Trading strategies

Pennant Patterns: A Guide to Trading Bearish & Bullish Pennants

Screen showing trading charts
Screen showing trading charts

Learning to interpret and understand trading patterns is a crucial part of day trading. Pennants are a continuation pattern used in analyzing the forex market and predicting future market movements.

What Are Pennant Pattern Charts?

These are continuation patterns formed after a rise or fall in prices. Unlike other trendlines such as wedges, they are only used in forex trading. The pattern begins after an abrupt change in price, which creates gaps known as poles. Generally, it represents a moment of indecision in between a complete move that consolidates the last leg. 

The price usually oscillates in a small symmetric triangle of numerous forex candlesticks, but it eventually converges.

How To Identify Pennant Patterns

Trading charts on computer screen
Trading charts on computer screen

Pennants are identified by the flag-shaped candles following sudden moves up and down. The first key indicator is a sharp move in either one direction on a chart giving a clue to the formation and the expected direction of the breakout that will occur. 

The sudden market movement will usually be followed by a brief consolidation with lower volume and a continued trend in the same direction on a higher volume to complete the pattern. 

It comes with the following attributes which help in its identification:

  1. A flagpole-the pattern starts with a flagpole differentiating it from other designs such as triangles. 
  2. Breakout levels- the pattern comes with two breakouts; one after the flag and the other after the consolidation as the trend moves upwards or downwards. 
  3. The pennant- a pattern that forms when the flagpole and breakout consolidate.

Types of Pennant Patterns

Trading charts on a screen
Trading charts on a screen

Here are the different types of the indicator: 

Bearish Pennants

These are indicators that occur during a strong downtrend. They start with a flagpole due to a strong downward movement in price followed by a short pause before the downward trend continues. The momentary pause is what causes a triangular shape to form. A bearish pennant indicates an impending downward movement in price. Instead of consolidating after an upward move in price, the consolidation happens after a significant downward trend. Look out for the pole which forms after a consolidation between support and resistance trends and forms a triangle.

Bullish Pennants

A bull market is rising, meaning bullish pennant forms when a sharp increase in stock prices. They’re formed after extensive movement upwards, followed by a pause and consolidation of both converging and resistance lines. It serves as an indication that the original upward price move will resume, which can lead to profits if taken advantage of. A bullish pennant is, therefore, sought after as it indicates an upward shift in price and can occur at different times. 

For instance, day traders seek this indicator on second and minute charts while long term traders spot them after weeks or months. They can be identified by watching out for two elements: an upward movement known as the pole followed by a price consolidation which forms asymmetric with resistance and support lines. A falling is a good sign showing that a bearish pennant is developing, and the volume builds up as the market breaks out.

Differences Between Bullish and Bearish Trading Pennants

Trading charts on a screen
Trading charts on a screen

It can be challenging to differentiate between the two, especially since the consolidation is usually too small compared to the price that follows. Here are some noteworthy differences between the two. 

Bullish Bearish
It’s formed when the market consolidates after an upward movement. Arise when the market consolidates after a downward movement. 
Breakouts happen when the market moves beyond a resistance line. A breakout occurs when the market goes beyond a support line. 

For a trader to successfully trade, they need to know when to open the trade, when to take profits and where to exit and cut their losses.

Key Takeaways

  • Pennants form when a breakout follows a consolidation which is used by traders for analysis. 
  • These must be used together with other tools for confirmation since they can produce inaccurate readings.

FAQ

How can I identify a pennant market?

It’s similar to a flag chart but a pennant’s consolidation phase is marked by converging rather than parallel lines.

What is a bullish pennant?

It’s a trend pattern formed after a rise in prices.

What is a bearish pennant?

It’s a pattern formed after a sudden fall in stock prices.

Source
https://www.dailyfx.com/https://economictimes.indiatimes.com/https://www.forbes.com/https://www.business-standard.com/

Marc Richer

Marc Rich (born Marcell David Reich; December 18, 1956 – June 26, 2013) international commodities trader, hedge fund manager, financier, and businessman.

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