Continuation patterns — Learn charts

A rising or falling price does not go straight in one direction. After a big move it often caught its breath in a narrow range for a while, then went on in the same direction. In this lesson, real charts show the shapes of such pauses, bull and bear flags and pennants, and rising and falling wedges, which look similar but are read differently. Unlike flags, wedges often broke out on the side opposite to their slope. We also look at wrong examples where the move did not continue after the pause.

The pole and the flag: the shape of a pause

A continuation pattern is read in two parts. First there is a stretch that moved a long way in a short time (the pole), and then a stretch where price rests briefly in a narrow range (the flag). It looks like a flag on the end of a pole, hence the name. Volume often shrinks during the pause, and when price leaves the resting range in the direction of the pole, the trend is read as continuing. In the flag charts below, the grey shading is the pole and the two grey dotted lines enclose the pause.

What a trend is and how to spot one was covered in Basics lesson 2, "Trends and sideways moves". Continuation patterns appear in the middle of such a trend: even a rising or falling price does not move in one direction without stopping, and it catches its breath along the way.

Bull flag

After a steep rise in a short time (the pole), price rests in a narrow band that tilts slightly down. The upper and lower lines of the band are almost parallel. It is read as a pause after a big rise while some people take profits.

Volume shrinks during the pause, and when price closes above the upper line of the band, it often went on in the direction of the pole: up again. The pause is usually shorter than the pole and gives back only a little of the pole’s rise.

Drag the chart sideways with a finger or the mouse to move it, and pinch with two fingers to zoom in. With a keyboard, click the chart, then use ←/→ to move and +/− to zoom.

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100 daily candles of one stock. After rising fast from candle 59 to candle 69, it rested for about ten candles, drifting slightly down in a narrow band. During the pause, volume was lower than during the pole. Candle 80 closed above the extended upper line of the band, and the next candle closed above the high of candle 69, where the flag began. It kept rising after that, and near the end it was well above the flag.

Bear flag

A bull flag turned upside down. After a steep fall (the pole), price rests in a narrow band that tilts slightly up. It looks like a rebound, but it is a small move compared with the pole.

When price closes below the lower line of the band, it often went on in the direction of the pole: down again. There is no short selling in the game, so use it as a signal to "not buy new" and to "sell if you are holding".

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This stock fell a long way between candles 59 and 68; most of the pole is a single candle that dropped sharply in one day. After that it rested for ten or so candles, drifting slightly up; it looked like a rebound, but it was a small move compared with the pole. Candle 80 closed below the extended lower line, moved around that height for about six candles, then fell hard again, and near the end it was well below the bottom of the pole.

Pennant

Like a flag, it is a pause after a pole, but the pause is a small triangle rather than a parallel band. The highs get lower and the lows get higher, and the two lines come together at a point. It is a small triangular flag (a pennant), hence the name.

The pause is often shorter than a flag’s, and as with a flag, look for price to leave in the direction of the pole. It resembles the symmetrical triangle of lesson 5, but it differs in having a steep pole in front of it and being much smaller.

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This stock rose fast from candle 64 to candle 74 on higher volume than usual, then for five or so candles the highs got lower and the lows got higher as the range narrowed. During the pause, volume was lower than during the pole. From near the end, where the two lines almost met, it closed above the upper line; candle 80 also closed above it, and then the price rose again, and near the end it was above the top of the pole.

Wedges: they look like flags but read the opposite way

A wedge is also a shape where price moves between two lines, but it is not a flag. The two lines are not parallel: they slope the same way together and narrow until they come together at a point. Narrowing means each swing is getting smaller. In a rising wedge, price is still rising, but this is read as a sign that the strength behind the rise is draining away.

So it is read differently, too. A flag is read as "goes on in the earlier direction (the pole)", but a wedge is read as "leaves on the side opposite to its slope". A rising wedge that slopes up often broke out downward, and a falling wedge that slopes down often broke out upward. Reading a rising wedge as a sign that the rise will continue is reading it backwards.

A wedge does not always continue the trend, either. A rising wedge at the end of a rise is read as a sign that the rise is turning, like the top patterns of lesson 2. As in the two charts below, a rising wedge in the middle of a fall, or a falling wedge in the middle of a rise, is a pause before the earlier trend continues. Either way, price leaves on the side opposite to the slope.

Rising wedge

Both lines slope up to the right and get closer together. The lower line (the lows) rises more steeply than the upper line (the highs), so the two lines are about to meet at the end. Price is rising, but each push up is smaller, so it is read as the rise losing strength.

So despite the name, price often broke out below the lower line. If you are holding, set the lower line as your exit, and be careful about buying new even while price is rising.

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This stock rose again from around candle 27 after a big fall. The lows rose quickly but the highs rose only a little, so the gap between the two lines became much narrower than at the start: it was still rising, but each push up was smaller. Candle 80 opened below the previous close and closed below the extended lower line, and after that the price fell without getting back above that height, and near the end it was even lower than the bottom where the wedge began. The wedge sloped up, but price left downward, in the direction of the fall before it.

Falling wedge

A rising wedge turned upside down. Both lines slope down to the right and narrow, and the upper line (the highs) falls more steeply than the lower line (the lows). Price is falling, but each push down is smaller, so it is read as the fall losing strength.

So despite the name, price often broke out above the upper line. A close above the upper line is treated as a place to buy.

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This stock came down from the top at candle 41 after a big rise. The highs fell quickly but the lows fell only a little at a time, so the gap between the two lines became much narrower than at the start: it was still falling, but each push down was smaller. Candle 80 closed just above the extended upper line, and on the two candles that followed it rose on volume more than two to three times the usual level during the wedge. Within a few candles it was back at the height of the top where the wedge began, and near the end it was above that. It left a downward-sloping wedge upward, in the direction of the rise before it.

