Trending patterns include rising/falling wedges and channels up/down. Continuation trending patterns are ideally traded when the market is up trending or down trending, and when the initial trend reading is rated at a medium to high strength.
Continuation entries can be swing entries off downtrend resistance lines or uptrend support lines. They can also be breakdown entries when the trending momentum is very strong and the market offers little to no correction.
The falling wedge chart pattern in this example has a high Initial Trend reading which indicates a continuation play set up. The uniformity and clarity indicators are very strong and this shows that the pattern’s price action will be more reliable and less prone to whipsaws and random price action. It is important to keep in mind the time when the chart pattern developed as pending economic releases increase the possibility of high volatility.
There are two primary entry considerations:
1. The short, as prices exhaust at or near the downtrend resistance line which would be an Autochartist correction of the trend entry (A.R.C.) or “swing” short;
2. The downtrend support line breakdown which would be a continuation breakdown entry. As the initial trend reading is high, a reversal would not be a primary trade consideration. Follow the trend! The trend is your friend, especially when the initial trend reading is high.
When the initial trend reading is strong at a maximum of 10-bars, consider the breakdown play a more likely scenario.
When the initial trend reading is 6 or 7-bars it is important to proceed with caution. Remember there is still some trend strength therefore a chance of a corrective or “swing” entry exists. The backbone of the pattern however could be tested and broken.
When the initial trend reading reflects 6 to 7-bars indicating a medium trend, there is less chance of the momentum continuation move lower through the bottom line of this down trending pattern.
When the initial trend reading is low (less than 6-bars) but a trending pattern alert has signaled it would be best to forego that combination, and instead look for a non-trending pattern alert. However, also consider that the initial trend reading will point to the most likely entry strategy for the chart pattern based on the direction, and strength of the current market.