Wednesday, April 22, 2015

Trend Continuation Patterns

Technical analysis provides charts that reinforce the current trends.
These chart formations are known as continuation patterns. They consist of
fairly short consolidation periods. The breakouts occur in the same direction
as the original trend.
The most important continuation patterns are:
1. Flags
2. Pennants
3. Triangles
4. Wedges
5. Rectangles
Flag formation
The flag formation provides signals for direction and price objective.
This formation represents a brief consolidation period within a solid and steep
upward or downward trend. The consolidation itself is bordered by a support
line and a resistance line, which are parallel to each other or very mildly
converging, making it look like a flag (parallelogram) and tends to be sloped
in the opposite direction from the slope of the original trend, or is simply flat.
The previous sharp trend is resembles a flagpole.
If the original trend is going down, the formation is called a bearish

flag. (See Figure 5.22.) As Figure 5.22. shows, the original trend is sharply
down. The flagpole is measured between points A and B. The consolidation
period occurs between the support line B to E and the resistance line C to D.
When the price penetrates the support line at point E, the trend resumes its
fall, with the price objective F, measured from E. The price target is of about
equal amplitude with the flagpole's length (A to B), measured from the
breakout point through the support line (B to E.)
In the numerical example, the height of the flagpole is measured as the
difference between 140.00 and 120.00 equals 2000 pips. Once the support
line is broken at 125.00, the price target is 105.00, as 2000 pips from 125.00.
Pennant Formation
The pennants are closely related to the flags. The same principles apply.
The sole difference is that the consolidation area better resembles a pennant, as
the support and resistance lines converge. If the original trend is bullish, then
the chart pattern is a bullish pennant. In Figure 5.23., the pennant pole is A to B
The pennant-shaped consolidation is framed by C, B, and D. When the market
breaks through the resistance line B to D, the price objective is E. The
amplitude of the target price is D to E, and it is equal to the pennant pole A to B.
The price target measurement starts from the breakout point.





In the numerical example, the height of the pennant pole is measured as
the difference between 1.5500 and 1.4500, or 1000 pips. Once the resistance line
is broken at 1.5200, the price target is 1.6200, as 1000 pips from 1.5200.








If the original trend is going down, then the formation is a bearish
pennant. In Figure 5.24., the pennant pole is A to B. The pennant-shaped
consolidation is framed by C, B and D. When the market breaks through the
support line B to D, the objective price is E. The amplitude of the target price is D
to E, and it is equal to the pennant pole A to B. The price target measurement
starts from the breakout point.
In the numerical example, the height of the flagpole is measured as the
difference between 139.00 and 119.00, or 2000 pips. Once the support line is
broken at 120.00, the price target is 100.00, as 2000 pips from 120.00.






Triangle Formation
Triangles can be visualized as pennants with no poles. There are four
types of triangles: symmetrical, ascending, descending, and expanding
(broadening).
A symmetrical triangle consists of two symmetrically converging support
and resistance lines, defined by at least four significant points. (See Figure 5.25.)
The two symmetrically converging lines suggest that there is a balance between
supply and demand in the foreign exchange market. Consequently, a break
may occur on either side. In the case of a bullish symmetrical triangle, the
breakout will occur in the same direction, qualifying the formation as a
continuation pattern.




As Figure 5.26. shows, the converging lines are symmetrical. The declining
line is defined by points B, D, and F. The rising support line is defined by points
A, C, E, and G. The price target is either (1) equal to the width of the base of
the triangle BB', measured from the breakout point H (HH'); or (2) at the
intersection of line BI (which is a parallel line to the rising line AG) with the price
line.
Trading volume will visibly decrease toward the end of the triangle,
suggesting the ambivalence of the market. The breakout is accompanied by a rise
in volume.
In the numerical example, the price objective is either 1.5500, as the
difference between 1.5000 and 1.4000, measured from 1.4500 or 1.5300, as the
difference between 1.5000 and 1.4000, measured from 1.4300.






