The Pennant pattern is one of the popular trend continuation patterns. It is favored by Forex traders around the world. Although appearing quite often, Pennant is often confused with other patterns. Therefore, in this article, I will guide you on how to identify and trade with the Pennant pattern in the most detail.
What is the Pennant pattern?
The Pennant is a continuation pattern, predicting that the price will continue to follow a strong uptrend or downtrend in the short-term that has been formed before. However, many new traders easily confuse the Pennant pattern with the Triangle pattern.
To distinguish the Pennant pattern from other patterns, investors need to understand the characteristics of the Pennant as follows.
- Pennant is a pattern that occurs in the middle of a strong uptrend or strong downtrend.
- After the strong bullish or bearish beginning, the market often “takes a rest” to gain momentum before continuing to move in the direction of the original trend. During this period, the price usually fluctuates in a small range and narrows until it converges to a point to the right of the pattern to form a complete short-term triangle.
- The Pennant pattern is only really confirmed when the price has broken the resistance/support zone.
- As mentioned earlier, Pennant signals the continuation of the price trend.
Types of Pennant patterns in Forex
Similar to other price continuation patterns, Pennant is easy to divide and recognize. In fact, it comes in two main variations, the Bullish Pennant and the Bearish Pennant. The characteristics to identify each pattern will be shared shortly.
Bullish Pennant pattern
- Bullish Pennant is a pattern signaling that price will continue the initial uptrend. Therefore, the important feature of Bullish Pennant is that the price must have had a strong uptrend before. This uptrend also forms the complete flagpole.
- Bullish Pennant is usually created by a downward sloping resistance line and an upward sloping support line converging to form a triangle.
- Price movements are limited to this triangle for a short period until it gains enough strength to break out of the resistance line to continue going up.
- After the condensed period, when the buyers have accumulated enough necessary energy, they will “massively” push the price up sharply and the market will continue to increase strongly.
Bearish Pennant pattern
- Bearish Pennant is a continuation pattern formed after a strong downtrend. This pattern is created by the crossover of support and resistance lines forming a triangle.
- After the price dropped sharply, many sellers closed their orders one by one to take profits. However, some people jump in to follow the trend, causing the price to slow down.
- When the number of sellers is strong enough, the price immediately breaks the support line and continues to go down. This is also a signal that the sellers are starting to sell and the supply in the market will increase rapidly.
Pennant pattern identification features
To distinguish the pennant pattern from other quote patterns. Here are some salient features to note.
The first is also the most important factor. Before the pattern is formed, the market must be in a strong trend, bullish or bearish. This sharp rise or fall in price is called the flagpole. Therefore, if a pattern does not have this pole, it is a Triangle, not a Pennant.
Next, two converging support and resistance trendlines will form a flag. This is quite similar to the Flag pattern and the Wedge pattern. One point worth noting during this period is that the trading volume will be large during the initial trend. Then it levels off and changes very little when forming the flag part. When the price breaks out of the pattern, the volume continues to increase again, pushing the price to move in the direction of the previous trend.
– Finally, the time to complete the Pennant pattern usually ranges from the next 3-10 candles. This is thought to be a reasonable time for traders to analyze the chart and prepare their trading strategy.
How to trade with the Pennant pattern
Here I will show you how to trade with the Pennant pattern most effectively.
Step 1: Enter the trade as soon as the price breaks out of the Pennant pattern
This is a very familiar and common entry point for most of the popular Forex patterns. Some patterns have an additional way of entry, which is to wait for the price to break out of the pattern and retest the trendline. However, with the Pennant pattern, there is usually only one standard way to place orders, which is to enter an order when the price has just broken out of the pattern.
Step 2: Set stop loss and take profit
– Stop Loss: For the Bullish Pennant pattern, the price will increase sharply after the breakout of the pattern. So to trade with this pattern, we should place a buy order right above the Pennant pattern and stop loss below the bottom of the pattern, a few pips from the low of the flag part.
With the Bearish Pennant pattern, traders should place a sell order at the bottom of the pennant and stop loss a few pips above the pennant’s high.
Take profit: Finally, the step of placing take profit is quite simple. You take profits at the point where the distance from that position to the entry point is at least equal to the height of the flagpole. Note that the take profit will be on the same side as the entry point.
Hopefully, the above sharing has helped you understand the identification and how to trade with the Pennant pattern in Forex. To become a smart investor, always learn and update your knowledge. And don’t forget the rules of stop loss, take profit in each trade!
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