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The “How To Spot Continuation Patterns In Commodities Trading" article examines and elaborates upon the benefits and advantages continuation patterns in commodities indicators offer to investors in the commodities and futures markets and how to identify the signals generated in order to help individuals identify profitable trading signals.
Continuation patterns are horizontal price movements and usually represent a short-term suspension of the underlying trend. Continuation patterns are shorter-term by nature. The most common continuation pattern is called a triangle. Triangles can be classified as symmetrical, ascending, or descending. The symmetrical triangle will show converging trend lines that meet at a point. The ascending triangle has a rising lower line with an upper line that is horizontal or flat. The descending triangle, on the other hand, has a flat or horizontal bottom line with an upper declining line.
Reading the points of the triangle
Most analysts believe that the minimum requirement for a triangle is four reversal points. Breakouts of continuation patterns occur when the upper or lower lines are penetrated. Volume generally diminishes as price movements narrow within a triangle. An excellent indicator of trend resumption or reversal is a significant volume increase at the time of the penetration of the trend line. Ascending triangles are generally considered bullish, while descending triangles are considered bearish. The symmetrical triangle is generally viewed as a neutral formation.
Reading flag and pennants
Two other common charts formations used in technical analysis are called flag and pennant formations. Flags and pennants represent brief pauses in strong market trends. A flag or a pennant can only occur after a sharp almost continuous single directional move. These formations are considered to be the most reliable of continuation patterns.
A flag is formed by two parallel trend lines that slope against the prevailing trend. In an uptrend, the flag would have a slightly downward slope. The reverse would be true in a downturn. A pennant is distinguished by to converging trend lines and tends to be more horizontal.
It is critical in utilizing these patterns for investment purposes, the volume should be diminishing noticeably at their formation. These patterns are short-term and should be completed within a few weeks time. The breaking of the relevant trend line signifies the resumption of the underlying trend. Usually, when the trend has been resumed after penetration of a flag or pennant, the trend will continue to the same degree prior to its formation.
Accounting for volume
Volume is important in any technical analysis chart formation. The volume of activity should be higher on rising prices, while the fallbacks and corrections should be smaller volumes in order for the formation to be considered a continuation of the underlying uptrend. If the heavier volume is on the downside, however, they should be taken seriously as a warning of a possible trend reversal.
Utilizing the patterns for your trading style
Different traders trade continuation patterns in different ways. One can wait for a clearly identifiable pattern to emerge, and then based on the breakout that occurs with the proper volume confirmation, take a position in the trend identified. This is probably the more conservative approach.
Short-term traders confident in their ability to identify these continuation patterns will utilize them as opportunities to buying near the bottom and then selling near the top of the range. This method allows this type of trader to take advantage of these perceived clearly defined price boundaries, and improve his return in a lackluster market. As the positions are being placed at the range limits, the risks are easily defined and relatively small. When a penetration signaled materializes, the investor exits the losing trade immediately and reverses his position in the direction of the newly established trend.
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