What Are SMC Continuation Patterns?
SMC continuation patterns are price formations that indicate a trend will continue after a brief consolidation or pause. These patterns form when smart money pauses the current trend temporarily to accumulate more liquidity before launching the next leg.
Common SMC Continuation Patterns
1. Flags and Pennants - Price consolidates in a narrow range (flag) or forms converging lines (pennant) before breaking out in the direction of the original trend. These are extremely reliable when they form after strong impulsive moves.
2. Rectangles - Price bounces between two horizontal lines creating a box pattern. When price breaks above (in uptrend) or below (in downtrend) the rectangle, it signals strong momentum continuation.
3. Consolidation Zones - Price moves sideways with diminishing volume before breaking out. The smaller the consolidation, the more explosive the eventual breakout often is.
4. Wedges - Converging lines that are angled with the trend. In an uptrend, look for wedges with rising lows and falling resistance. These breakouts often extend the trend significantly.
The Psychology Behind Continuation Patterns
Continuation patterns work because:
- Smart money pauses to accumulate/distribute without moving price
- Retail traders get shaken out and stop-hunted during consolidation
- Once enough retail liquidity is captured, smart money launches the next leg
- Pattern breakouts often produce the most explosive price moves
Trading Continuation Patterns: Entry Rules
Before the Breakout:
- Identify the original impulsive trend (must have clear higher lows or lower highs)
- Spot the consolidation pattern forming
- Note the boundaries of the consolidation zone
- Wait for price to approach the breakout point
At the Breakout:
- Enter when price breaks above/below the consolidation boundary
- Require volume confirmation on the breakout candle
- Place stop just inside the consolidation zone (on the other side of breakout)
- Target is typically 1.5-2x the width of the consolidation zone
Measuring Continuation Pattern Targets
Professional traders use this targeting method:
- Measure the height/width of the consolidation pattern
- Project this distance from the breakout point in the trend direction
- This gives your profit target
- Example: If a flag is 40 pips tall and breaks at 1.2500, target is 1.2540
Avoiding False Breakouts
Not all breakouts are valid. Filter for real breakouts:
- Volume should surge on the breakout (compared to consolidation volume)
- Price should move decisively beyond the boundary (not just barely touch)
- Check higher timeframe confirmation (ensure daily aligns with breakout)
- A pullback to the breakout point often confirms the breakout was real
Real-World Continuation Pattern Example
EUR/USD is in a strong uptrend with higher lows at 1.0800, 1.0900. Price rallies 150 pips to 1.1050, then consolidates in a flag pattern between 1.0950-1.1000 for 8 candles with reduced volume. When price breaks above 1.1000 on increased volume, we enter LONG with stop at 0.0950. The height of the flag is 50 pips, so we project that from the breakout point and target 1.1050. Price hits this target in 4 days.
FAQ
A: No. Flags and pennants after strong impulsive moves are most reliable (70-80% success rate). Rectangles are slightly less reliable (60-70%).
A: Failed breakouts are your stop loss. If price closes back inside the consolidation, exit your trade immediately. The pattern has failed.