The flagpole of the pennant pattern must display strong bearish characteristics in the price action. Enter a buy order, when the price breaks out and closes above the resistance trend line of the pennant pattern. It’s important to understand that pennant patterns are fractal in nature, meaning that they can occur at all degrees of trend from the shortest to the longest. If you’ve missed an uptrend from the beginning, the bullish pennant trading strategy allows you to get in along the way. The entry is placed at a price where the breakout closes, while the stop loss is located just below the breakout candle and the wedge. Following the establishment of a short-term peak, the price action starts to consolidate below the highs.

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The line through the peaks and the line through the troughs converge and the https://g-markets.net/ is completed by a break outside the converging lines. A flag is formed when parallel lines can be drawn through the peaks and the troughs in a correction (or a rally during a down-trend). The pattern is completed by a break outside the parallel lines. Look for the trend line to help define the trend to ensure there is continuity over multiple days.

Best Day Trading Chart Patterns

– Is there no defined flagpole on the pennant pattern you’re watching? Never go against your strategy just because you’re antsy to trade. The pennant pattern is recognized by the V-shaped trend lines that accompany it. These trend lines appear set to convergence, meaning the stock is making higher lows and lower highs in an ever-shrinking range. However, day traders can use smaller time frames and attempt to trade the pennant pattern as well. There you have it – a complete guide to trading the bull pennant pattern.

With the Use of Technical Indicators and ToolsIn the following sections, let us briefly go over both these approaches, so that you never experience issues in identifying a Pennant Pattern. For the highest accuracy, I would strongly recommend that you leverage both these approaches towards identifying the Pennant Patterns in combination with each other. Take profit calculations are the exactly same as that of option one above. All information is subject to specific conditions | © 2023 Navi Technologies Ltd.

Flags and Pennants in Forex Trading

Sometimes, traders attempt to open a position based on a bullish pattern found inside a declining trend or based on a bearish pattern inside a rising trend. Although it may work from time to time, but success rate of such invalid setups is inferior to that of a correctly located flag or pattern. The bearish pennant pattern can be seen following a strong price movement to the downside, which is often seen as an impulsive leg. As with the bullish variation of this pattern, the bearish pennant appears as a short pause within the price action and resembles a shortened version of a contracting or symmetrical triangle.

Personally, when trading the Pennant Pattern, I always look for divergence on the price chart to confirm my directional bias for the trade. The breakout candlestick can sometimes be very long, so your stop loss distance can be significant. If you think you’ve missed a good strong trend move from the start, this forex trading system allows you to jump in along the way.

The reason you should use the middle of the trend line, is due to the possibility of a quick fake out before resuming the direction of the breakout. Pennants again are another common shape that we see not only in the trading world, but also in the real world. It’s a triangle that is converging tightly on both sides to a point. As a kid, I remember my Dad buying me pennants at the Orioles game so I could cheer on the hometown team.

They are best traded on the 4-hour, daily, and weekly timeframes. The breakout is determined using a combined price and time filter — a breakout candle has to close well above/below the border. The initial move is used to calculate the approximate extent of the breakout move, and this is used to determine your trade’s target. A protective stop is determined by the consolidation area’s peak point. Applying flags and pennants in Forex trading can be a viable addition to any chart pattern trader’s tool set.

Forex Trading Strategies

The buyers are forcing the price movements higher in a very aggressive manner. After the short-term peak is in place, the price action starts correcting mildly lower. You can see that the form of this correction is triangular, meaning that EUR/USD created a few lower highs and higher lows. Deepen your knowledge of technical analysis indicators and hone your skills as a trader. A flag is a technical charting pattern that looks like a flag on a flagpole and suggests a continuation of the current trend. This information has been prepared by IG, a trading name of IG Markets Limited.

If the pennant trading strategy then takes the form of a pennant, we must be ready to dip into the market as soon as the breakout occurs. Most technical traders count Pennants among the most reliable chart patterns. It is relatively easy to trade using Pennants, and the pattern is known to provide highly reliable trading signals. However, the reliability of the Pennant Pattern can be further enhanced by using it in combination with other complementary trading methods and technical indicators.

Now that we all have the same base understanding of the pattern, let’s dive into the three strategies for trading the flag and pennant patterns. Our entry trigger will be a breakout and close below the support line of the pennant pattern. Notice here that entry occurred quite a bit below the support level just one bar prior.

Alternatively, stop loss can be placed at the bottom or the top of the Pennant formation. With this approach, when trading a Bullish Pennant, you will place the stop loss for your trade a few points below the bottom of the Pennant. Similarly, in the case of a bearish trade, your stop loss will be placed a few points above the top of the Pennant formation. Harmonic Patterns are great at providing a forecast on the upcoming waves on the price chart of a security. Hence, when trading Harmonic Patterns, you already have a good sense of direction in which the price is expected to move. Similarly, when trading the internal wave structure of a Pennant, the Reversal Candlestick Patterns can provide confirmation signals on potential reversal points.

How to Trade the Bull Pennant Pattern

Similar to other breakout chart patterns and technical indicators, the pennant can be a false signal if it fails to break out as expected. The second school will enter a trade before the breakout point, while the pattern is still forming. Their reasoning is that the patterns are normally reliable and early entry means lower risk, as the stop is closer to the entry point. This is only makes sense for pennants, not for flags where there is no technically reliable point to place a stop-loss. For a bearish pennant chart pattern to form, there has to be an existing downtrend.

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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. Take a look at the bullish and bearish versions of the flag pattern. Instead of two parallel trend lines, the pennant pattern is bounded by two converging trend lines. Aside from that, pennant and flag patterns are the same in that they both indicate a temporary exhaustion before the market resumes its trend. The chart below provides an excellent opportunity to review the identification guidelines.

Let us dive deep into what Pennants Patterns are and how you can trade the bullish and bearish versions of the same. But in the real world, there will be a lot of times where patterns will fail, and false breakouts will occur. Not only do we use the 50-period moving average to filter trends, but also to take our profits.