Last week’s article led to a simple question from a reader – “I’m not familiar with the Inside Continuation pattern. Do you have a post where it’s discussed?”
No blog post, sorry. So let’s create one now.
The prior article was this one: Project – Confirm – Trade
And the reference to the term Inside Continuation patterns was a part of this image, now with the section highlighted:
The Inside Continuation pattern is a subset of the larger category of patterns which I call “Complex Pullbacks” discussed here.
Usually when we talk about Complex Pullbacks we discuss the standard text-book example of a 3-swing retracement:
The Inside Continuation pattern is still a multi-leg pullback, but without the trap below the intermediate swing low.
From “the other trader” perspective, we don’t benefit from any trap-driven orderflow that might aid our entry into a standard complex pullback.
But these are still a favourite of mine, benefiting from a “rule of thumb” you might recall me mentioning in the past – if the market tries to do something twice and fails, consider the idea that it might move in the other direction.
Imagine the emotional turmoil for anyone entering short early in the first pullback, hopeful of catching an early entry into a reversal. Confidence at point 2 in the image above. Apprehension as the rally comes dangerously close to continuing to new highs at point 3. Relief as it turns to start a second leg lower, driving towards point 4. Fear as this second leg turns higher again without being able to even break below point 2.
Emotion = opportunity!
There was an inside continuation trade on the same day as the prior article – the one used in the image above with labels 1 to 5.
It’s an interesting one because I didn’t take the first “standard pullback” attempt LONG. Instead, I was one of these traders who did attempt a short entry from 1, in the hope of catching a reversal.
But I was able to recognise that I was wrong and get out of the position. And then flip to long via the Inside Continuation entry.
Note: For record keeping & tracking I personally prefer to not operate with a dozen different names for a dozen different types of pullbacks. It’s either a Simple Pullback if it’s a smooth single-leg retracement. Or it’s a Complex Pullback.
Maybe you’ll want to track them all separately.
Either way – the Inside Continuation pattern is one you want to have in your trading toolkit.