As an essential factor in the study of residual stress formation during cooling, the effect of transformation plasticity on residual stresses has not been concluded. This paper investigates the effect of transformation plasticity on residual stresses during continuous cooling of hot-rolled strip steel using a combination of phase transformation behaviour study, finite element calculation, and residual stresses measured by the crack compliance method. The results show that the residual stress formation in the continuous cooling process consists of three stages: thermal stress dominated stage I, surface phase transformation dominated stage II, and corephase transformation dominated stage III, and the above three stages are interrelated through the influence of the stress in the former stage on the transformation plastic strain in the latter stage, the final residual stress in the strip is determined by the plastic strain generated by the phase transformation in the core.