Chart patterns that keep going

Taking a breather

Trends don't run nonstop. Think of a runner in a long race. She sprints, slows down to catch her breath, then sprints again. Markets do the same.

Patterns that show a short rest inside a trend are called continuation patterns. They hint that the trend may keep going after the rest. "May" is the key word.

Flags

A flag has two parts:

1. The pole: a fast, strong move, like a flagpole.
2. The flag: a short, slow drift the other way, between two parallel lines, like a little flag on the pole.

In a bull flag, price shoots up (the pole), then drifts down gently (the flag), then often breaks out up again. A bear flag is the upside-down version: a fast drop, a slow drift up, then often another drop.

The story: after the big move, some traders take their profits, so price drifts back a little. But the drift is slow and small, which shows the other side isn't strong. Often the volume gets quieter during the flag, too.

A pennant is the same idea, but the rest after the pole is a tiny triangle instead of a slanted box.

Triangles

A triangle forms when the peaks and dips squeeze closer and closer together, like a funnel. Price gets squeezed until it has to break out one way.

• Ascending triangle: a flat top and rising dips. Buyers keep stepping in at higher prices while sellers hold one ceiling. It breaks up more often than down, but not always.
• Descending triangle: a flat bottom and falling peaks. Sellers keep pushing lower highs against one floor. It breaks down more often than up, but not always.
• Symmetrical triangle: both lines slant toward each other. Nobody is winning. It can break either way, so traders wait to see which way it goes.

Wedges

A wedge looks like a triangle, but both lines slope the same way while squeezing together.

• A rising wedge points up, but each push up is smaller than the last. Buyers are getting tired. It often breaks down.
• A falling wedge points down, but each push down is smaller. Sellers are getting tired. It often breaks up.

That's a little surprising: wedges often break the opposite way from how they're pointing.

How traders use them

Most traders wait for the breakout, a close outside the lines, before they treat the pattern as real. Big volume on the breakout makes it more convincing, just like you learned in the volume lesson.

What goes wrong

• Breaking the wrong way. A bull flag can break down instead. An ascending triangle can fail. "Often" is not "always."
• Fake breakouts. Price can pop out of a triangle and fall right back in.
• Drawing the lines to fit. If you have to bend the rules to make a flag, it isn't a flag.

Remember

• Continuation patterns are short rests inside a trend.
• Flag: a fast pole, then a slow drift the other way.
• Triangles squeeze price until it breaks out. Wedges often break the opposite way they point.
• Wait for the breakout, and remember patterns can fail.