Bearish pennants are continuation patterns that mark a pause in the movement of a price halfway through a strong downtrend, offering you an opportunity to go short.

They occur just after a sharp drop in price and resemble a triangular flag as the price moves sideways, making gradually lower highs and higher lows. The downtrend then continues with another similar-sized fall in price.

There are two types of pennant:

• Bearish pennant
• Bullish pennant

This lesson will show you how to identify the bearish pennant and look at ways you can use it to profit from the second half of a strong downtrend.

How to identify a bearish pennant

See the chart below for an example of what a bearish pennant looks like:

number_1 Pole of the pattern

As shown above, before the flag-like pennant forms, the price experiences a sharp drop. This is known as the pennant’s ‘pole.’

The pole can represent either the start or the continuation of a downtrend and its size is important when you are calculating where to place the profit target for your sell trade.

The triangular pennant itself is usually very small in relation to the size of the overall downtrend so this pattern can be hard to spot.

How to trade the bearish pennant: method 1

The first method allows you to trade as soon as the price breaks out of the triangle pattern.

Enter your trade

Enter your short trade as soon as a candlestick has closed below the pennant’s lower trendline.

See the chart below for an example of this:

number_1 Pole of the pattern
number_2 Area where price has broken the lower support of the pennant
es1 Sell order (short entry)

Place your stop loss

Place your stop loss on the other side of the pennant, just above its upper trend line.

See the chart below for an example of this:

number_1 Pole of the pattern
number_2 Area where price has broken the lower support of the pennant
es1 Sell order (short entry)
sl2 Stop loss

Place your profit target

Measure the initial drop in price (the pennant’s pole) before the market started to consolidate.

Then place your profit target the same distance below the pennant’s breakout point.

If, for example, the initial price drop was 50 pips in size, you should place your profit target 50 pips underneath your trade entry.

See the chart below for an example of this:

number_1 Pole of the pattern
number_2 Area where price has broken the support of the pennant
number_3 Distance from entry to take profit (this is the same height as pole number_1)
es1 Sell order (short entry)
sl2 Stop loss
tp3 Take profit

Try the exercise below to practice placing your entry, stop loss and profit target using method 1:

How to trade the bearish pennant: method 2

Using the second method of trading, you wait until the price comes back to test the lower trend line as resistance before you enter.

Enter your trade

As with method 1, wait for the price to fall below the pennant’s lower trend line. Once this support has broken, place a sell order after the price retests that trend line – the broken support will now become a resistance level.

See the chart below for an example of this:

number_1 Pole of the pattern
number_2 Area where price has found resistance at the previous support line
es1 Sell order (short entry)

Place your stop loss

Place your stop loss above the new resistance area.

See the chart below for an example of this:

number_1 Pole of the pattern
number_2 Area where price has found resistance at the previous support line
es1 Sell order (short entry)
sl2 Stop loss

Place your profit target

As with method 1, measure the size of the pennant’s pole.

Then place your profit target an equal distance below the pennant’s breakout (where you entered the trade).

See the chart below for an example of this:

number_1 Pole of the pattern
number_2 Area where price has found resistance at the previous support line
number_3 Distance between entry and take profit tp3 (this is the same height as pole number_1)
es1 Sell order (short entry)
sl2 Stop loss
tp3 Take profit