Dear Traders, the importance of technical analysis in financial trading is well-known to almost everyone. Traders at every level, including beginners and experienced traders, benefit from various tools in technical analysis. Among these tools, the leadership of chart patterns is clearly evident. Therefore, I have dedicated this article to one of these chart patterns, the Pennant pattern.
What is the Pennant Pattern?
The Pennant is a chart pattern that indicates continuation
of the trend in which it forms. There are two types of Pennant patterns in
technical analysis. One is called the Bullish Pennant, while the other is known
as the Bearish Pennant. The Rising (Bullish) Pennant pattern is a chart pattern
that indicates a continuation of an upward trend. The Falling (Bearish) Pennant,
on the other hand, is a chart pattern that indicates a continuation of a
downward trend. Both are patterns in technical analysis that can signal the
continuation of the current price movement.
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| Pennant Chart Patterns |
In some cases, the Pennant pattern can be confused with the Symmetrical Triangle pattern. However, there is a slight difference between them. In the Pennant pattern, there is a pole (pennatpole or flagpole), while in the Symmetrical Triangle pattern, there may not be a pole. Additionally, the Symmetrical Triangle is a neutral chart pattern, meaning that it is not certain whether prices will rise or fall.
Formation of the Pennant Pattern
A Pennant pattern usually represents a situation where the
price moves sideways for a period of time, exhibits a trend, and then resumes
its previous direction. The Bullish Pennant pattern is formed when prices enter
a period of consolidation following a previous uptrend. The Bearish Pennant
pattern is similar, but occurs when prices consolidate following a downtrend.
The structure of both types of Pennant patterns includes the following:
Pennant Pole
Both Bullish Pennant and Bearish Pennant patterns start with a long candlestick, often called the pole or flagpole. This initial move is not random, it happens as a result of the strong trend that came just before it. In a bullish pennant, the pole shows a sharp upward movement, while in a bearish pennant, it reflects a strong downward move. The length and intensity of this pole give traders an idea of how powerful the previous trend was and in which direction the market is leaning. Essentially, the pole acts as a visual signal, letting traders know that the strength from the prior trend is still influencing the market.
Pennant Body
After the initial pole, the market usually enters a consolidation phase where prices move within a tight range. This period of consolidation forms the body of the pennant. During this phase, the price action starts to create a small triangular formation, showing that buyers and sellers are taking a pause and weighing their next move. Even though the market is moving sideways, this phase is important because it indicates that the previous trend's energy is being stored up before the next breakout. Traders pay close attention to the pennant body because the way prices behave here can provide clues about whether the trend will continue in the same direction or if a reversal might occur. The pennant body represents a temporary balance between buyers and sellers, and understanding this balance is crucial for making informed trading decisions.
The structural elements mentioned above represent the general characteristics of both types of Pennant patterns. When these elements come together, it is widely known that a Bullish and Bearish Pennant pattern is formed, and the next move of prices, i.e., whether the previous trend can continue, is now widely known among a broad audience.
How to Trade with the Pennant Pattern?
The Pennant pattern is one of the clearest signs that a trend is likely to continue in the market. What traders are really waiting for is the breakout or breakdown point, because this is when the market chooses its next direction and when we can make informed decisions about buying or selling. Before this moment, the price usually moves sideways within a small triangular range, giving both buyers and sellers a chance to catch their breath and prepare for the next big move. When the price finally moves out of this range, either above the top line or below the bottom line, it shows which side is taking control. This sharp move is called the breakout for an upward move or the breakdown for a downward move. It is often a much more reliable signal than trying to guess the next move before the pattern completes, because it reflects the actual decision of the market.
Watching this moment carefully is key for traders. A breakout to the upside can be an opportunity to go long and ride the bullish trend, while a breakdown to the downside can provide a chance to go short and follow the bearish trend. Factors like the strength of the previous trend, the size of the breakout or breakdown, and the trading volume at that moment all help confirm that the move is real and not a false signal. Understanding this gives traders confidence to act at the right time instead of reacting too early or too late.
