Pennant Patterns: How to Trade Bearish and Bullish Pennants
Pennant Patterns work as a continuation signal in the forex market and help identify the ideal entry and exit price points. They can also predict future bullish and bearish market movements. Let us dive deep into what Pennants Patterns are and how you can trade the bullish and bearish versions of the same.
What are Pennant Patterns?
Pennant Pattern is a continuation pattern formed by large currency pair price movements that help identify the direction in which currency pairs are headed. The pattern resembles the shape of a flag, which denotes a drastic increase or decrease in the currency pair prices, continued by a price fluctuation in a particular range, finally followed by a breakout either in the upward or downward direction.
- The flagpole is the large/sharp movement in currency pair prices
- The consolidation phase occurs when currency pair prices converge
- The breakout is when the price continues to move in the direction of the market trend
Characteristics of a Pennant Pattern
The flagpole is the beginning of the Pennant Pattern. It is formed either as a steep downward or upward sloping trendline.
- If the flagpole is sloping upward, it signals a continued uptrend
- If the flagpole is sloping downward, it signals a continued downtrend
Volume provides traders with an idea of how the sudden drop or price rise creating the Pennant flagpole will affect the trend’s direction. The consolidation period should have lower volumes and breakouts should have higher volumes.
There are two breakout levels. The first breakout occurs as the flagpole ends. The second one occurs after the currency pair price trades within a price range between the resistance and support levels for some time.
- If the breakout is in the upward direction, it confirms an uptrend
- If it is in the downward direction, it confirms a downtrend
Types of Pennant Patterns
1. Bullish Pennant Pattern
Bullish Pennant Pattern is an uptrend confirmation pattern that is formed after a sharp increase in the currency pair prices. Once the price increases, the currency pair starts trading within a range between its support and resistance levels, and fluctuates by dropping a little overall. Soon after, the currency pair prices break out in the upward direction and start rising continuously, confirming the uptrend.
- Traders can place buy/entry orders at the beginning of the flagpole or at the end of the actual flag, where the price fluctuates within a range
- The stop-loss order can be placed at the end of the flag
- The take profit order can be placed at the topmost price level before there is a market reversal in the long term
Two elements to identify the Bullish Pennant Pattern
- A prior continued uptrend in the market over a few hours or days
- A price consolidation after the uptrend ends and the prices trade between their support and resistance levels before breaking above the resistance level
2. Bearish Pennant Pattern
Bearish Pennant Pattern is a downtrend confirmation pattern that is formed after a sharp decrease in the currency pair prices. Since the price decreases, the currency pair starts trading within a range and fluctuates with a little overall increase. Soon after, the currency pair prices break out in the downward direction and start decreasing continuously, confirming the downtrend.
- Traders can place sell/exit orders at the beginning of the flagpole
- The stop-loss order can be placed at the end of the flag where the price fluctuates within a range
- The take profit order can be placed at the 50% or 100% level of the flagpole in the downward direction
Two elements to identify the Bearish Pennant Pattern
- A prior continued downtrend in the market over a few hours or days
- The currency pair price movement (after the downtrend ends) between its resistance and support level before the price breaks below the support level
How to trade forex with a Pennant Pattern?
1. Identify a strong bullish or bearish trend
The first step to trade the Pennant Pattern is to identify either a continued uptrend or downtrend, which occur after the formation of at least a few consecutive candlesticks. If there are a few green (bullish) candlesticks in the price chart, they signal an uptrend, and if there are a few red (bearish) candlesticks in the price chart, they signal a downtrend.
2. Analyse price consolidation right after the big price move
After the continued uptrend, wait for the currency pair price to consolidate and trade between its support and resistance level for some time. At this point, in an uptrend, traders can place buy orders to trade with the rising market. However, during a downtrend, this is the right time to exit the market in order to be protected against heavy losses due to the continued downturn.
3. Draw the Pennant’s flagpole and flag
The flagpole is drawn by connecting the bullish or bearish candlesticks where the prices are either increasing or decreasing continuously. Next, connect the high and low price points in the charts to draw the flag’s body.
4. Identify the breakout level
The breakout level in the Pennant Pattern occurs when the currency pair prices either cross the resistance price level or drop below the support price level. In an uptrend, the currency pair prices moving beyond the resistance level is the price breakout that provides traders with entry signals. In a downtrend, the prices falling below the support level is the price breakout signalling exit.
5. Place stop-loss orders
Stop-loss orders can be placed right below the support and resistance area during an uptrend and above the support and resistance area during a downtrend.
6. Monitor trades and exit when needed
Once traders have made an entry/exit decision and placed the stop-loss order according to a prior trend while trading the Pennant Pattern, they can monitor the trades for a few days or weeks till the trend reverses. Traders can then exit/enter the market before reversal.
Trade Pennant Patterns and identify strong market trends
The Pennant patterns help traders identify strong market continuation trends and provide them with the ideal entry and exit points. Start trading with Pennant Patterns on Blueberry Markets and benefit from competitive spreads, 24/7 customer support, and a real-time price tracking mechanism. Sign up for a live trading account or try a risk-free demo account.
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