Continuation Patterns

Each trading day, a decision needs to be made, whether it is to exit a trade, enter a trade, or remain in a trade. A candle pattern that helps identify the fact; that the current trend is going to continue is more valuable than may first appear. It helps answer the question as to whether or not you should remain in a trade. Japanese literature refers to 16 continuation candle patterns. One continuation pattern and its related opposite cousin are particularly good at trend continuation identification.

Rising and Falling Three Methods. The Rising Three Methods continuation candle pattern is the bullish counterpart to this duo and will be the subject of this scenario building. A bullish continuation pattern can only occur in an uptrend and a bearish continuation pattern can only occur in a downtrend. This restates the required relationship to the trend that is so necessary in candle pattern analysis.

The first day of the Rising Three Methods pattern is a long white day which fully supports the up trending market. However, over the course of the next three trading periods, small body days occur which, as a group, trend downward. They all remain with­in the range of the first day's long white body and at least two of these three small-bodied days have black bodies. This period of time when the market appears to have gone nowhere is considered by the Japanese as a "period of rest." On the fifth day of this pattern, another long white day develops which closes at a new high. Prices have finally broken out of the short trading range and the uptrend will continue.      

A five day pattern such as the Rising Three Methods requires a lot of detail in its definition. The above scenario is the perfect example of the Rising Three Methods pattern. Flexibility can be applied with some success and this only comes with experience. For example, the three small reaction days could remain within the first day's high-low range instead of the body's range. The small reaction days do not always have to be predominantly black. And finally, the concept of the "period of rest" could be expanded to include more than three reaction days. Don't ignore the Rising and Falling Three Methods pattern; it can give you a feeling of comfort when worrying about protecting profits in a trade.