Continuation Candlestick Patterns
These patterns are a treasure trove of information for traders, offering insights into market trends and potential price movements.
Whether you're a seasoned or a novice trader, continuation candlestick patterns are a treasure trove of information. They give you helpful insights into market trends and potential price movements. Having these valuable clues, you can effectively incorporate these patterns into your crypto trading strategy and boost your profits.
Read below to learn more about continuation candlestick patterns, why they matter in crypto trading, and how to use them to your advantage.
What Are Continuation Candlestick Patterns
Continuation candlestick patterns are a subset of candlestick patterns that occur during a trend. These patterns tell you that a specific trend will likely continue in the same direction. They usually consist of two or more candles that show a temporary pause or pullback in the price movement, followed by a resumption of the trend.
Since they provide crucial information about the ongoing market sentiment, they’re seen as a brief period of rest for either the bulls or the bears before they reassert their dominance.
You can identify continuation patterns by analyzing candlesticks’ shape, size, and positioning on the price chart.
Two Types of Continuation Candlesticks
Continuation candlestick patterns can be divided into two types:
- bullish continuation candlesticks
- bearish continuation candlesticks
Bullish Continuation Candlesticks
- Bullish Pennant
This pattern resembles a small symmetrical triangle that forms after a strong price rally, namely when the price experiences a sudden surge (flagpole) followed by a small consolidation (pennant).
It suggests the bulls are gathering momentum, indicating a temporary consolidation before another upward move.
Traders often enter long positions when the price breaks above the upper trendline of the pennant.
*Tip: placing a stop-loss order just below the lower trendline of the pennant can help manage risk in case the pattern fails to produce the expected bullish move.
2. Ascending Triangle
This bullish continuation pattern features a series of higher lows and a flat upper resistance line. It signifies an increasing buying pressure and a breakout above the resistance line that signals a continuation of the uptrend.
Ideally, during the formation of the Ascending Triangle, there should be an increase in trading volume. This surge in volume often precedes a breakout, indicating strong market interest.
Traders often initiate long trades when the price breaks above the upper trendline.
*Tip: consider using other technical indicators such as the Relative Strength Index (RSI) or Moving Averages to confirm the bullish bias suggested by the Ascending Triangle pattern.
3. Bullish Flag
This pattern resembles a flag on a pole and is characterized by a sharp, upward price movement (flagpole) followed by a consolidation phase (flag). The breakout from the flag formation usually leads to a continuation of the previous uptrend.
The flagpole is a sharp and strong rally in the direction of the prevailing trend, followed by a period of sideways movement or a slight decline that forms the flag. The flag is usually a rectangular shape that slopes against the trend and represents a consolidation phase where the buyers take a break and the sellers try to push the price down, failing to reverse the trend.
*Tip: when trading based on the Bullish Flag Continuation Candlestick Pattern, look to enter a long (buy) position when the price breaks above the upper boundary of the flag. Conversely, you can consider exiting the trade if the price starts to reverse or deviate significantly from the expected pattern.
Bearish Continuation Candlesticks
1. Bearish Flag
The bear flag pattern is the opposite of the bull flag pattern and is represented by a rectangular-shaped pattern that occurs after a sharp price decline. It consists of a sharp, downward price movement (flagpole) followed by a period of consolidation (flag).
The initial sharp decline (flagpole) indicates a strong bearish sentiment, usually triggered by significant news or events. However, as prices consolidate within the flag, it suggests a short-term consolidation before further downward movement.
This consolidation phase represents a battle between buyers and sellers. While some investors may see the reduced prices as an opportunity to buy, the prevailing sentiment is still bearish. This bearish trend will likely continue once the consolidation phase ends.
*Tip: consider taking short positions when the price breaches the lower trendline of the flag.
2. Descending Triangle
The descending triangle is a bearish continuation pattern characterized by a flat support line and a series of lower highs. This pattern occurs when the price creates lower highs and a horizontal support line is formed. It suggests that the selling pressure is gradually increasing, and a breakdown below the support line could signal a continuation of the downtrend.
As a trading strategy, you should consider short positions when the price breaches the lower trendline. It's also crucial to place stop-loss orders above the pattern's upper trendline to manage risks. This helps protect against potential losses in case of an unexpected price reversal.
*Tip: pay attention to the trading volume during the formation of the descending triangle; a decrease in volume as the pattern evolves can further validate its significance.
3. Bearish Pennant
Contrary to the bullish pennant, a bearish pennant pattern occurs when the price experiences a sudden drop (flagpole) followed by a small consolidation (pennant). This pattern suggests that the bears are gaining momentum for another leg down, and a breakdown from the pennant formation often leads to further downward movement.
The volume usually decreases during the formation of the pennant, indicating a lack of interest from both buyers and sellers.
You should closely watch for a breakdown below the lower trendline of the pennant as it signals a restart of the previous downtrend.
*Tip: use the breakout point of the pennant as an entry point for short positions or as an exit point for long positions. This can help optimize risk management strategies.
How to Use Continuation Candlestick Patterns for the Crypto Market
As they provide clues about a trend’s direction and strength, continuation candlestick patterns can help cryptocurrency traders identify trading opportunities in the market.
But you should follow these steps to leverage the clues:
- spot the trend: first determine whether the market is in an uptrend or a downtrend, by using indicators such as moving averages, trend lines, or higher highs and higher lows.
- identify the pattern: look for continuation candlestick patterns that form within the trend, by using candlestick charts and applying visual analysis.
- confirm the pattern: confirm the validity of the pattern by looking for other factors that support the continuation of the trend, such as volume, momentum, or support and resistance levels.
- trade the pattern: enter a trade when the price breaks out from the pattern in the trend’s direction, and set your stop loss below or above the pattern depending on whether they are going long or short; additionally, set your profit target based on the size of the pattern or use trailing stops to capture more profits if the trend continues.
Continuation candlestick patterns can provide valuable insights into the future direction of the price, allowing you to enter or exit positions at suitable moments.
Keep in mind that when analyzing these patterns, it’s essential to have a wider view and consider the overall market trend and volume. Use confirmation signals, such as breakouts or bounces, to validate the pattern before making any trading decisions.