Pennant patterns: bullish and bearish pennant trading charts

What are pennant patterns?

A pennant pattern is a chart pattern that signals the continuation of an existing trend. The pattern itself appears as a symmetrical triangle, which indicates a short-term consolidation. Following a breakout above the upper trendline or below the lower trendline, we may see a continuation of the prevailing trend.

Is a pennant bullish or bearish?

A pennant can be either bullish or bearish. Whether a pennant is bullish or bearish will depend on the previous direction of the trend, but they are both continuation patterns, i.e., they are hinting at a continuation of the current trend.

Bullish pennant pattern

A bullish pennant occurs during an uptrend, typically after we have seen a rapid increase in price. As momentum fades, a short-term consolidation occurs which leads to the formation of the pennant pattern (symmetrical triangle). With a bullish pennant, we are looking for a breakout above the upper trendline, which would then indicate a continuation of the uptrend.

Bearish pennant pattern

A bearish pennant, on the other hand, can be spotted in an existing downtrend, typically after we have seen a large drop in price. Similarly, a consolidation occurs, which leads to the formation of the pennant pattern. We are then looking for a breakout below the lower trendline, which hints at a continuation of the prevailing downtrend.

How to identify pennants

The first step is to look for an existing trend (either uptrend or downtrend) and a strong price movement in the form of a sharp price increase (for a bullish pennant) or sharp decline (for a bearish pennant).

After this rapid price move, consolidation occurs, which leads to the formation of a symmetrical triangle.

Following a consolidation, we will be waiting for the price to break outside of the pennant pattern, either above the upper trendline for a bullish pennant or below the lower trendline for a bearish pennant.

Pennants can be spotted on various timeframes—ranging from short-term to long-term — as well as on the price charts of various trading instruments.

It is a simple pattern and can be complemented with technical indicators for validation.

How to trade pennants

The first step of trading a pennant is to be able to identify it. We are looking for a sharp price movement that occurs during an existing up- or downtrend, followed by a consolidation phase during which a small, symmetrical triangle forms.

The breakout outside of the triangle confirms the actual pattern and signals to enter a trade.

For a bullish pennant, we are expecting a breakout above the upper trendline. For a bearish pennant, we are expecting a breakout below the lower trendline.

Once a breakout occurs, traders will either go long (bullish pennant) or short (bearish pennant).

Setting stop-loss and take-profit orders is crucial for proper risk management. But where should traders place these?

Typically, the stop-loss order is placed below the pennant’s lower trendline when trading a bullish pennant and above the pennant’s upper trendline when trading a bearish pennant.

Meanwhile, the take-profit order can be determined by measuring the distance between the start of the sharp price move to the beginning of the pennant pattern. For example, for a bullish pennant, we would measure the distance from the point to which the sharp upside move occurred to which the pennant started. If the distance is 100 pips, we would add 100 pips to the breakout level and place the take-profit order there.

It is important to note that only breakouts that match the prevailing trend should be traded. For example, there is a strong uptrend, but the breakout outside the pennant occurs to the downside; it is not a valid signal and should not be traded.

Advantages of pennants

1. Pennant patterns have a simple structure and are easy to identify.
2. Pennant patterns can be traded across various timeframes and price charts of all asset classes.
3. The entry level, as well as exit levels, are well-defined.
4. When trading pennant patterns, traders can use technical indicators for additional confirmation, for example, RSI to identify overbought/oversold conditions.
5. Pennant patterns usually occur during a strong trend, improving the probability of a successful trade.

Disadvantages of pennants

1. As with any chart pattern, false signals do occur, which is why setting stop-loss orders is crucial.
2. Pennant patterns have a simple structure but can be mistaken for another chart pattern.
3. Pennant patterns should be traded in trending markets, but high volatility can also lead to a higher chance of false breakouts.
4. Pennant patterns occur more frequently than other chart patterns, which can lead to the generation of more trade signals of lower quality.

Conclusion

Pennant patterns are chart patterns that signal a temporary consolidation followed by a continuation of the existing trend. Pennant patterns can either be bullish (uptrend) or bearish (downtrend). The pattern itself has a simple structure and is easy to spot. Traders will be looking for a strong price move followed by the formation of a symmetrical triangle (pennant) and then wait for a breakout in the direction of the existing trend.

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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation and needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability with regard to the accuracy and completeness of the content in this publication. Readers should seek their own advice.