The Pennant pattern is a continuation pattern that forms when there is a large price movement, followed by a brief consolidation, and finally moving in the same direction. The pattern looks like a small symmetrical triangle. They are both constructed of lower highs bound by a downward sloping resistance trend line and higher lows bound by a rising uptrend line. The two trend lines converge at a point called the apex.
What is the Pennant pattern?
The Pennant compromises of series of price’s highs and lows, before indicating trend continuation. The sizeable initial movement of the pattern is called a flagpole. When the Pennant pattern completes, the price moves in a similar direction of the large initial movement, signifying trend continuation. This is also known as the second half of the flagpole.
The Pennant pattern has short consolidation spam of one to three weeks and has converging trend lines during this period.
When identifying the pattern, traders should be careful about the volume. At the initial stages, there is a massive movement, which represents greater volume. The consolidation period has a weak volume, and when the breakout occurs, there is a substantial volume again.
This is how the Pennant appears on the chart:
The structure of the Pennant resembles the Flag pattern and the Symmetrical Triangle pattern. But, the Flag is a reversal pattern, and in Symmetrical Triangle, the trend lines should converge equally. The only difference between a pennant and a flag is the fact that the flag is shaped like a rectangle while a pennant has a triangle shape. A bearish flag forms after a financial asset forms a major dip.
How to use the Pennant pattern?
To apply the Pennant, one must familiarize himself/herself with its bullish and bearish variations.
a. Bullish Pennant
The bullish Pennant pops up in an uptrend and signals the continuation of the trend. Traders take their long positions after the breakout. The candle close to the Pennant provides an entry point with stop-losses set near the breakout candle’s low. Unlike the flag where the price action consolidates within the two parallel lines, the pennant uses two converging lines for consolidation until the breakout occurs.
b. Bearish Pennant
The bearish Pennant surfaces in a downtrend and identifies trend continuation. Traders go short after the breakout. The candle close to the Pennant gives entrance opportunity with stop-losses set near the high of the breakout candle. A bearish pennant is a technical trading pattern that indicates the impending continuation of a downward price move. They’re essentially the opposite to bullish pennants: instead of consolidating after a move up, the market pauses on a significant move down.
In both bullish and bearish Pennants, profit-targets can be placed by measuring the first half of the flagpole’s distance. The calculated distance can then be applied after the breakout candle.
For example, if the price of EUR/USD rises from 1.2890 to 1.2900, consolidates at 1.2895, breaks from the Pennant at 1.2898, then profit-targets are 1.2890 + 1.2898 = 1.2988.
Sometimes the Pennant shows a price reversal rather than a continuation. This reversal can cause losses. To avoid trading in situations like these, a trader could combine the Pennant with momentum oscillators like the RSI or Stochastics. In this way, he/she can try to spot the direction of the overall trend and take positions according to these analysis.
Pennant pattern trading strategy
A Pennant pattern has to be preceded by a strong up or down move that resembles a flagpole. If there isn’t a flagpole, then it’s a triangle and not a Pennant. A Pennant tends to form a shallow retracement (typically less than 38% of the flagpole). A deep retracement is indicative of a triangle rather than a Pennant.
If spotted correctly, the Pennant pattern can be useful. Although the pattern can develop on shorter and longer timeframes, it may be more beneficial to some traders to find the pattern on longer timeframes. This is because the Pennant’s consolidation period can be anywhere between one to three weeks. However, traders may look for the Pennant pattern on any timeframe according to their own individual trading needs.
Pennant pattern buy strategy
- Locate the pattern in an uptrend.
- Wait for the price bar to go bullish before entering.
- Enter the trade after the breakout candle.
- Place a stop-loss near the low of an entry point.
- Exit the trade when the trend reverses.
Pennant pattern sell strategy
- Look for the pattern in a downtrend.
- Wait for the price bar to go bearish before entering.
- Enter the trade after the breakout candle.
- Place a stop-loss near the high of an entry point.
- Exit the trade when the trend reverses.
Pennant pattern conclusion
The Pennant pattern is a chart pattern that can sometime define trend continuation where a period of consolidation is followed by a possible breakout. To filter out false signals, some traders may apply the Pennant pattern with momentum oscillators. In the Forex market, there are a countless number of candlestick patterns. The Pennant pattern is one of the candlestick patterns that is extensively used by traders to make trading decisions.
The pennant pattern considers a bunch of candlesticks rather than just a single candlestick, making it much powerful in nature. Moreover, the pattern is logic-driven as it indirectly considers other vital aspects of analysis. The Pennant Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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