Pennant Guide: How To Trade Bearish And Bullish Pennants?

Pennants are typically seen as a manifestation of a temporary pause or consolidation in the market, and the psychological dynamics during this phase contribute to the pattern’s formation. Then, the price consolidates within two converging trendlines, creating the pennant shape. During this phase, trading volume decreases, showing reduced activity as traders wait for the next move. The breakout level in the Pennant Pattern occurs when the currency pair prices either cross the resistance price level or drop below the support price level. In an uptrend, the currency pair prices moving beyond the resistance level is the price breakout that provides traders with entry signals.

Formation of the Pennant Pattern

During the period of asset consolidation, an increase in lows and a decrease in highs are seen, which indicates a narrowing price range, from where a breakout should follow. During this pause, the asset accumulates between converging support and resistance lines. Pennants and flag patterns are often confused for each other as they look alike, but they have distinct characteristics that traders need to understand to make accurate technical analyses.

Typically pennants act as continuation signals in the direction of the previous trend. However, they can also mark trend reversals on rare occasions, so traders should be aware of this possibility. As you can see, the critical components are all there — the strong uptrend, the period of consolidation forming a pennant, declining volume, and finally the upside breakout with expanding volume. However, if you are able to identify another perspective on the formation, you essentially can develop an edge over other market participants.

A pennant pattern formation duration is a minimum of 30 days on a daily timeframe price chart. To calculate the pennant pattern formation duration, multiple the timeframe used by 30. For example a pennant pattern on a 20-minute timeframe price chart would take a minimum of 600 minutes (20 minutes x 30) to form. Here is no such thing as “the best pennant pattern forex strategy for everyone”.

FAQs about Pennant Pattern

A protective stop loss can be placed just below the breakout candle or the lower trendline of the pennant. Ideally, the shorter and shallower the consolidation, the stronger the ensuing breakout. A textbook bullish pennant corrects only to the 38.2% Fibonacci retracement level before breaking out. Determine the risk tolerance and set a pennant trading strategy stop loss order just outside the pennant pattern. The stop loss should be placed accordingly either above or below the pattern.

It will form a complete bullish pennant pattern with flag pole and pennant. A pennant pattern failure, also known as a “failed pennant”, is when a pennant pattern forms, the price breaks out of the pattern but fails to continue in the price breakout direction. The pennant pattern is invalidated and fails when the asset price reverses after a pattern breakout and trends in the opposite direction of the breakout. The bullish pennant pattern entry point is when the market price penetrates the pattern resistance area on rising buyer volume.

1. Usually, the height of the earlier move (also known as the mast) is used to estimate the size of the breakout move.
2. A Pennant is a type of continuation pattern formed when there is a large movement in security known as the flagpole.
3. An alternative is to wait for a throwback to the broken trendline and enter on this retest which offers a better risk-reward ratio.
4. As you can see in the above picture of the American flag, a flag blows in the wind.
5. A bearish pennant is characterized by a market sharp decline (creating the pole) due to pronounced negative sentiment.

It’s important to note that the pennant pattern is often confused with other chart patterns, especially symmetrical triangles, and wedges. The bullish pennant pattern will occur over lots of different time frames. Secondly, a price consolidation forms a roughly symmetrical triangle with its support and resistance lines. It’s important not to confuse a bullish pennant with other patterns such as triangles, falling wedges, and bullish flags.

Symmetrical Triangle

As in the case of bullish pennants, the profit target is set at the height of the flagpole or the entire pattern. The breakout of the pennant lower border served as a signal to open a short position. The price movement during the formation of a bearish pennant is determined by the height of the flagpole or the height of the pennant itself. The price target for pennants is often established by applying the initial flagpole’s height to the point at which the price breaks out from the pennant. The stop-loss level is often set at the lowest point of the pennant pattern, since a breakdown from these levels would invalidate the pattern and could mark the beginning of a longer-term reversal.

A flag pattern consolidation should be limited by equidistant lines, while a pennant consolidation should be bounded by converging lines. When attempting to spot a pennant pattern, traders are usually checking several visual cues. A pennant pattern depicts the diverging views of the market players, the struggle between bulls and bears.

Traders should look to enter the trade on confirmation of the breakout after a sudden sharp move in price. Trading during the breakout offers the potential to capture a significant price move. Like most other patterns in trading, the Bullish pennant chart pattern signals to traders that changes are taking place in the market. In some cases, with a protracted downtrend, the pattern signals a bearish-to-bullish reversal. Pennants are characterized by converging trendlines that form a small symmetrical triangle.

1. The pennant pattern formation process begins with the formation of the flag pole which is formed by a sharp market price increase or sharp market price decrease.
2. When it comes to setting take profit and stop loss orders, traders can consider placing them at key support or resistance levels beyond the breakout point.
3. The strong negative sentiment causes the market to plummet lower in a bearish pennant.
4. When the price consolidates, the market experiences a brief pause, characterized by two converging trendlines that form a symmetrical triangle or flag shape.
5. When applying the same strategies to a short-term position, all you have to do is follow the above steps in reverse.
6. However, unlike the flag, the pennant pattern is built with converging lines that have an intersection point.

After narrowing the range, there was a sharp surge in volumes, at which the price broke through the upper boundary of the pennant. In other words, the trend continues to develop in the same direction after a short-term accumulation. These tips will help you navigate trades more effectively and increase your chances of success. Entering the trade at this point increases the probability of success by confirming that the bearish momentum is resuming.

Strike offers a free trial along with a subscription to help traders and investors make better decisions in the stock market. Based on the risk tolerance and the distance between the entry point and the stop loss level, determine the appropriate position size for the trade. With more conservative trading, before opening a position, you can wait for a retest of the broken-out level and then open a position. However, the retest does not always occur, and in some cases, the trader may miss a good entry point with such an approach.

On the other hand, the ascending triangle contains an upper trend line that is horizontal and flat as prices keep retesting resistance, but cannot break through. Once this initial movement occurs, a period of consolidation typically follows. During this phase, traders should look for converging trendlines that form a symmetrical triangle. These trendlines emerge as the asset’s price oscillates between support and resistance levels, steadily moving towards a narrow price range. The pattern often resembles a small symmetrical triangle or pennant on the chart, hence the name.

When the sellers are able to secure a breakout, it ends the consolidation period. When the pattern shows that the upper and lower trend lines are converging, it means a breakout is about to follow. This does not occur in the bearish flag, as the consolidation can last for a long time. Wedges are a type of chart pattern traders use to predict market movements. A rising wedge occurs when prices consolidate between converging trend lines that slope upwards.