Not every pause in a move means the trend is over. Sometimes the price catches its breath in the shape of a triangle or a flag, then carries on. These shapes are called continuation patterns, but the name describes what often happens; it is not a promise.
What you will learn
Recognize a triangle and a flag on a chart.
Know why a close outside the shape is what settles the direction.
See why "continuation" does not mean the trend must continue.
The lesson as a short video · 24 seconds · Watch on YouTubeIn this lesson
In a triangle the price swings within a space that keeps narrowing: each high a little lower than the last, each low a little higher. Join the highs with one line and the lows with another and they meet ahead at a point: that is the triangle. It describes a market that is waiting, with buyers and sellers drawing closer until one side takes over.
SymmetricalHighs fall and lows rise at about the same slope.
AscendingHighs sit at about the same level while lows rise.
DescendingLows sit at about the same level while highs fall.
The flag
A flag starts with a fast, strong move called the pole. Then the price settles into a small channel tilted slightly against the move. After a rising pole, the channel tilts down; after a falling pole, it tilts up. The shape describes a short pullback or pause after a strong move; the chart alone cannot prove the cause was profit taking.
Symmetrical triangle
Falling highs, rising lows, until the price breaks out
Flag
A fast rising pole, then a small channel tilting down
The shape's edgesThe poleThe breakout close
A triangle and a flag on charts of invented stocks. The green dot is the close outside the shape.
ExampleIn this flag on an invented stock, the pole rose from 9.80 to 12.50, EGP 2.70 or about 27.6%. The price then slipped within the channel only to 12.00, giving back EGP 0.50. That is about 18.5% of the pole, a relatively small pullback. The deeper the pullback, the less clearly the shape reads as a flag, but no single fixed percentage separates a flag from other shapes.
The name is not a promise
The name comes from the fact that these shapes often end with the earlier trend carrying on. But often they end the other way. So people who use them rely on the breakout: the price closes clearly outside the shape and stays outside. Many also watch volume: it usually calms while the shape forms and picks up with the breakout.
Break upThe trend before the shape carried on
Break downThe same shape, the opposite of its name
The same triangle can break either way. The close outside the shape is what tells you.
Watch outDo not assume the direction of the break from the pattern's name. And remember the breakout itself can be false, with the price slipping back inside the shape, as covered in real and false breakouts.
Find a pause in the middle of a move
Open the chart of a stock after a strong rise and see what the price did next: a small channel, a triangle? Which way did it leave it?