In our last article, we discussed flag patterns. In this article, we will discuss how to recognize pennant chart patterns, what they indicate and how to use them in trading.
A pennant is composed of an ongoing trend and then followed by a small converging consolidation that looks like a small symmetrical triangle.
This indicates a strong directional move which is followed by a small consolidation that is often somewhat counter to the trend.
Pennant is a continuation price pattern used by traders to predict upcoming market movements.
After breaking the consolidation phase, price is likely to continue the sharp trend in the direction of the prevailing trend.
Depending on the direction of movement and ongoing trend, pennant chart patterns are usually described as bearish and bullish.
Formation of bullish and bearish pennant chart pattern
Pennant is the symmetrical triangular pattern formed when the market consolidates for a while before continuing to move in the same direction.
Bullish pennant is a continuation pattern that occurs in a strong uptrend or after a sharp rise in the prices of the stock.
Bearish pennant is the opposite of bullish pennant. Bearish pennant formed as a continuation pattern in a strong downtrend or after a sharp fall in the prices of the stock.
Both bearish and bullish pennants start with a flagpole followed by a pause in the prevailing trend.
The large movement in the prices before forming a pennant chart pattern is known as the flagpole.
This pause forms a triangular shape, known as a pennant. It indicates that there is likely to be a break in the direction of the initial move.
A bullish pennant will have a long bias and the bearish pennant has a short bias.
The upper and lower slope line act as a support and resistance level. Any breakout in the direction of the trend is considered as a bullish sign. Similarly breakdown to the downside of the trend is considered as a bearish sign.
Here is how the bullish and bearish pennant pattern looks like visually.
| Bullish Pennants | Bearish Pennants |
| Gets formed when the stock consolidates after a strong upward move or rise in price. | Gets formed when the stock consolidates after a strong downward move or fall in price. |
| Breakout from the pennant indicates continuation of a bull market. | Breakdown from the pennant indicates continuation of a down market. |
| Breakout occurs when the market moves beyond the upper resistance line. | Breakdown occurs when the market moves beyond the down support line. |
| From the breakout point, traders prefer to go long. | From the breakdown point, traders prefer to go short. |
Difference between wedge, triangle and pennant
Both pennants and wedges are considered as a continuation chart pattern. The difference between these two is the directional move. Pennants are sideways and horizontal. Whereas wedges are either ascending or descending.
Pennant looks like a symmetrical triangle. However, we have a difference between a triangle and a pennant.
A pennant is formed only as a continuation chart pattern in a strong up or down trend. Whereas triangle chart patterns can be formed anywhere in price action. This means a pennant chart pattern has to be preceded by a strong down or up move that resembles a flagpole.
How to trade pennant chart pattern
Traders before entering into a trade, wait for a candlestick close above the bullish pennant or below the bearish pennant. After getting breakout or breakdown confirmation, they enter the trade.
In general, stop loss is placed at the low of the breakout candle or high of the breakdown candle. Some traders prefer to put stop loss below the bullish pennant and above the bearish pennant. Stop loss is a must as no price pattern is 100% reliable.
Some traders prefer to have a fixed target while trading a pennant chart pattern. In general, a measured distance from the beginning of the flagpole up to the formation of a pennant chart pattern is considered as a target from the breakout or breakdown point.
Here are the most popular candlestick patterns:
- Evening Star
- Morning Star
- Bearish Abandoned baby candlestick pattern
- Bullish Abandoned baby candlestick pattern
- Three Inside up/down
- Three outside up/down
- Inside Bar
- Bullish Piercing
- Dark Cloud Cover
- Spinning Top
- Shooting Star and Inverted Hammer
- Hammer & Hanging Man
- Gravestone, Dragonfly and long-legged Doji
- Engulfing Candlestick Pattern
- Marubozu candlestick pattern
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
