How to identify continuation trend pattern
Prices should break out in the direction of the prior trend somewhere between two-thirds to three-quarters of the horizontal width of the triangle. (It the width were 12 weeks long, then the breakout should take place sometime between the 8th and the 9th week)
Volume should decrease as the price moves within the triangle. But should increase the penetration of the trend line that completes the pattern.
The simplest technique is to measure the height of the vertical line at the widest part of the triangle and measure that distance from the breakout point.
The second method draws a parallel line to the lowest triangle line where it meets the apex then we know two things where the price will be and when.
In the ascending triangle, the volume tends to be slightly heavier on bounces and lighter on dips.
In the descending triangle, volume should be heavier on the downside and lighter during the bounces.
Wedges as tops and bottom reversal patterns.
The wedge can appear at tops or bottoms and signal a trend reversal. That type of situation is much less common. Near the end of an uptrend, we may observe a clear cut rising wedge. The rising wedge is a clue that this is a bearish and not a bullish pattern.
It is actually an inverted triangle or a triangle turned backward. The trend lines actually diverge in the broadening formation, creating a picture that looks like an expanding triangle. It is also called a megaphone top. The volume tends to expand along with the wider price swings.
This situation represents a market that is out of control and unusually emotional. Also, represents an unusual amount of public participation, it most often occurs at major market tops. The expanding pattern is usually a bearish formation. It generally appears near the end of a major bull market.
Flags and Pennants
The flag and pennant represent brief pauses in a dynamic market move. They are both preceded by an almost straight line move (called a flagpole) on heavy volume.
Prices then pause for a few candles on very light volume. The move continues on a burst of volume. Both patterns occur at about the midpoint of the market move.
Flags and pennants are said to ‘fly at half-mast’ from a flagpole. They usually appear at about the halfway point of the move. The move, after the trend has resumed will duplicate the flagpole. Measure the distance of the point at wich the original trend signal saw given the sharp move up. This is how much more the move will be after we break the formation.
You should keep a close eye on which moves have the heavier volume. If the rallies are on heavier and the setbacks on lighter volume, then the formation is probably a continuation of the uptrend. If the heavier volume is a downside, then it can be considered a warning of a possible trend reversal in the works.