How to Trade Bearish and Bullish Pennants in Forex

The three drives pattern reflects the psychology of the market participants. The corrective second drive makes traders question the sustainability of the trend. The third and final drive fakes a breakout, trapping bulls or bears who have tried to trade the reversal.

If you can understand these two images, you will be able to recognize these patterns on a price chart. As you can see in the above picture of the American flag, a flag blows in the wind. The flag is in motion and will drift towards the direction the wind is blowing, which essentially is the same as trading in the direction of the primary trend. Another approach is to first wait until the price breaks out, then look for above-average volume to confirm the breakout. Pennant performance strongly depends on the initial price change as defined by the pennant’s pole. The pennant should have weakening volume, followed by a large increase in volume during the breakout.

Main Groups of Chart Patterns

It is a period of price consolidation that tightens from right to left. The bullish pennant is a formation that signals the extension of an upward move in price. Read on to learn more about the bullish pennant pattern and how to trade this powerful technical tool. While the bull pennant pattern indicates a continuation of an uptrend through a brief consolidation phase forming a symmetrical triangle, it suggests a tighter and quicker consolidation than its counterpart.

Pennant Trading Strategy 3: Trading based on 50% of the flagpole

A bullish pennant pattern price target is set by measuring the height of the flagpole and adding this number to the long trade entry price to generate the exit price. The 2 pennant pattern types are the bullish pennant pattern which is a bullish continuation pattern and a bearish pennant pattern which is a bearish continuation pattern. A pennant pattern is important in technical analysis as it enables traders to enter market trends from a low risk entry point and it offers price action understanding for traders. The principle of determining the bearish pennant pattern in the price chart is the same as with the bullish pennant, only in the opposite direction. 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.

Traders find the range of the V to be an appropriate target price after the trade entry. The descending staircase pattern is a bearish chart pattern that indicates a sequential downtrend characterized by progressively lower highs and lower lows. As the uptrend advances, buyers become indecisive while sellers initiate short positions near the highs.

1. The Fibonacci ratios help quantify this mass psychology into defined price structures.
2. Volatility patterns such as broadening formations and island reversals can indicate periods of market indecision or potential reversals.
3. Post pipe bottom, the expectation is for the market to continue rising to new highs.
4. Once the triangle pattern is complete, the price typically breaks out of the triangle and continues the upward trend.
5. However, this is not always as the case as in most cases with flags, the break it sharp and quick.
6. 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.

When it comes to projecting the target, this may vary from the market context and the momentum behind the prior move. Usually, the target is calculated as the initial flagpole’s height projected from the beginning of the breakout point. Looking at the chart of Bitcoin we can see a solid rise on the 12th of January. As the price was in an uptrend, a brief consolidation formed before further continuation.

You should look for a sharp and steep run before the consolidation occurs as the aggressive trading that occurs before the pennant forms is likely to continue after the breakout. Pennants are characterized by converging trendlines that form a small symmetrical triangle. The converging lines indicate a temporary consolidation or pause in the market before a potential continuation of the existing trend. The price movement within a pennant usually has low volatility, and the breakout from the pattern is typically accompanied by a surge in trading volume.

Bullish Pennant Pattern

The goal of the procedure how to trade bearish and bullish pennants is to look at how a chart looks and then using this information to predict how the price will move in the future. With this, it is assumed that the results could improve if larger moves were taken into account. However, there are several entry strategies you can take to ride the trend.

Ascending Triangle as Continuation and Bilateral pattern

In this article, we will review the identification and use of the pennant, how to trade the price formation and discuss the pennant relative to other common chart patterns. To most easily spot the difference between a pennant and a flag, take a look at the slope of the trendlines. Pennants have trendlines that converge and form a symmetrical triangle, while flags have parallel trendlines that creating a rectangular shape. Before you start trading chart patterns, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account.

1. The bull pennant chart pattern signals a continuation of an uptrend as it begins with a sharp price increase that causes an asset’s value to rise further.
2. The breakout is the last part and perhaps the most important for a trader.
3. The market security price then breaks out and trends higher leading to pattern completion.
4. The three drives pattern refers to a price chart that shows three successive drives or impulses in the same direction, with each impulse typically being contained within the range of the preceding one.
5. Check our video by our trading analysts on how to identify and trade the bullish pennant pattern.

The Diamond Top is a reversal pattern that signals the transition of an uptrend into a downtrend. The diamond top pattern forms when the price of a stock rises to a new high and then declines, forming a peak. This peak is followed by a moderate rise and fall that forms the upper and lower sides of the diamond shape, indicating a potential reversal of the prior uptrend, as seen in the image below. The Island Reversal is a powerful trend reversal pattern that forms after an extended trend. In the example above, observe how lower lows are forming since the beginning of the consolidation.

The chart below, Figure 7, shows a bullish pennant example and how it can be traded. Flags and pennants chart patterns are primarily known for signaling a continuation of the previous trend. The flag or pennant chart pattern is formed right after a bullish or bearish price movement followed by a period of consolidation.

After many years in the financial markets, he now prefers to share his knowledge with future traders and explain this excellent business to them. The best way to trade a pennant pattern is to wait for the breakout from the converging trendlines. This movement can be a rapid surge (for a bullish pennant) or a steep decline (for a bearish pennant).

Continuation patterns feature flags, pennants, wedges, various types of triangles, and rectangles. Candlestick patterns form another significant category, including doji, hammer, hanging man, engulfing patterns, harami, morning star, evening star, three white soldiers, and three black crows. These patterns often provide insights into short-term price movements and sentiment shifts. Just like any other continuation pattern, the bullish pennant also helps the uptrend to reach higher.