Pennant Chart Pattern

What are pennants patterns?

The Pennant is one of the most popular patterns used by technical analysts and it is basically a short-medium term continuation chart pattern used by many traders in many financial markets. This chart pattern will exist and last long from one to three weeks of time. The pennants are formed in both bullish and bearish trends and indicate that there is a high probability that the trend will continue in the same direction. Depending of the direction of the previous trend, the pennants can be classified in two types:

Bullish pennants (Ascending pennant).
Bearish pennants (Descending pennant).

After a big upward or downward market movement, buyers or sellers usually pause to regain strength before taking the financial asset price further in the same direction. Because of this, the price usually consolidates and forms a tiny symmetrical triangle, which is called a pennant.

While the price is still consolidating, more buyers or sellers usually decide to jump in on the strong move, forcing the price to escape of the pennant formation.

Pennants description

Bullish and bearish pennants

The pennants looks very similar to the flags, another very common and known continuation chart pattern, with a lengthy pole representing a long spike in the price (the trading volume increases) which is followed by a symmetrical triangle (the trading volume is reduced) that is smaller and lasts less than normal symmetrical triangle. In a pennant the symmetrical triangle is created due to the narrowing of rates – turning higher or lower. In this case however, no zigzag fluctuations can be seen from one band to the another, and instead of breaking the band in a point between 50 and 75% of its length, the breakout is usually made very near the corner or end of the formation. When breakout occurs trading volume increases again.

In fact, some traders classify the pennant as a particular case of flag formation, with the difference that instead of being defined by two parallel lines, it is defined by two lines that taper into a small triangle (the pennant). This triangle represents a break in the previous price trend, and in the end the price moves again strongly upwards or downwards.

How to trade with the pennants?

When you conclude that there is a pennant formation pattern in a price chart, then you could contrive your entry and exit prior the opening of a position. This is because, you could examine when the breakthrough will probably arise in the market. Yet another excellent benefit of pennants is that, you will be able to examine how high and low the rates will drop during the time of breakout. For examining this price breakthrough, you need to measure the pennants poles and measure the heights for applying it to the breakthrough point.

Downtrend

Entry: Open a sell position when there is a breakout in the lower band.
Stop: The stop is placed above the previous high.
Objective: Use the theoretical target pattern. When the breakout occurs, the target price is equal to the height of the pennant pole.
Advantage: The movement is usually quite strong when there is a bearish breakout.
Disadvantage: The price objective is not achieved in 62% of cases, so the trader needs to set his own target prices.

Uptrend

Entry: Open a buy position when there is a breakout in the upper band.
Stop: The stop is placed below the previous low price.
Objective: Use the theoretical target pattern. When the breakout occurs, the target price is equal to the height of the pennant pole.
Advantage: The movement is usually quite strong when there is bullish breakout.
Disadvantage: The objective is not achieved in 62% of cases, so the trader needs to set his own target prices.

What to consider about pennants patterns?

Remember, pennants chart pattern will most likely last longer for 1 week to a maximum of 3 weeks of time. When the pattern exists either shorter or longer than this, then it doesn’t remain reliable. Also remember that, the volume must decrease during the formation of pennants. Pennants are definitely a good chart pattern for pro traders who deal with huge volumes.

In 75% of cases, the price breakout occurs in the direction corresponding to the previous trend.
In 90% of cases, the pennant behaves as a continuation pattern.
In 55% of cases, the price target of the pattern is reached.
In 16% of cases there is a pullback.
The 84% of pennants occur in the lower third of the range when this is a downward trend or in the upper third of the trend when this is an upward trend.
In most cases, the stronger the previous movement before the formation of the pennant, the stronger the subsequent movement due to the breakout of the price from the pattern.
A pennant with a narrow base is more powerful than a pennant with a broad base.
A pennant is stronger while false breakouts do not occur.
The pullbacks adversely affect the performance of the pattern.