocks of technical analysis in financial markets. Technical analysts rely on candlestick continuation patterns when trying to predict where the market (or an individual stock) will move after a period of consolidation.
Continuation patterns in charts highlight periods of correction and consolidation that take place while the market is trending. In technical analysis, there are many different types of continuation patterns.
Candlestick continuation patterns occur mid-trend, signalling that a prevailing trend is likely to resume after a period of consolidation. Below are some of the common candlestick continuation patterns.
Types of Candlestick Continuation Patterns
Triangles, either ascending or descending, are common continuation patterns. These patterns occur whenever there is a convergence of a price range, be it higher lows or lower highs. The convergence of prices is what creates a triangle formation which can have a bullish or bearish bias.
While triangles vary in duration, they often have at least two swings on the high side as well as on the low side, and end up converging at the apex.
Bullish Symmetrical Triangle
A bullish symmetrical triangle is a type of candlestick continuation pattern that occurs when the price is trending upwards. In this case, the price of an underlying asset will register lower highs and higher lows before breaking out after breaching the resistance level, in continuation of the prevailing trend line.
Bearish Symmetrical Trend Line
A bearish symmetrical candlestick continuation pattern occurs when price is trending lower. In this case, price action will register lower highs and higher lows before ending up in convergence at the apex, before breaking out on the downside.
The market is not always trending. Sometimes, its price will pause and trade sideways in what is often referred to as a range. Rectangles are trading ranges that can occur after an uptrend or a downtrend.
Bullish rectangles refer to a period of consolidation after a sharp move upwards. In this case, price moves up and down in a range allow traders to take partial profits. The trend is only complete once price resumes the upward trend upon breaking out of its range.
On the flip side, bearish rectangles involve prices trading in a range but this time with a bearish bias. The trend is only complete once the price breaks a support level, resulting in further movements on the downside in continuation of the prevailing downtrend.
A flag is another type of candlestick continuation patterns that forms whenever the price is confined in a small price range in the form of two parallel lines. A pause in the middle of a bullish or bearish trend essentially gives the pattern a flag-like appearance.
Unlike triangles and rectangles, flags are generally short and only last a few bars. Once they occur in an ascending market, the price is likely to break out after a short time and continue in the direction of the prevailing uptrend.
Whenever they occur in a bearish market, price will usually break out of the flag pattern and continue in the direction of the downtrend.