Nick Goold
A trend continuation is where prices following a reversal continue in the same direction as the original trend. This pattern occurs regularly and can result in highly profitable forex trading opportunities.
Steps to finding trend continuation patterns
Step one: Define the trend
There are many ways to define the market`s trend, which can lead to confusion. The easiest way to determine the trend is to use a moving average. Simply put, the direction of the moving average is the current trend. In an uptrend, the moving average points higher and lower in a downtrend. The stronger the trend, the steeper the slope of the moving average.
In an uptrend, prices will stay above the moving average, and the moving average will act as support. Conversely, in a downtrend, prices will remain below the moving average, and the moving average will act as resistance.
Step two: Find a trend reversal
A trend reversal is where prices move below the moving average in an uptrend or above the moving average in a downtrend. Many traders look for trend reversal trading opportunities, so they sell when prices break below the upward-pointing moving average or buy when prices move above the downward-pointing moving average.
A trend reversal can happen due to profit-taking from traders because no market moves in a straight line, so profit-taking is natural. Alternatively, a news event can result in traders changing their views on the market and a price reversal.
Step three: Trend continuation entry
A trend continuation buy signal occurs in an uptrend when prices move back above the upward-pointing moving average. On the other hand, in a downtrend, the sell signal is when prices move back below the moving average.
Reversal trend traders will usually quickly exit their positions when the trend continues adding momentum to the trend.
The steeper the direction of the moving average, the more powerful the entry signal, as the potential profit is higher.
How to choose the moving average length?
Getting the moving average right for your trading style is vital. A 5 to 20-bar moving average for short-term traders will provide many profitable trading opportunities. Traders can use strategy can be successfully used on 1-minute to monthly bars.
Long-term traders will be better off using over 20 bars when calculating the moving average. Longer-term moving averages will present fewer opportunities, so watching multiple markets for opportunities is best.
Trend continuation pattern risk management
Stop loss
The attraction of the trend continuation pattern is that a large stop loss is not required. In an uptrend, traders should place the stop loss below the moving average. For day traders, the stop would be 1 to 5 pips below the moving average, whereas swing traders might use a stop of 10 to 50.
A trailing stop is helpful to lock in profits when using a trend strategy. As the trade becomes profitable, move your stop closer to the current market price. In an uptrend, the moving average can act as support, so it is best to keep the stop loss below the moving average.
Profit target
Strong trends are rare but can continue for a long time. Therefore, maximizing profits is vital to achieving long-term gains with this strategy. In an uptrend, the market can easily go above resistance, so it is usually best to exit if prices touch resistance and fall.
Not using a target and only using a trailing stop is a good strategy when there are no resistance levels. Large profit targets can be stressful as you need to hold positions for a long time, but they are essential with this strategy.
Trend continuation pattern mental control
The trend continuation requires traders to be confident in their strategy, as the market can move quickly when the trend resumes. Being ready to enter the market as soon as prices move back above the moving average will allow you to place a small stop loss and large target.
Traders require patience to maximize, and watching the market too closely can make this difficult. However, trend-following strategies usually have a 50% or lower win ratio, so accept your losing trades and focus on maximizing your profits.
