How to Trade Bearish and Bullish Pennants

Pennant Patterns are considered powerful continuation indicators, allowing traders to identify the best entry and exit points in the forex market. They also predict future bullish or bearish movements of currencies accurately. So, let’s dig deeper into what they are and how you can make use of them while trading!

What are Pennants?

Pennants in forex are often used by traders to identify possible price movements. Pennant patterns are continuation chart formations that signal the market is about to make a strong move. They occur when price action experiences a big push in one direction, followed by consolidation before continuing on with that trend. Pennants look like small symmetrical triangles and can indicate either bullish or bearish tendencies depending on the direction of the original momentum. Traders find them useful when entering trades around breakouts.

Bullish Pennant

A bullish pennant signals a strong uptrend, giving you the opportunity to go long and profit from price increase. The pattern consists of two parallel lines (called the ‘flag poles’) connecting a series of highs and lows forming a triangle at both ends. This triangle suggests consolidation before price rises again as bulls look for another move upwards.

Bearish Pennants

A bearish pennant signals the continuation of an existing downtrend, offering you the opportunity to go short. The bearish pennant is formed when a falling volume of trading activity briefly stabilizes, forming the “flagpole” portion of the pattern. This trend then quickly resumes its sharp decline for another leg. Therefore, it is essential to confirm a breakout below support or enter positions after an established break to consider entering short trades with this pattern.

How to Identify Pennants

As mentioned, these graphical chart patterns are used by traders to identify trend continuation in the desired direction. A pennant can typically be identified with two converging lines, forming triangle-like structure. The following points provide insight into identifying these commendable patterns in forex:

• Look for short and symmetric flag pole inside a strong preceding trend: Pennants tend to form at the end of rapid trends. 
• Observe successive swing highs or lows creating connecting lines: This phenomenon outlines parallel sides which together forms the core shape of a triangle indicating an impending break – either way up/down.
• Measure confirmation over three candlesticks before making entry: Check presence or absence of sufficient volume behind each candle to confirm actual breakout as against anticipated one.

How to Trade Bearish and Bullish Pennants in Six Steps

Bullish Pennant

1. Identify the Pennant: Look for a strong and established uptrend on the price chart.
2. Spot the Pennant Formation: A bullish pennant consists of two main parts:
   • Flagpole: This is the initial strong upward price movement that forms the left side of the pennant. It represents the impulsive move that leads to the consolidation phase.
   • Pennant: This is a small symmetrical triangle or flag-like pattern that forms after the flagpole. It is characterized by converging trend lines and decreasing trading volume, indicating a temporary consolidation.
3. Confirmation: Wait for a breakout. The bullish signal is confirmed when the price breaks out above the upper trend line of the pennant pattern. This breakout should ideally be accompanied by an increase in trading volume, indicating renewed buying interest.
4. Entry: Enter a long (buy) position when the price breaks above the upper trend line of the pennant. Some traders wait for a slight pullback to the breakout point for a better entry.
5. Stop-Loss: Place a stop-loss order below the lower trend line of the pennant pattern to limit potential losses if the trade goes against you.
6. Take Profit: Calculate a target price based on the height of the flagpole. A common approach is to measure the length of the flagpole and project it upwards from the breakout point to set a profit target.

Bearish Pennant

1. Identify the Pennant: Look for a strong and established downtrend on the price chart.
2. Spot the Pennant Formation: A bearish pennant consists of two main parts:
   • Flagpole: This is the initial strong downward price movement that forms the left side of the pennant. It represents the impulsive move that leads to the consolidation phase.
   • Pennant: This is a small symmetrical triangle or flag-like pattern that forms after the flagpole. It is characterized by converging trend lines and decreasing trading volume, indicating a temporary consolidation.
3. Confirmation: Wait for a breakout. The bearish signal is confirmed when the price breaks out below the lower trend line of the pennant pattern. This breakout should ideally be accompanied by an increase in trading volume, indicating renewed selling interest.
4. Entry: Enter a short (sell) position when the price breaks below the lower trend line of the pennant. Some traders wait for a slight pullback to the breakout point for a better entry.
5. Stop-Loss: Place a stop-loss order above the upper trend line of the pennant pattern to limit potential losses if the trade goes against you.
6. Take Profit: Calculate a target price based on the height of the flagpole. A common approach is to measure the length of the flagpole and project it downward from the breakout point to set a profit target.