The main goal of analyzing a financial security with technical analysis is to find trends in the security’s past and current price and volume data. The easiest way to see these trends or patterns, which will be used to forecast future price movements, is to look at the data on a chart. There are two main types of patterns, reversal patterns and continuation patters. Knowing the difference between these will be helpful if you want to invest on your own, or are studying for any section of the CFA exams. This article will discuss continuation patterns. Remember, if there is no clear trend before the suspected pattern starts, the pattern has no predictive value. Also, one challenge of technical analysis is that analysts cannot be sure of which pattern will form until after the fact.
Continuation patterns are patterns on a chart that suggest a previous trend will exhibit temporary changes, but will eventually continue that previous trend in the long run. These are the opposite of reversal patterns which suggest that a previous trend will end and reverse.
Triangles
Two types of triangle patterns that form are ascending triangles and descending triangles. In an ascending triangle pattern, a horizontal trend line can be drawn connecting several highs that occur at the same price level.
Rectangle Patterns
Summary
Continuation patterns show technical analysts that a trend in a security’s price/volume data will continue. There are several different continuation patterns that are important to understand if you are in the investing field or are studying for any of the CFA exams. These patterns, including ascending and descending triangles, and bullish and bearish rectangles, are all signs that a current trend should continue in the future.