Continuation patterns are simply groupings of candlesticks or bars on the chart that suggests that we are going to continue to go in the same direction. This is simply a continuation of the longer-term trend, and a confirmation that momentum is still building up. There are a multitude of patterns, but some of the most common ones are also some of the most powerful ones because so many traders are aware of them. One of the easiest ones to spot is the actual breakout. In other words, we break out above a rectangle which is one of the most common consolidation patterns, it shows that we are going to continue to go higher. We also have flags and ascending or descending triangles, both of which show a buildup of momentum in one direction or the other. In other words, it simply shows that a lot of the momentum and the effort is put into going in one direction or the other. Continuation isn’t guaranteed, but typically when you break out of a resistive barrier, it means that the buyers are continuing to pile into the marketplace. In other words, it’s likely that the resistance or support has given way and now the previous buyers or sellers are getting especially aggressive. They have simply broken through yet another barrier. While you cannot necessarily expect a 100% correlation to a continuation pattern and actual continuation, the odds simply work in your favor if you follow some very basic rules of continuation patterns themselves, and are patient enough to wait for a candle close above whatever resistance you are spotting on the chart, or support, if you are selling.

A candlestick that signals continuation can come in several different forms. For example, it can be a very bullish candle that is an impulsive, during a fairly reliable uptrend. In other words, it seems that the buying pressure has picked back up. This obviously works in downtrend as well, as a strong red candle in a downtrend also suggests that the momentum is picking up. Essentially, those are the easiest continuation candlesticks to find. We also have other candlesticks which can happen after pullbacks. For example, an uptrend you could get a hammer which shows that the selling has abated, and that the buyers are starting to come back into the marketplace. Remember, the hammer essentially is a candle with a long wick underneath it, showing that the market has run out of selling pressure. Obviously, a shooting star can mean the same thing, if we have recently bounced and what has been a longer-term downtrend. The shooting star is essentially the same thing as the hammer, only the long wick is above, meaning that the buyers have run out of momentum.

Candlestick reversal patterns are essentially just candles that show signs of exhaustion, or a sudden shift in momentum. In other words, we may have been going higher, but suddenly looks as if we are either running out of momentum to the upside, or than the sellers have come in and absolutely taken over. Either one is reason enough to think that we are going to turn things back around. Of course, the opposite is true as well. For example, we may have been falling rather rapidly but eventually the market bounces in the way during the course of the candle that tells us perhaps the buyers are about to take over again. One of the great things about reversal candles is that they can give you a bit of a “heads up” as to trouble ahead. For example, perhaps you were short of a particular currency pair and it forms what is known as a hammer. The hammer is simply a candle that shows that the sellers ran out of momentum, and ended up reversing quite a bit of the momentum. This often can be the sign of the market turning back around to the upside. So if you are already short, this may give you the idea to either exit the market, or at least move your stop loss is to lower levels. You also have the same thing in an uptrend, we form what is known as a shooting star, which is essentially a market going fairly high, and then dropping back down to form a candle with a very long wick. You can move your stop losses higher. On the other hand, when you see the signals you can start trading in the other direction. It’s a great way to pick up trend changes.

While there are many different types of charting available for the average trader, candlestick charting is rapidly becoming the norm for most financial markets. It has long been a stable of the Forex community, but we are now starting to see a lot of stock traders and futures traders use candlestick chart because of the many advantages that you can find by using them. The candlestick chart looks drastically different than online chart which most people who don’t even trade would recognize. A line chart of course plots where we closed during a particular day or hour, and forms a line by connecting all of those levels. However, candlestick charting offers color-coded units that show us as to whether or not the markets rose or fell during each one of those time periods. For example, most charting packages will use either red and green, black and white, or white and blue candles. They color code the body of the candle, to show whether or not it was a positive or negative move. Typically, it’s the darker color or the red that shows negativity, while lighter colors show positivity.