Service commercial : 01 80 88 43 02

What Is a Pennant Chart Pattern in Technical Analysis?

Another pitfall in pennant trading involves neglecting broader market context. Traders may focus only on the pennant pattern without considering external factors that could impact the trade. For example, think about broader economic events may impact more than just one security. Equities may tip their hand and show where they may be headed, but events out of the company’s control may oppose the expected price movement. A flag pattern features parallel trendlines during consolidation, forming a rectangle that slopes against the prevailing trend. A symmetrical triangle can occur as both a how to trade bearish and bullish pennants continuation and a reversal pattern and typically forms over a longer period.

How to trade bullish and bearish pennants with IG

Pennant is one of these key chart patterns that you can use in your forex trades. In this Pennant guide, we will take a deeper look at the Pennant pattern and its characteristics. Here we can see after a rapid rally, prices started to consolidate within a tight range forming a pennant. Upon break out from this pennant, price then subsequently rallied to reach the projected target.

Decreasing volume and volatility reflect a stabilizing period where supply and demand momentarily balance out. The triangular shape shows indecision as both bulls and bears hesitate during the pause. Dr. Andrew Lo and Jasmina Hasanhodzic’s 2009 study, “Can We Learn to Time Reversals? ” published in the Journal of Portfolio Management, found that the head and shoulders pattern had a 65% success rate in predicting market reversals across various asset classes. The psychology behind the head and shoulders pattern is that the first peak represents a rush of buyers moving the price up rapidly.

In the above example, we have a flag pattern, which had an impulsive move higher. Then the stock began to trend sideways for a few hours on the 5-minute chart. As you can see, RUSS never broke the 23.6% retracement line, before screaming higher. Pennants again are another common shape that we see not only in the trading world, but also in the real world. As a kid, I remember my Dad buying me pennants at the Orioles game so I could cheer on the hometown team.

Pennant Pattern is a continuation pattern formed by large currency pair price movements that help identify the direction in which currency pairs are headed. When the bullish pennant pattern is formed, a strong upward movement is likely to occur when the price breaks above the pennant. The bear and bull pennant patterns are continuation patterns, with the key difference being their directional cues. Both patterns share a common structure and indicate a pause in market momentum before a likely continuation in the direction of the prevailing trend.

Due to traders’ desire to profit from the upward movement, there is a surge of purchasing pressure during the early rally. A bearish pennant pattern forex example is illustrated on the weekly NZD/USD forex chart above. The currency price consolidates and forms the converging support and resistance lines of the pattern. The asset price then breaks down and trends downwards leading to pattern completion. With a bullish pennant, a long position must be opened after the breakout of the pennant’s upper border. The target profit is measured by the height of the flagpole or the height of the entire pattern.With a bearish pennant, a short position should be opened after the breakout of the pennant’s lower border.

What Are Common Mistakes When Trading a Pennant Chart Pattern?

A proper pennant usually consolidates for a couple of weeks and up to three weeks maximum. If it goes longer than that it is likely evolving into a larger pattern, such as a symmetrical triangle, or it could lead to a failure. A failure is when the price moves in the opposite direction from what is anticipated.

This leads to a decrease in volatility and a narrowing of the trading range, forming the wedge shape. The lower highs and lows create a clear downtrend, but the decreasing volatility hints at an impending upside breakout. The breakout point is when prices close above the upper descending trendline.

1. Observe how price retested to the broken support, formed a bearish candlestick pattern and created a short setup.
2. Say, for example, that EUR/USD enters into a bullish wedge and breaks its resistance line at $1.084.
3. Monitor for increased buying volume on a bullish pennant breakout and increased selling volume on a bearish pennant breakdown.
4. You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money.
5. In the image above, the flagpole represents the previous trend higher, the period of consolidation forms a pennant pattern, and traders watch for a breakout from the upper trend line of the symmetrical triangle.

We just looked at how the cup and handle pattern, which is an important component of candlestick analysis works. In this report, we will look at the bearish pennant pattern and how you can use it in the market. However, upon a breakout, the volume should spike reflecting enthusiastic buyers or sellers and the chance for a sustained move up or down. The extended breakout period is why traders are so fond of using this pattern.

Here is no such thing as “the best pennant pattern forex strategy for everyone”. A successful strategy should be a combination of market approach and analysis, strict rules of risk and money management, and discipline. Depending on your expertise, trading style and risk tolerance, establishing the entry point for a pennant pattern trade could imply three scenarios. A pennant pattern is traded in scalping strategies, day trading strategies, swing trading strategies, position trading strategies, and investment strategies.

Definitive Guide for Day Trading Fibonacci Arcs

1. The reliability of the bull pennant pattern is increased when there is a surge in volume during the breakout, indicating strong market consensus on the continuation of the uptrend.
2. A bullish Pennant, one that performs on an uptrend will result in prices that break higher while a bearish pennant will result in breaking at a lower level.
3. A bullish pennant is a technical trading pattern that indicates the impending continuation of a strong upward price move.
4. A pennant is a price pattern where the price starts to range and the difference between the peaks and troughs start to decrease, in a horizontal manner and show similar features to a symmetrical triangle.
5. The rounding top pattern is a bearish reversal pattern that signals a potential downwards breakout.

It is a fairly common pattern and can occur relatively frequently in all time frames, but is seen more often in short-term time-frames. Pennants are similar to flag patterns as far as they each have a sharp rally creating a flagpole before the consolidation phase. Following the surge or decline, there is a consolidation period, forming a tiny symmetrical triangle, known as a pennant. During the consolidation phase price makes lower highs and higher lows, indicating a market pause, when prices gather enough momentum to resume the trend. A defining element of the pennant pattern is the movement that precedes the stage of price consolidation in a narrower triangle, known as the flagpole.

This entry is based on the premise that the increased volume signifies strong market participation in the bullish continuation, offering a higher probability of a successful trade. The bull pennant is a favorite pattern among traders as it basically applies a triangle to a flag pole. Discover how to identify and trade using this powerful continuation pattern. False breakouts are avoided by waiting for confirmation before entering a trade based on a chart pattern. A false breakout occurs when the price breaks out of a pattern but fails to continue in the expected direction.

If you are looking to trade a trend reversal, wait for the flag or pennant to line up directly below or within the cloud. Then wait for the market to send the stock screaming higher through the cloud. At this point, you are essentially entering the position right as the trend changed, which will leave a number of traders trapped and covering their positions. While triangles have swing highs and lows as the price oscillates back and forth, a pennant’s price action will be confined within a range or consolidation that gets even smaller over time. Approach the interpretation of these patterns with prudence, considering that market dynamics are subject to a wide array of influencing factors that might deviate from expected outcomes.

But here, there is a risk of erroneous pattern assessment since the market may behave irrationally under the news background. The profit target is also known in advance and is at the resistance level. Take profit is determined either by the height of the flagpole or, as in this case, by the height of the pennant itself. Let me explain the bullish pennant pattern on the example of the USDCHF H4 chart.