Identifying Continuation Patterns with Candlestick Charts

Editor’s note: This article is the third installment in a series on candlestick patterns. The first article introduced candlestick charts. The second installment looked at trend reversal patterns—a single candle or group of candles that indicate a change in trend may be coming.

A continuation pattern is a pause or pullback during an established trend, which, when completed, in the view of candlestick fans, should continue to move price in the direction of the trend. But just like with reversal patterns, there are a few things to keep in mind with continuation patterns:

• A continuation pattern is not a guarantee that the previous trend will continue—just a signal that the pause in the trend might be temporary.
• Continuation patterns that show up in a range are not necessarily valid. They should normally be preceded by a trend—either up or down.
• Most continuation patterns have specific criteria, which you can see in the thinkorswim^® Learning Center. The closer a pattern is to these criteria, the more tech traders say it is likely to work out as expected.

With that said, let’s look at some popular candlestick continuation patterns.

Three White Soldiers

This pattern takes its name from a time when charts were drawn by hand, on paper. In that context, up candles were white and down candles were black. With today’s electronic charting, up candles are generally green and down candles red.

As the name implies, this pattern involves three white (green) candles in a row, with the following criteria:

• All three candles are long and bullish.
• Each candle’s opening price is within the previous candle’s body.
• Each candle’s closing price is higher than that of the previous candle.

This pattern type is determined by where it occurs. For example, if it occurs after an extended downtrend, it can be a reversal pattern. However, it is considered a continuation pattern if it occurs after a minor pullback in the middle of an existing trend.

In figure 1, an established uptrend is in place, and after a minor pullback, the three white soldiers pattern appears, signaling that the uptrend may be continuing.

Rising Three Methods

The rising three methods is a bullish continuation pattern, and although it would seem from its name it consists of three candles, it’s actually five:

• The first candle is long and bullish and continues the uptrend.
• The next three candles are small and form a short-term pullback, all closing within the first candle’s body.
• The fifth candle is long and bullish, and its closing price is higher than that of the first candle.

On occasion, there may be more than three short candles in this pattern, but it’s considered more powerful with only three.

Separating Lines

This is a two-candle continuation pattern that can be either bullish or bearish depending on the previous trend direction.

The bullish version is identified by:

• The first candle is long and bearish, occurring during an uptrend.
• The second candle is long and bullish, and its opening price is equal to that of the first candle.
• The second candle does not have a lower shadow (“wick”).

A bearish separating lines pattern has the opposite characteristics.

In Neck

This last candlestick pattern is one of the few continuation patterns that can only be bearish:

• The first candle is long and bearish and appears in a downtrend.
• The second candle is bullish and opens at a new low price.
• The second candle’s close price is either equal to or slightly higher than the close of the first candle.

There is a slightly different version of this pattern called on neck. It too signals only bearish continuation, and the only difference is that the second candle’s closing price is equal to the low price of the first candle.

These are just a few of the more common continuation patterns. As with any type of pattern recognition, there are no guarantees as to which way price will go next, but these and other candlestick patterns can help alert you to possible outcomes. To learn more about these patterns and more, visit the thinkorswim Learning Center.