He expands his analysis to stock brokers, crypto exchanges, social and copy trading platforms, Contract For Difference (CFD) brokers, options brokers, futures brokers, and Fintech products. Hakan Samuelsson and Oddmund Groette are independent full-time traders and investors who together with their team manage this website. It’s pretty demanding to make a pennant trading strategy with strict trading rules and settings because of all the rules required.

Strategies

However, false breakouts and pennant patterns failures can occur, and they do so. This is why traders should always have a well-defined risk and money management plan. When the price breaks through the pennant’s lower trend line and trend resumes, we have a confirmed bearish pennant pattern. Like the bullish pennants, declining volume frequently indicates the formation of a bear pennant. Once the price makes the breakout, the volume should increase significantly.

This includes identifying an existing uptrend and the formation of a pennant after that uptrend has begun. The Bullish Pennant pattern is formed when the price of a security moves up in an uptrend and then consolidates before continuing its upward move. A Bearish Pennant pattern is formed when the price moves down in a downtrend and then consolidates before continuing its downward move. It’s vital to remember that market conditions are often not perfect—the price may turn around and back, so it’s vital to set a stop-loss level. Stop losses might be set beyond the last significant swing high or low in the pattern. With an idea of how the pennant works and what it looks like, let’s take a closer look at some pennant trading rules to use the pattern consistently.

You can see above that the “pole,” if you want to call it that, had a strong upward movement (nearly verticle). The buyers then began to close their positions and made the trend stall and form what’s called a pennant pattern. Both the bearish pennant chart pattern and the chart pattern bullish pennant can offer useful trading signals but also come with drawbacks to consider. According to analysis research based on over 120,000 patterns, symmetrical pennants successfully breakout in the expected prevailing trend direction about 67% of the time. The main distinction is that the stock chart pennant pattern is usually considered a subset within the larger triangle pattern group.

Unlike other markets, Forex pennants frequently exhibit tighter consolidation ranges due to high liquidity and the influence of institutional traders. The convergence of trendlines occurs faster, often within hours or days, and breakouts tend to respect the dominant trend direction with higher precision. These characteristics highlight key insights into the meaning of Forex trading when applying technical analysis strategies. The pennant pattern resolves rapidly in strong trends, where the momentum drives the consolidation phase to complete quickly, reinforcing the prevailing trend direction.

The first trading strategy for the triangle pattern is the breakout entry, which allows us to enter the trade immediately once the pattern is completed and the breakout occurs. After having seen all the different price patterns, in this chapter we will zoom in on the flag pattern, which is one of the continuation patterns. Once you are done with that, you can return to this guide, which will focus on the flag & pennant patterns in greater detail. Volume plays an essential role in the formation and confirmation of a pennant.

Check out our Parabolic SAR strategy if you want to specifically trade with this indicator. We have this strategy on the chart to help us make a great trading decision when it comes time to make an entry/exit trade. Some sellers got in before new buyers made entries and eventually kept the main trend going to the upside. Historical data shows pennant trading pattern formations to provide effective continuation clues but proper context is required. The best way to improve your eye is to scan historical charts and identify past examples. For instance, during 2022’s bear market, we saw bear pennant chart pattern formations repeatedly on the S&P 500 weekly chart stalling upside bounces.

• Pennants are a continuation pattern, making them an excellent choice for traders looking to enter new positions following a consolidation period in their security of interest.
• These formations typically indicate a loss of momentum, resulting in substantial price movements upon breakout.
• This consolidation forms the flag portion, which is often accompanied by decreasing volume.
• Symmetrical triangle patterns have trend lines that converge at symmetrical angles, between 15° and 30°, creating a balanced triangular shape.

This allows you to speculate on price swings, which means you pennant trading strategy can trade both the bullish and the bearish pennant pattern. It’s crucial to differentiate pennant patterns from other price patterns such as rising and falling wedges, triangles, as well as flag patterns. Once an entry point is identified, traders should set stop-loss orders to manage risk.

What Are Pennant Chart Patterns?

Pennants have trendlines that converge and form a symmetrical triangle, while flags have parallel trendlines that create a rectangular shape. We were not able to develop a 100% quantified pennant pattern trading strategy. According to Bulkowski, the percentage of formations that meet or exceed their predicted price targets is disappointing for both flags and pennants. He views values above 80% to be reliable, and 52 and 63% is not going to cut it. Trading analytics aggregate results by pattern type, entry method, and trade-management rules so you can measure win rate, average R, drawdown, and expectancy for each approach.

How to Trade Pennant Pattern?

For example, a trader could place their stop loss below significant support levels or prior resistance levels. If the price drops below these levels during the breakout, this would be an indication to exit the position. In our previous example, if $40.00 served as a strong support level before the pennant formation, a trader might consider placing their stop loss at that level. Price Target CalculationThe initial move—the flagpole—provides insight into estimating the price target for a pennant. The height of this movement serves as the base for determining potential upside when a breakout occurs from the consolidation period (pennant).

How to trade bullish and bearish pennants

Once the flagpole and consolidation phase are clear, traders should wait for the breakout above the upper trendline. Entry points are typically just above this breakout level, confirmed by a spike in volume. Conversely, a bearish pennant pattern forms during a downtrend and indicates the continuation of the downward movement. The pattern starts with a steep price decline, creating the flagpole, followed by a consolidation phase that shapes the pennant.

• Before you even think about becoming profitable, you’ll need to build a solid foundation.
• When a breakout occurs, increased buying or selling activity usually follows, driving the price in the breakout direction.
• However, there are strategies you can use to trade this, but for the PPG trade strategy, if the prices break below the pennant in a bullish pennant pattern, then avoid trading.
• Traders monitor the pennant chart formation for a breakout when the price movement fluctuates within the confines of the pattern.
• Traders use reversals to switch from trend-following bias to contrarian entries with defined invalidation levels and measured targets.

How Can Traders Manage Risk and Psychology When Trading Chart Patterns?

If they do, it could invalidate the pennant and signal a potential trend reversal. Bullish pennants form after a significant upward move, signaling a continuation of the uptrend. Bearish pennants appear after a sharp downward move, indicating further declines.

How Do Double Top and Double Bottom Patterns Indicate Reversals?

Symmetrical triangle patterns take a similar or longer timeframe, with formations spanning several weeks to months. The pennant pattern in cryptocurrency trading exhibits heightened volatility and compressed timeframes, with breakouts frequently amplified by speculative retail activity and regulatory developments. The bearish pennant target is measured by projecting the height of the flagpole from the breakout point downward. Pennants and flag patterns are often confused with each other as they look alike, but they have distinct characteristics that traders need to understand to make accurate technical analyses. In the above example, the stock creates a pennant when it breaks out, experiences a period of consolidation, and then breaks out higher.

Repetition and review build speed and accuracy while revealing personal strengths and weaknesses to refine. Tradingsim provides a hands-on learning environment that maps directly to the pattern-and-trend workflows above. With a day trading simulator, Market Replay Engine, and paper-trading tools, you can practice execution and market structure without real capital.