Technical Analysis·Candlestick Patterns
Continuation Patterns
Not Every Pause Is a Reversal
Markets don't move in straight lines — they advance, pause, and advance again. Continuation patterns appear during these pauses and signal that the existing trend is likely to resume. Recognizing them stops you from exiting a perfectly good trend too early. In fact, some of the best trade entries come from continuation patterns within established trends, because you are trading with the momentum rather than against it.
Understanding continuation patterns is just as important as knowing reversal patterns. Many novice traders are so focused on catching tops and bottoms that they miss the meat of a move — the middle portion where the trend is well established and continuation patterns offer low-risk, high-probability entries.
Flag pattern · pole, flag, measured move
The Harami — Inside Bar
Definition
Harami (Inside Bar)
A two-candle pattern where the second candle is completely contained within the body of the first candle. It signals consolidation and energy building within the trend. A bullish harami (small bullish inside a large bearish) hints at a pause in selling; a bearish harami suggests a pause in buying. The Japanese word 'harami' means 'pregnant' — the first candle is the mother and the second is the baby.
Trading the Inside Bar Breakout
- 1
Identify the trend
Determine the prevailing trend direction. Inside bars within trends are continuation signals; inside bars at extreme levels can be reversal signals.
- 2
Mark the mother candle range
Draw horizontal lines at the high and low of the mother candle (the first, larger candle). This defines the consolidation range.
- 3
Place breakout orders
In a strong uptrend, place a buy stop order just above the high of the inside bar. If price breaks out to the upside, it confirms the trend is resuming.
- 4
Set stop loss
Stop loss goes below the low of the mother candle. This is your invalidation — if price takes out the entire mother candle, the setup is wrong.
- 5
Target the next level
Target the next significant resistance level, or use the height of the mother candle projected from the breakout point as a measured move.
Trading the inside bar breakout
In a strong uptrend, an inside bar forms on the daily chart of USD/CAD. The mother candle ranges from 1.3550 to 1.3620. The inside bar's range is 1.3570 to 1.3600. A buy stop at 1.3625 triggers on the next candle, confirming the trend is resuming. Stop loss at 1.3545 (below the mother candle low). Target at 1.3700 — R:R of approximately 1:1.9.
Multiple inside bars
Sometimes you will see two or three consecutive inside bars — each smaller than the last. This creates a coiling effect, like compressing a spring. The eventual breakout from a multi-inside-bar pattern is often explosive. These are sometimes called 'narrow range' patterns (NR4, NR7) and are favorites of breakout traders.
Rising & Falling Three Methods
These five-candle patterns show a brief consolidation within a strong trend before the trend continues. They're less common but highly reliable when they appear on higher timeframes. The pattern shows that even when counter-trend traders attempt to push price back, the dominant trend absorbs their efforts and continues.
A
Rising Three Methods (Bullish Continuation)
- Large bullish candle (1st)
- 2-3 small bearish candles that stay within the first candle's range
- Large bullish candle closing above the first candle's high
- The small candles represent a 'rest' in the uptrend
- Volume typically lower during the consolidation
- The final bullish candle should have increased volume
B
Falling Three Methods (Bearish Continuation)
- Large bearish candle (1st)
- 2-3 small bullish candles that stay within the first candle's range
- Large bearish candle closing below the first candle's low
- Represents a 'rest' in the downtrend
- Volume lower during the small bullish pullback
- The final bearish candle confirms continuation with volume
Bullish and Bearish Windows (Gaps)
Definition
Window (Gap)
In Japanese candlestick terminology, a gap between candles is called a window. A bullish window (gap up) occurs when the low of the current candle is above the high of the previous candle. A bearish window (gap down) is the reverse. Windows in the direction of the trend are powerful continuation signals — they show the market moving so fast that no trading occurred at the gap prices.
While true gaps are less common in the 24-hour forex market (they mainly occur on Sunday opens), they are extremely common in stocks, indices, and commodities. In forex, look for gaps on the weekly open — the difference between Friday's close and Sunday's open can create significant windows that act as support or resistance for the entire week.
| Gap Type | Context | Significance | Trading Approach |
|---|---|---|---|
| Breakaway Gap | Start of a new trend, often after consolidation | Very High — signals a decisive shift | Trade in the direction of the gap |
| Continuation Gap | Middle of an established trend | High — confirms trend strength | Add to position or enter with the trend |
| Exhaustion Gap | Late in a trend, often at extended levels | Medium — may signal reversal soon | Tighten stops, prepare for reversal |
| Common Gap | During sideways or low-volume periods | Low — often fills quickly | Typically ignored or faded |
Don't confuse pauses with reversals
A common mistake is treating every pullback candle as a reversal signal. In strong trends, small opposing candles are just profit-taking, not trend changes. Context (overall trend direction, strength, timeframe) determines whether a pattern is a continuation or reversal. Ask yourself: is this pause happening within a strong directional move, or at a key level where the trend might genuinely be ending?
Entry
149.85
Stop
149.40
Target
150.80
Inside bar continuation pattern on the USD/JPY daily chart during a strong uptrend. The mother candle was a large bullish candle, and the inside bar consolidated tightly near the highs. Entry on the breakout above the inside bar high at 149.85. Stop below the mother candle low at 149.40. Target at the psychological 150.80 zone. R:R of approximately 1:2.1.
Knowledge check
In a strong uptrend, you see three small red candles followed by a large green candle that closes above the previous swing high. What pattern is this?
Knowledge check
You see two consecutive inside bars forming on the EUR/USD daily chart during a strong downtrend. What does this suggest?