'CONTINUE' trading with 'CONTINUATION' pattern !!!!Market can be either in trending phase or in a range-bound phase. No trend generally lasts forever in the market.
After prolonged or medium or shorter duration up and downtrend, the market often reverses and a move starts in the opposite direction of the prior move.
Often we find that well defined geometrical patterns are formed in the chart which provides good indication of price
reversals. These patterns are called reversal classical chart patterns. When they are formed as a bullish reversal pattern they are said to be part of accumulation.
On the other hand if they are formed at the top of a price move just before bearish reversal, then they are part of distribution.
However, a geometrically shaped consolidation does not necessarily mean price reversal. Often price resumes
the erstwhile trend post the consolidation move. These are called continuation classical chart pattern. We will
discuss about few of the classical chart patterns in the following tutorial.
-> Triangles -:
Triangles are one of the most well-known chart patterns used in technical analysis. The three most common types of triangles, which vary in construction and implications,
are Symmetrical Triangle, Ascending Triangle and Descending Triangle.
These chart patterns are considered to last anywhere from a couple of weeks to several months.
These are areas of consolidations after a trending move and are generally continuation patterns, i.e. the erstwhile trends resumes after the breakout. However, in certain cases
they act as reversal patterns. They can appear both in up-trend and down-trend.
-Symmetrical Triangle -:
This kind of triangle is formed when the price of the script consolidate in range which is getting narrower with the time, i.e. the sequence of
lower highs and higher lows.
-Ascending Triangle -:
This kind of triangle is formed when the price of the script consolidate in range which lower bound is getting higher with a stiff upper bound, i.e. the sequence of
higher lows but almost equal highs.
-Descending Triangle -:
This kind of triangle is formed when the price of the script consolidate in range which higher bound is getting lower with a stiff bottom bound, i.e. the sequence of
lower highs but almost equal lows , it is juxtapose of ascending triangle.
-> Flags & Pennants -:
These two short-term chart patterns are continuation patterns that are formed when there is a sharp price movement followed by a generally sideways price movement.
The patterns are generally thought to last from one to three weeks . They can appear both in up-trend and down-trend.
Flag :
Pennant:
-> Rectangles -:
Often there will be pauses in a trend in which the price action moves sideways, bound between parallel support and resistance lines. Rectangles, also known as trading ranges, can last for short periods or many years. This pattern is very common and can be seen often intra-day, as well as on longer-term time frames.
->Mechanism of Continuation Patterns -:
Continuation patterns provide some logic to the price action. By knowing the patterns, a trader can create a trading plan to take advantage of common patterns. The patterns present trading opportunities that may not be seen using other methods.
Unfortunately, simply because the pattern is called a "continuation pattern" does not mean it is always reliable. A pattern may appear during a trend, but a trend reversal may still occur. It is also quite possible that, once we have drawn the pattern on our charts, the bounds may be slightly penetrated, but a full breakout does not occur. This is called a false breakout and could occur multiple times before the pattern is actually broken and a continuation or a reversal occurs. Rectangles, due to their popularity and easy visibility, are highly susceptible to false breakouts.
Patterns can also be subjective, as what one trader sees is not what another trader sees, or how another trader would draw or define the pattern in real time. This is not necessarily a bad thing, as it can provide traders with a unique perspective on the market. It will require time and practice for the trader to develop his or her skill in finding patterns, drawing them and formulating a plan on how to use them.
My Observation -: These geometrical patterns are formed after a trend in that particular stock, it generally resumes the previous trend after being out of the pattern but some times it reverses the previous trend hence, it is advised to wait for the conformation to play the pattern.
In the next publication I'll try to elaborately explain continuation patterns like - head & shoulder, double top & bottom, wedge; Till then,
#Enjoy_trading
