Our next pennant pattern forex example formed at the early stages of a downtrend and was followed by a strong bearish continuation. Additionally, traders should monitor the price action and look for signs of a potential reversal or continuation. Candlestick patterns, such as doji candles or engulfing patterns, can provide valuable insights into market sentiment and potential turning points. Continuation patterns can be a breakout trade where price breaks from a pause or consolidation, or a continuation after a short pause in a move higher or lower. In today’s lesson we discuss the pennant, triangle, wedge, and flag chart patterns, but there are many others you can also use and you will find lessons for on this site. These include market reversals, 123 pattern, double tops and double bottoms and swing highs and lows to find high probability trades.

This is also a high probability way velocity trade to look at the symmetrical triangle for potential trade setups. You could look to make trades when price breaks out of the wind up phase, or look for quick break and intraday retest trades. As with all continuation patterns, price will most often look to continue with the same move it was in before it moved into the consolidation phase. In other words; if price was trending higher before moving into consolidation, it will often break higher in the same direction completing the continuation. Sometimes the Pennant shows a price reversal rather than a continuation.

Symmetrical triangle patterns have trend lines that converge at symmetrical angles, between 15° and 30°, creating a balanced triangular shape. Spotting bearish and bullish pennants can be tricky at first because the consolidation is often small when compared to the preceding price move. To practice identifying and trading patterns without risking any capital, open an tastyfx demo account today. The bullish pennant pattern can occur over lots of different time frames. Day traders look for them on second or minute charts, while longer-term traders spot ones that arise over weeks or even months. Pennant Patterns work as a continuation signal in the forex market and help identify the ideal entry and exit price points.

What are Pennant Patterns?

Depending on your expertise, trading style and risk tolerance, establishing the entry point for a pennant pattern trade could imply three scenarios. However, any consolidation is ending, and the lack of bullish sentiment favors the breakout pushing the prices down. Any sellers who have been holding back will jump in if the support line cedes, which will lead to new price lows. After you calculate your stop-loss and take-profit levels, you have to consider whether the resulting risk-to-reward ratio is good enough for you to trade this setup. Now that you know what a pennant pattern looks like, the next logical step will be to start using your platform’s trendline drawing tools to help you define the shape of the pattern.

Basic Property of Pennants

See the chart examples in the section below for real-life chart markups of stop-losses for bearish flags and pennants. Once the breakout hit a price target that corresponded to the same length as the pole, the price started to retrace in the opposite direction. This shows the importance of using the measured move in setting trade exits in flags and pennants.

Understanding Pennant Patterns

It probably won’t produce a strong enough breakout to make the trade worthwhile. As with all technical patterns, in real trading situations pennants come in a wide variety of forms. To be a true pennant, in the first phase the market must make a strong move in one direction. This means that pennants in an uptrend are expected to break out upward and those in a downtrend, downward. 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.

The pennant pattern signals a breakout that indicates the trend is resuming in the direction of the prior movement. The breakout is highly beneficial for traders, aligning their trade positions with market momentum. The pennant pattern helps identify the breakout’s direction while offering timing insights, enabling traders to enter trades as volatility increases. This shape is similar to the shape of the pennant flags typically used in sporting events.

What Is a Pennant Pattern?

• A bullish pennant begins with a significant uptrend where the price of a particular asset is increasing, forming a bullish pole.
• Bulls feel that there may be a reversal in the price, and the sellers who drove it down may subsequently retreat and take their profits, causing a price consolidation.
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This is the step that will help you manage your risk and protect your trading account if the breakout is not sustained, or if the market reverses course. Even the flagpole part plays an integral role in the ‘how to trade it’ part of this pattern, which we will discuss a bit later. Swing trading is where strategy meets patience, and the real profit comes from catching the move rather than chasing it.Unlike day trading, where trades are fast and fleeting, swing trading is… We talked briefly about support and resistance lines with this strategy, and if you still are not quite grasping what we mean, check out the Rabbit Trail Strategy, which talks a lot about this. This could be a sign that this upward move is over, and you should consider exiting like so many other traders are doing.

In currencies you can find pennant-like structures at any time frame down to the minute charts. And the development is often the same as the larger patterns – only on a shorter time horizon. Another approach is to first wait until the price breaks out, then look for above-average volume to confirm the breakout. For example, when a bullish Pennant forms, you can place a limit buy order just above the Pennant’s upper trendline. A continuation pattern is a chart pattern that leads to the continuation of an existing trend.

Once it breaks out beyond resistance, technical traders would expect it to make another 200-point move. Pennants are sought after by traders because they tend to lead to extended breakouts. So when you’re trading them, you want to find the perfect place to open your position and ride the subsequent move. We don’t recommend you to trade with the “Pennant” using a classical strategy, because the odds of a successful market entry are unbelievably low. At that, there is a good sign that the pattern will materialize, namely – high volume spots at the classical breakout point. Now in the next step, wait for a breakout of trendline and high of wave D.

This is confirmed using a candle’s close, which should be well above the consolidation area of a bullish pattern or well below the consolidation area of a bearish pattern. Using 10% of the channel’s width for a flag or of the pennant’s base width for a pennant can be a good rule of thumb here. With this pennant pattern forex example, volume increased during the formation of the pennant part, though price failed on numerous occasions to break above the upper resistance trendline.

• These trendlines should converge, indicating a decrease in volatility and a potential breakout.
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Traders can set a buy order above the upper trendline for bullish pennants or a sell order below the lower trendline for bearish pennants. This strategy ensures that the breakout is confirmed before entering the trade. A pennant is a specific chart pattern that indicates a market consolidation followed by a significant price movement. It’s what traders call a continuation pattern, meaning it suggests the current trend is going to resume after the period of sideways price consolidation. Knowing the key differences between bullish and bearish pennants will allow traders to adapt their approach depending on different market circumstances.

The example below shows price creating the pole with the fast rise higher, followed by the bullish flag that is created with price consolidating. The bullish flag pattern is created when price is in a strong axitrader review trend higher. Price will make a strong move higher creating the pole and then consolidate sideways creating the flag. If this pattern was to form at the bottom of a downtrend, then traders could watch for a possible market reversal and change in the trend direction.

To avoid trading in situations like these, a trader could combine the Pennant with momentum oscillators like the RSI or Stochastics. In this way, he/she can try to spot the direction of the overall trend and take positions according to these analysis. Unlike the other chart patterns wherein the size of the next move is approximately the height of the formation, pennants signal much stronger moves. One extra clue that a bullish pennant is forming is falling volume as price consolidates. Then, when the market begins to break out of the pattern, volume spikes. It’s important not to confuse bullish pennants with other patterns such as triangles, falling wedges and bullish flags.

Traders monitor the pennant formation in volatile markets to determine the strength of the prevailing trend and capitalize on thinkmarkets review the momentum established before a price breakout occurs. The pennant pattern offers precise price breakout opportunities when the market stabilizes, making it a common and effective tool for predicting future price movements. The difference between a pennant and a symmetrical triangle pattern lies in their formation, duration, volume behavior, and breakout direction. The pennant pattern forms within one to three weeks and features converging trend lines creating a small symmetrical triangle after a strong price movement. Symmetrical triangles, forming over a similar or longer timeframe, have evenly converging trend lines with a balanced shape.