The ascending triangle consists of flat resistance line and a rising support
line. (See Figure 5.27.) The formation suggests that demand is stronger than
supply. The breakout should occur on the upside, and it consists of the width of
the base of the triangle as measured from the breakout point. As you can see in
Figure 5.28., the resistance line defined by points A, C, and E is flat. The
converging bottom line, defined by points B, D, and F, is sloped upward. The price
objective is the with of the base of the triangle (AA') measured above the
resistance line from the breakout point G (GG'.) In the numerical example, the
price objective is 106.00, as the 200-pip difference between 105.00 and 103.00,
measured from 104.00.
Trading volume is decreasing steadily toward the tip of the triangle, but
increases rapidly on the breakout.










The descending triangle is simply a mirror image of the ascending triangle. It
consists of a flat support line and a downward sloping resistance line. (See
Figure 5.29.) This pattern suggests that supply is larger than demand. The
currency is expected to break on the downside. The descending triangle also
provides a price objective. This objective is calculated by measuring the width
of the triangle base and then transposing it to the breakpoint. As shown in
Figure 5.29., the support line, defined by points A, C, E, and G, is flat. The
converging top line, defined by points B, D, F, and H, is sloped downward. The
price objective is the width of the base of the triangle (AA'), measured above
the support line from the breakout point I (IF.)
In the numerical example, the price objective is 1.3000, as the 1000-pip
difference between 1.5000 and 1.4000, measured from 1.4000.








Trading volume is decreasing steadily toward the tip of the triangle, but
increases rapidly on the breakout.
The expanding (broadening) triangle consists of a horizontal mirror image of
a triangle, where the tip of the triangle is next to the original trend, rather than its
base. (See Figure 5.30.) Volume also follows the horizontal mirror image switch
and increases steadily as the chart formation develops. As shown in Figure 5.30,
the bottom support line, defined by points B, D, and F, and the top line, defined by
points A, C, and E, are divergent. The price objective should be the width, GG', of
the base of the triangle, measured from the breakout point G.
In the numerical example, the price objective is 102.00, as the 100-pip
difference between 101.00 and 100.00, measured from 101.00.








Wedge Formation
The wedge formation is a close relative of the triangle and the pennant
formations. It resembles both the shape and the development time of the
triangles, but it really looks and behaves like a pennant without a pole. The
wedge is markedly sloped, and the breakout occurs in the direction opposite to its
slope (see Figure 5.31.), but similar to the direction of the original trend. The
signal we receive from the wedge formation is direction only. There is no reliable
price objective. Depending on the trend direction, there are two types of
wedges: falling (see Figure 5.31.) and rising.




Rectangle Formation
Also known as a trading range (or congestion), the rectangle formation
reflects a consolidation period. Upon breakout, it is likely to continue the
original trend. Its failure will change it from a continuation to a reversal pattern.
This pattern is easy to spot, as it can be considered a minor side-ways trend.
If it occurs within an uptrend and the breakout occurs on the upside, it is
called a bullish rectangle. (See Figure 5.32.) The price objective is the height of
the rectangle. As Figure 5.32. shows, the currency moves between welldefined,
flat support and resistance levels. A valid breakout may occur on
either side from this consolidation period. The price target (GH) is equal to the
height of the rectangle (G'H), measured from the breakout point H. In the
numerical example, the price objective is 1.6200, as the 100-pip difference
between 1.6100 and 1.6000, measured from 1.6100.
If the consolidation occurs within a downtrend and the breakout continues
the original trend, then it is called a bearish rectangle. (See Figure 5.33.) As
shown in Figure 5.33., the currency moves between well-defined, flat support
and resistance levels. A valid breakout may occur on either side of this
consolidation period. The price objective (HG') is equal in size to the height of the
rectangle (GH), measured from the breakout point H. In the numerical example,
the price objective is 100.00, as the 100-pip difference between 102.00 and
101.00, measured from 101.00.











































































































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