Pennant Pattern Trading Guide
Chart patterns are essential elements of technical analysis. Among these patterns, there is a pennant pattern. Pennant patterns are a kind of continuation chart pattern. Indeed, it appears in the forex and coins market and they are generally used to predict upcoming market movements. However, they are similar to flag chart patterns, but there is a simple difference, which arises in the consolidation phase. Flag patterns are characterized by parallel trendlines, while pennants are marked by converging trendlines. In this article, we will explain what pennant chart patterns are, how to use them, what is bullish and bearish pennant patterns, and how to trade them.
Pennant pattern FAQ
What is the pennant chart pattern ?
Pennant chart pattern is a trend continuation pattern that we can see when there is a large price movement in a security. known as a flagpole, it is followed by a consolidation phase with converging trend lines. Then the continuation of the existing trend: consists of a breakout movement in the same direction as the initial trend movement, which describes the second half of the flagpole. However, this breakout is usually accompanied by a rise in volume. After that, the pennant pattern forms and it looks like a tiny symmetrical triangle, which is made of multiple candlesticks. In other words, this pattern is characterized by a bearish or bullish pattern.
How to identify this pattern ?
The pennant pattern consists of the three following items:
- Flagpole: A flagpole is an initial strong move that comes before the symmetrical triangle. Every pennant pattern starts with a flagpole which distinguishes it from the other patterns.
- Breakout: It happens after the consolidation period. There are two kinds of breakout: Break of the resistance line, which happens when there is a bullish pennant pattern. And break of the support line, which occurs when there is a bearish pennant pattern.
- Pennant: pennant consists of two converging trendlines (support and resistance lines), which form a symmetrical triangle. Pennant happens when the market consolidates. It is a phase between the flagpole and the breakout.
Bullish pennant pattern example
Bullish pennant pattern is a technical trading pattern that shows the upcoming continuation of a strong uptrend movement of the price. It is formed after a sharp rise in the security price (upward flagpole). After a long uptrend, traders attempt to close their buy position assuming a reversal going to happen. Then the prices started to consolidate since the traders start exiting the security While, at the same time new buyers begin purchasing which leads to a breakout of the prices in the same direction as the initial trend.
Bearish pennant pattern example
Bearish pennant pattern is a chart trading pattern that shows the upcoming continuation of a strong downtrend movement of the price. It is simply the opposite of the bullish pennant pattern. Bear pennant is formed after a shape drop in the security’s price (downward flagpole). After a long downtrend, traders attempt to close their sell position assuming a reversal going to happen. Then the prices start to consolidate since the traders start exiting the security. At the same time, new sellers begin selling and this leads to a breakout of the prices in the same direction as the initial trend.
How to trade with it ?
Trading pennant patterns is very simple, you just need to follow these steps:
- Identify the pattern
Look for an initial strong price movement block zones (swing up or down), which represents the pole of the pattern. Then pinpoint a sideways trading area or a consolidation phase that retraces some of the initial moves. The two trendlines that join the highs and lows should converge to meet each other. Also, the lateral consolidation zone tends to flex against the trend instead of trading sideways.
- Check up on the existing trend
One of the most essential conditions for the pennant pattern to work is the chart should show a prior trend in the same direction as the movement of the flagpole. Moreover, bullish pennants must be inside a general uptrend, while a bearish pennant must be inside a general downtrend to be valid.
- Prepare the entry and exit points
Entry and exit points are extremely crucial price stations when trading pennant formations.
Entry points
You can enter a trade only when the price breaks the consolidation zone in the direction of the initial move ( flagpole). You can confirm this by using a candle’s close. This candle should be well above the consolidation zone of a bull pattern or well below the consolidation zone of the bear pattern. To clarify more, it must be a breakout candle that breaks through and then closes beyond well the boundary of the pattern. This means that the close value is far away from the pattern’s boundary, not near or just above or below the boundary. After the breakout is verified, you can execute the trade in the direction of the breakout. Enter a buy position for bullish pennants and a sell position for the bearish pennants.
Exit Points
You can use a calculated move to set up a profitable exit (TP). A calculated move is a move that begins from the opposite side of the consolidation zone and has the same length as the flagpole move (initial move). Measure the distance between the flagpole to the consolidation zone. Next, apply the same distance to the boundary of the consolidation opposite to the breakout. Set your take-profit at the obtained value. Once the price reaches the same length as the flagpole, it starts to retrace in the opposite direction.
Stop loss
You set the SL near the top of the consolidation zone for the bull pennant and near the bottom of the consolidation zone for the bear pennant.
After the calculation of the TP and SL, you have to check if the risk-to-reward ratio is good enough for trading or not. If not, it may be better to skip this pattern.
Conclusion
Pennant patterns are a good technique for trade chart patterns. Since they are a continuation pattern their chances of failing are very low. Therefore these kinds of patterns can provide a safer technique to trade chart patterns.