When price leaves: confirm with the close

The two lines enclosing the pause are the same as the support and resistance lines of lesson 1. Price is treated as having left when it closes outside a line; poking out during the day and coming back inside may be a false breakout, as seen in lesson 1, "Breakouts and false breakouts".

For bull flags, pennants and falling wedges, the usual point to watch is a close above the upper line; for bear flags and rising wedges, a close below the lower line. The lines stop at the end of the pause, so compare with the height of the line extended to the right.

Sometimes, after leaving, price stays near the height of the line for a while before moving on. The bear flag chart above did that. On the other hand, if price comes back inside the lines and closes there, that is read as a sign the break may have been wrong (see the wrong examples below).

Wrong examples: the trend did not continue after the pause

Even when the shape is right and price closes outside the lines, it does not always go that way. In the two charts below, one flag that broke upward soon collapsed, and one wedge that broke downward by the textbook was turned around in a single day.

Bull flag: it came back as soon as it broke out

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This stock rose a long way between candles 63 and 73, and a large share of that rise came on one day with a big burst of volume. It then rested sideways for a few candles, and candle 80 closed above the extended upper line. By shape alone, this is a bull flag breakout. But it cleared the line by only a tiny margin, and this candle’s volume was not even half of the volume during the pole. The next candle came back below the line, and two candles later, as volume jumped, it spiked above the top of the pole during the day but could not close at that height. Then it fell below the lowest point of the flag, and near the end it had given back more than half of the pole’s rise.

Why it went wrong

It cleared the line by too little. It closed only a tiny bit above the upper line, and the candle right before had closed at the same price. As seen in lesson 1, a line is a band, and a small crossing inside the band can be a false breakout.
Volume did not back it up. The breakout candle’s volume was not even half of the volume during the pole, and lower than during the pause. Breakouts where the trend continues often came with rising volume; lesson 7 looks at this check in detail.
Setting your exit in advance would have kept the loss smaller. That means getting out when price closes below the lowest point of the flag, reading it as "this was not a pause". This chart broke that point a few candles after the breakout.

Rising wedge: it broke down, then turned around in a single day

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This stock made a rising wedge in the middle of a rise. We said a wedge that slopes up often breaks out downward, and at first it moved the other way. Candle 80 (↑) and the next candle closed just above the extended upper line, as if breaking out upward, but they cleared it by only a little and got no further: the "crossing inside the band" seen in lesson 1. Then the price came down below the extended lower line and closed there for a few candles. Up to here, it is the textbook. But the next candle was one that leapt sharply in a single day: it opened far above the previous close, got above the wedge in one go, and volume was several times the usual. After that the price rose further above the wedge and never came back down to the wedge’s height to the end.

Why it went wrong

A wedge cannot promise a direction. Price often left on the side opposite to the slope, but that does not mean it always does. This chart went slightly above the upper line, then broke below the lower line, and even that did not last. Near the narrow end of the two lines, even small moves easily cross both lines.
A candle that leaps sharply in a single day cannot be seen in advance from the shape. Such candles often come from news outside the chart. Keep in mind that the trend can change in one go, whether or not the shape was right.
Set a point to look again even after you sell. There is no short selling in the game, so what you can do with a rising wedge is sell what you hold. If you sold, setting a point such as "if it closes back above the wedge, look again" keeps you from missing the whole rise that follows.

Using continuation patterns in the game

When a match starts, the first 60 candles are already on the chart. Flags and pennants are short and often end within about ten candles, while wedges can last longer. If you see a narrow pause after a steep move near the end of the preview candles, draw lines above and below the pause. There is no short selling in the game, so bear flags and rising wedges are used to decide "do not buy new" and "sell if you are holding".

What you see	A common response
After a steep rise, price rests in a narrow band or a small triangle (bull flag, pennant)	Treat a close above the upper line as a place to buy. Decide in advance to get out if price closes below the lowest point of the pause.
After a steep fall, price rests while drifting slightly up (bear flag)	Even if it looks like a rebound, do not buy new. If you are holding, treat a close below the lower line as a place to sell.
A wedge that narrows as it falls (falling wedge)	Treat a close above the upper line as a place to buy. Do not rush to sell just because price is falling; wait to see which side it leaves.
A wedge that narrows as it rises (rising wedge)	Be careful about buying new even while price is rising. If you are holding, treat a close below the lower line as a place to sell. If price clearly climbs and closes above the upper line, rethink your view.
Price closes outside a line, then soon comes back inside	It may have been a false breakout. Get out at the point you set in advance, and wait until a clear point shows up again.

Watch out for

The pole comes first. A narrow back-and-forth without a steep move in front of it may not be a flag but just a sideways move. Read that kind of shape as a trading range from lesson 5.
Do not confuse a wedge with a flag. If the two lines are almost parallel it is a flag; if they slope the same way and narrow to a point it is a wedge. Price often left a wedge on the side opposite to its slope.
Look again if the pause is too long or too deep. If the pause goes on much longer than the pole, or gives back much of the pole’s move, it may be a change of trend rather than a pause.
Trade count: a match allows up to 10 trades (a buy counts as one and a sell counts as one). Getting in and out at every pause uses them up fast, so act only where price clearly closes outside a line.

Make a pennant bigger and you get a triangle. The next lesson covers triangles and trading ranges, where price is caught for longer and in a wider range. With no pole in front, the key is "wait to see which way it breaks".