Continuation patterns: triangles, flags and wedges

A trend never moves in a straight line. It alternates between impulse phases, where price covers a lot of ground fast, and pauses, where it tightens up. During those pauses, traders who are in profit bank part of their gains, while others wait for a better price to get in. The chart then draws shapes called continuation patterns, because they resolve in the direction of the prior trend more often than not.

"More often than not" doesn't mean "always". A continuation pattern can turn into a reversal. Your job isn't to guess the outcome. It's to wait for price to confirm it, then manage your risk if it fails.

The three triangles

A triangle forms when price swings between two converging lines. Each swing is shorter than the last. Volatility gets squeezed, and that squeeze almost always ends with a decisive move out of one side. The type of triangle tells you whether buyers or sellers seem to be gaining the upper hand.

In an ascending triangle, the flat resistance gets tested several times. Each test soaks up sell orders. Meanwhile, buyers are willing to pay a little more at every low. Once the supply at resistance runs out, price pushes through. The descending triangle works exactly the other way round, with flat support that eventually gives way.

The symmetrical triangle is the most neutral. Neither side is in control, and the range narrows from both ends. You give it the bias of the trend that came before, but it can break either way. Here more than anywhere, wait for a close outside the pattern.

The flag: a short pause after a sharp move

The flag is the most explosive of these patterns. It starts with a strong, fast impulse, the flagpole. Then price drifts back slightly in a small channel sloping against the trend: that's the flag itself. The pullback is short, both in time and in size. If it retraces more than half the pole, it isn't really a flag any more.

The target for a flag is the height of the pole projected from the point where price breaks out of the flag. It's an ambitious target that assumes the market repeats the same impulse. It makes sense to lock in part of the profit before you get there.

The wedge: the pattern that reads backwards

A wedge looks like a triangle, but both its lines slope in the same direction. In a rising wedge, highs and lows both climb, but the lows rise faster than the highs. Price is still going up, but with less and less momentum. Each new high barely clears the previous one.

That's why the rising wedge is generally seen as bearish. In a downtrend, it shows up as a tired bounce before the decline resumes: a continuation. At the top of an uptrend, it can signal a reversal. The falling wedge, its mirror image, leans bullish instead.

One method for all these patterns

1. Identify the trend on a higher timeframe. A continuation pattern with no clear trend means nothing.
2. Draw the boundaries using at least two touch points on each side.
3. Wait for a close outside the pattern in the expected direction. A wick that pokes out and comes back isn't a breakout.
4. Place your stop on the other side of the pattern, or behind the last low (or high) inside it.
5. Work out the target by projecting the widest part of the triangle or the height of the pole, then check the reward-to-risk ratio is worth it.
6. Size the position from the distance to your stop and your risk per trade.

Volume, where it's available (stocks, indices, futures), helps you sort good breakouts from bad ones. It usually dries up while the pattern forms, then picks up sharply on the break. Spot forex has no centralised volume: the volume your broker shows only reflects its own order flow, so read it with caution.