What Is a Pennant Chart Pattern in Technical Analysis?

The pennant itself looks like a triangle with successive increasing lows and decreasing highs. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.

How to Trade the Head and Shoulders Pattern

Pennant chart pattern helps to identify trend continuation based on their structure and principles of technical analysis. Pennant patterns indicate trend continuation depending on six major factors as given below. The existence of a clear trend before the formation of the pennant is crucial for identifying trend continuation. A breakout occurs when the price moves above the upper trendline or below the lower trendline. Traders use a measuring technique to estimate a potential price target after the breakout.

Trade major, minor and exotic pairs with excellent trading conditions.

The strategic application of these patterns is vital for traders, offering insights into market psychology and informing decision-making processes. The flag pattern is encompassed by two parallel lines, these lines will be flat or pointed in the opposite direction of the primary market trend. The pennant pattern is characterised by converging trend lines and has a triangular shape. The breakout from the flag pattern occurs in the direction of the initial price move, indicating a continuation of the prior trend.

Traders aim to close their position, assuming a reversal is on the horizon during this period. The Bearish Pennant Pattern occurs after a significant decrease in a financial instrument’s price. Following a long downtrend, traders aim to close their short positions, assuming that a trend reversal will materialise. Traders place a buy limit order at the top trendline when trading a Bullish Pennant.

Discover how to identify and trade using this powerful continuation pattern. The second pennant pattern trading step is to enter a buy trade or short trade on a breakout from the pattern consolidation area. For traders working with advanced tools or algorithmic systems, coding pattern recognition algorithms can offer a practical approach.

Strategy #1 – Trade Flags and Pennants that retrace less than 23.6%

If these levels fail to hold their support and resistance levels following a breakout from the pennant formation, then this may be an indication that the security is reversing from its previous trend. Additionally, it is important to pay attention to any news events or company developments which can cause drastic changes in market sentiment and price movements of a given asset. By being aware of these potential reversals, traders are better equipped to limit their exposure to risk and maximize profits.

Therefore, when reviewing flag and pennant patterns you can look to see how the price action is trending relative to the Ichimoku Cloud. The subsequent consolidation phase, or the pennant, represents a brief pause in this pennant trading strategy upward momentum. At this point, the buyers have become exhausted and need to catch their breath. However, they feel the uptrend is still early and want to keep their long positions open.

1. So, in the Bullish Pennant pattern, a buy order can be placed whenthe breakout occurs from the upper part of the pennant.
2. Secondly, the emotional component of trading is minimized, as decisions are made based on data and predefined rules rather than human psychology.
3. Risk management is imperative when trading pennant patterns due to the possibility of false breakouts, whereby the price momentarily breaches the pattern only to reverse direction.
4. This pattern suggests that the initial upward trend will continue after a brief period of consolidation.
5. Continuation patterns indicate a pause in a trend and indicate that the previous direction will resume after a period of time.
6. Traders use moving averages to confirm the formation of the pennant pattern.

Traders have the potential to capture large moves if the breakout from the pennant aligns with the direction of the preceding trend. Enter the trade when the price moves decisively above the resistance line in a bullish pennant or below the support line in a bearish pennant. Use volume to confirm the breakout and set stop-loss orders just outside the opposite trendline to manage risk. A take profit must be set at a distance equal to the height of the flagpole or the pennant itself. The essence of trading according to this strategy is to determine the target profit at the level of the figure’s flagpole height. Let’s take a closer look at trading the bullish pennant pattern according to this strategy using Tesla stock as an example.

The bearish pennant pattern, as a rule, signals the continuation of the downtrend. The formation may sometimes indicate a bullish-to-bearish reversal after a long uptrend. Therefore, when trading with the bullish pennant chart pattern, you can take profits gradually, closing most of the positions with a gain upon reaching the first goal. Stop loss should be set below the support level according to risk management. The parallel trendlines in a flag pattern indicate a brief consolidation, with the price moving in a channel against the prevailing trend. Like pennants, flags are typically seen as a continuation pattern, and the breakout direction is expected to align with the existing trend.

1. The bullish pennant is a bullish continuation pattern that indicates the extension of the uptrend after the period of consolidation.
2. An uptrend can favor a bullish pennant formation, while a downtrend can include a bearish pennant pattern.
3. This initial movement, commonly referred to as the flagpole, establishes an obvious orientation.
4. After the pennant developed on the chart, ARWR experienced a breakdown right after lunch.

Look for the trend line to help define the trend to ensure there is continuity over multiple days. Once you can see the larger formation, look to buy the open of the stock once it gaps through the previous day’s flag or pennant. Triangle patterns may have small false breakouts before a major price movement.