Trading with the Bullish Pennant Pattern
The Bullish Pennant pattern usually forms during a strong uptrend and is seen as a continuation pattern. It starts with a sharp upward movement, known as the pole, followed by a brief consolidation where prices move within a small triangular range. This consolidation forms the pennant itself, and during this period, the market is at its core pausing to gather strength for the next move. The upper part of the triangle acts as a resistance level. Traders watch this area closely because a breakout above this resistance often signals that the upward trend is ready to continue. When the price finally breaks above the top of the pennant, it shows that buyers have the upper hand and that the previous bullish drive is likely to continue.
At this point, many traders consider entering a long position. A buy order can be placed as soon as the breakout is confirmed, ideally with an increase in trading volume to add reliability to the signal. The size of the breakout and the strength of the preceding pole can also help traders estimate how far the price might move after the breakout. Basically, trading the Bullish Pennant is about recognizing the pause in the trend, waiting for the market to signal continuation, and then acting confidently once that signal appears.
- Entry (Buy): As the first preference, a buy order is placed just above the breakout point from the upper part of the pennant. After the breakout, there may be a pullback, and buying can be done when prices start rising again after the pullback. This would be a safer entry choice.
- Stop-Loss: The stop-loss level is normally placed slightly below the bottom of the pennant or at a support level identified by technical analysis tools.
- Target: The target level is often measured by the size of the pattern. The distance between the highest and lowest points of the Pennant can be used for target setting. This distance is also referred to as the pattern's height. The target price is determined by adding the height of the pattern upwards from the breakout point. Some long-term traders set a target price equal to the length of the Pennant pole. They calculate the target price by adding the distance equal to the length of the Pennant pole upwards from the breakout point.
In the following 4-hour chart of Spot Gold/US Dollar, a
perfect trading example is presented with a Bullish Pennant pattern. If you'd
like to examine it, here it is:
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| Bullish Pennant Pattern on XAU/USD chart. |
Trading with the Bearish Pennant Pattern
The Bearish Pennant pattern usually appears when the market is in a clear downtrend. It begins with a sharp drop in price, forming what is called the pole, followed by a period where prices move sideways in a small triangular formation. This pause represents a moment of indecision in the market, where sellers and buyers are temporarily in balance before the next move occurs.
The bottom line of the triangle serves as a support level. Traders pay attention to this area because when the price finally falls below it, it often signals that selling pressure is gaining strength again and the previous downtrend is likely to continue. This breakout to the downside provides an opportunity to enter a short position. To make the most of the Bearish Pennant, traders often wait for confirmation of the breakdown. This confirmation can include increased trading activity or a cluster of candlestick patterns that reinforce the downward move. Once the breakdown is validated, placing a sell order can allow traders to capitalize on the continuation of the downward trend. Understanding the length of the pole and the duration of the consolidation can also help estimate the likely extent of the price decline.
- Entry (Sell): When opening a sell position, it is done when the breakdown occurs from the lower part of the pennant. For a safe entry, a pullback is expected after the breakdown, and selling can be done when prices start falling again after the pullback.
- Stop-Loss: The stop-loss level can also be placed slightly above the top of the pennant or at the nearest resistance level.
- Target: The distance between the highest and lowest points of the pennant (pattern height) can be used for target setting. This distance is added downwards from the breakdown point to determine the target. Another approach is to determine target levels using Fibonacci retracement levels or risk-reward ratios.
The 4-hour chart of the Ethereum/Bitcoin cryptocurrency pair
clearly shows a Bearish Pennant pattern, as demonstrated by the following
example, which presents an excellent trading opportunity:
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| Bearish Pennant Pattern on ETH/BTC chart. |
Don't Forget: Chart patterns may not always provide accurate signals in financial trading. The Pennant pattern is no exception. Since each trading situation is different, combining technical analysis tools with fundamental analysis can lead to more reliable trades. Additionally, always prioritizing risk management is essential.