Richard is a full time trader with 12 years experience that includes working as an equities day trader at a trading floor in Cape Town.
The pennant is a continuation chart pattern that appears in both bullish and bearish markets. Traders follow this pattern to predict whether a market is getting ready to resume a previous trend after a period of consolidation. During the consolidation phase price structure tends to move sideways within a narrowing range before a breakout occurs.
The first chart example above shows a bullish pennant pattern that formed in the GBP/NZD currency pair. Pennants consist of a flagpole that precedes the consolidation phase and two trendlines that looks like a tapering flag, hence the name ‘pennant’.
Here we have a bearish pennant that took more than a month to complete in the AUD/USD currency pair. Note how price broke out of both this and the previous example with an increase in momentum, which is a common characteristic of how price behaves once these patterns complete.
Using our previous bullish pennant pattern, traders will often execute a long position once price breaks above the upper trendline resistance and target a level equal to the height of the flagpole. A stop loss can generally be placed a few pips below the final swing low prior to the breakout.
Traders Tip: Both bullish and bearish pennant patterns will generally display certain characteristics during their formation which can help a trader qualify whether this pattern will present a good trading opportunity or not.
My final chart shows the same bearish AUD/USD pennant pattern that was presented previously and displays similar characteristics from a volume and retracement perspective.
Note: Bearish pennant patterns will not always show a notable decline in volume during the pennant formation since bearish markets generally move faster due to the underlying fear and anxiety that drive a sell-off. This is evident in the example above where volume only started decreasing during the latter part of the formation.
The pennant pattern is a powerful trend continuation pattern that appears in all markets and timeframes. When these patterns end, they typically lead to strong breakouts that raise the probability that a trend has resumed with decent follow-through.
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