Pennant Pattern: Types, Characteristics, and Trading Bullish and Bearish Patterns
It begins with a steep downward move, followed by a consolidation phase within converging trendlines. As with the Bullish Pennant, volume decreases during the pause and increases during the breakout, usually driving the price down to a target equal to the height of the flagpole. It occurs after a strong price movement (known as a flagpole), followed by a small consolidation where the price moves within converging trend lines. After that, a breakout happens, usually in the same direction as the initial move. It’s often mistaken for a Flag or Triangle pattern, but the Pennant is unique because of its symmetrical, tapering structure formed by converging trend lines.
- The bear pennant pattern can sometimes lead to false breakouts, where the price appears to break the consolidation phase but quickly reverses direction.
- Being able to visually identify these three stages goes a long way when scanning charts for bullish penant trading setups.
- In terms of the appearance of the pennant formation, it resembles a small symmetrical triangle with converging trendlines that contain the price action.
- The breakout typically occurs in the direction of the preceding uptrend, indicating a continuation of the bullish momentum.
What Is The Psychology Behind a Pennant Pattern?
With both strategies, your stop is far closer than the point at which you take profit. This is one reason why pennants are so sought after by traders – relative to other patterns, the risk-reward ratio tends to be high. For our EUR/USD trade, for example, you might be risking 10 or 20 points in exchange for 200 points of potential profit. If you’ve waited until the market retests its old area of support or resistance, you’d place your stop a few points below your entry position.
Bear Pennant Pattern Example
Traders use a measuring technique to estimate a potential price target after the breakout. Traders should use additional analysis tools and indicators to confirm and take a trend decision. A pennant pattern is preceded by a strong up or down move that resembles a flagpole. Many traders look to enter new long or short positions following a breakout from the pennant chart pattern. The trendlines of a pennant pattern represent a period of indecision among traders, with traders taking a break before deciding the direction of the next move.
What Are Common Mistakes Traders Make When Trading a Pennant 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. Starting from the left side of the chart, we can see a sharp move lower that forms the flagpole. Notice how there is a large percentage of red bearish candles compared to green bullish candles. You can see that the pennant formation has been how to trade bearish and bullish pennants outlined with the two converging trendlines.
- But consolidation can’t last forever, and without enough bullish sentiment to recover, the market turns bearish once more.
- Our entry trigger will be a breakout and close below the support line of the pennant pattern.
- Let’s take a closer look at trading the bullish pennant pattern according to this strategy using Tesla stock as an example.
- When the break takes place below the pennant, it is a single for traders to enter with a short position.
- Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
- The 2-hour Gold chart above shows the formation of a bear pennant where there was a strong decline in prices followed by a deep consolidation.
One must note that the consolidation phase needs to stem from a downward trend. This consolidation phase is over after sellers in the market secure a breakout. Now that you understand bull pennants better, you may be ready to start trading live markets and profiting from these patterns. If you need a forex and CFD broker to connect your analysis to real trades, check out Pepperstone or eToro if you’re a US resident. The prevailing expectation is for price to resume the original uptrend once the bullish pennant flag runs its course. So in most cases, we expect the equilibrium to resolve with a bullish breakout.
It starts with a significant price increase, creating the flagpole, followed by a consolidation phase, forming a small, narrow triangle. However, the bull pennant concludes with an upward breakout, signalling the continuation of the bullish momentum. While both pennants signal a continuation of the current trend, their key difference lies in the direction of the flagpole and eventually the breakout.
