Here’s how to spot some of the more common candlestick continuation patterns, which may indicate the larger trend will continue.
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:
With that said, let’s look at some popular candlestick continuation patterns.
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:
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.
FIGURE 1: THREE WHITE SOLDIERS.
These three up (green) candles signify that the minor pullback is potentially over, and the previous trend may be resuming. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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.
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:
On occasion, there may be more than three short candles in this pattern, but it’s considered more powerful with only three.
FIGURE 2: THREE RISING METHODS.
This image shows a five-candle consolidation pattern before the previous trend continues. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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:
A bearish separating lines pattern has the opposite characteristics.
FIGURE 3: SEPARATING LINES.
This is a two-candle pattern that indicates the current trend may continue. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
This last candlestick pattern is one of the few continuation patterns that can only be bearish:
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.
FIGURE 4: IN NECK.
This bearish-only continuation pattern indicates that the downtrend may continue. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.