What is a Pennant Pattern?

Pennant patterns are commonly used in technical analysis to identify potential price movements in the market. They are often seen as continuation patterns, where price consolidates before making a strong move in the same direction.  In this blog, we will explore different types of pennant patterns, their features, stages, and how to trade both bullish and bearish pennants. 

Types of Pennant Patterns

Pennant patterns come in two main types: Bullish Pennants and Bearish Pennants. Each of these patterns signals a potential price movement in a specific direction.

Bullish Pennant

A bullish pennant happens after a strong upward movement in price. It forms when the price consolidates in a small, narrow range, creating a triangle shape. After the price spends some time in this tight range, it breaks out to the upside, continuing the earlier upward trend.

Bearish Pennant

On the other hand, a bearish pennant forms after a sharp drop in price. Just like the bullish pennant, it also creates a small triangle, but this time the price moves sideways after the downtrend. When the price breaks out of the triangle to the downside, it suggests that the downward movement will continue.

Both patterns are considered continuation patterns. This means they show that the previous trend (either up or down) is likely to continue once the breakout happens. The key to trading these patterns successfully is to wait for the price to break out of the triangle, confirming that the trend is continuing.

Features of Pennant Chart Pattern

The pennant chart pattern has several key features that make it easy to spot on a price chart. These features help traders identify potential breakout points.

1. Sharp Price Movement

Before the pennant pattern forms, there is usually a strong price movement in one direction, either up or down. This initial move is important because it sets the stage for the consolidation phase.

2. Converging Trendlines

During the pennant formation, the price moves within two trendlines that converge, creating a small symmetrical triangle. These trendlines show the narrowing range where the price is consolidating.

3. Decreasing Volume

As the price consolidates, the trading volume typically decreases. This suggests that there is indecision in the market, and traders are waiting for a breakout in either direction.

4. Breakout

The final feature is the breakout. Once the price breaks out of the triangle, either upwards in a bullish pennant or downwards in a bearish pennant, it signals that the previous trend (up or down) is likely to continue.

Also Read: What is Hammer Candlestick: Types, Advantages and Drawbacks

Stages of Pennant Candlestick Pattern

The pennant candlestick pattern forms in three distinct stages, which help traders understand the market movement before a breakout occurs. 

1. Initial Strong Price Movement

The first stage of a pennant pattern is a strong price movement, either upward or downward. This sharp move indicates that a trend is already in place. The price usually moves quickly and decisively in this phase, showing clear market sentiment in one direction.

2. Consolidation Phase (Formation of the Pennant)

Once the strong price movement occurs, the second stage begins. This is where the price enters a consolidation phase, forming the pennant shape. The price starts to move within a narrow range, creating two converging trendlines that form a triangle. 

During this stage, the market shows indecision as traders await the next direction. Trading volume typically decreases as the price consolidates, indicating that fewer participants are active in the market during this phase.

3. Breakout Phase

The final stage happens when the price breaks out of the pennant pattern. In a bullish pennant, the price breaks above the upper trendline, signalling that the upward movement will continue. In a bearish pennant, the price breaks below the lower trendline, indicating a continuation of the downward trend. The breakout often comes with an increase in volume, confirming the direction of the next price movement.

Each of these stages plays a critical role in predicting future price movements. Identifying these stages correctly helps traders make informed decisions.

How to Trade Using Bullish and Bearish Pennants?

Trading with bullish and bearish pennants can be an effective way to profit from market trends. Here’s how to approach each type of pennant pattern:

1. Trading the Bullish Pennant

When a bullish pennant forms, it signals a continuation of the upward trend. To trade this pattern, follow these steps:

• Wait for the Breakout: The key is to wait for the price to break above the upper trendline of the pennant. This breakout confirms the continuation of the uptrend.
• Enter the Trade: Once the breakout happens, enter the trade immediately after the price closes above the trendline.
• Set a Target: A common strategy is to set a target price by measuring the height of the initial price movement (the flagpole) before the pennant. Add this height to the breakout point.
• Stop Loss: To manage risk, set a stop loss just below the lower trendline of the pennant. This helps protect your position in case the breakout fails.

2. Trading the Bearish Pennant

For a bearish pennant, the market is expected to continue its downward movement. Follow these steps to trade the pattern:

• Wait for the Breakout: Just like with the bullish pennant, wait for the price to break below the lower trendline.
• Enter the Trade: Once the price breaks the trendline, enter the trade after the price closes below it.
• Set a Target: Measure the height of the initial downtrend (flagpole) and subtract it from the breakout point to set a target price.
• Stop Loss: Place a stop loss just above the upper trendline to limit your losses if the breakout doesn’t work out.

Advantages and Disadvantages of Pennant Pattern

The pennant pattern can be a useful tool for traders when used correctly. It has some clear advantages but also certain limitations.

Advantages

• Clear Entry and Exit Points: The pennant pattern offers specific points to enter or exit a trade. This makes it easier to plan your moves with less guesswork.
• Effective in Trending Markets: The pattern works best when the market is already moving in a strong direction. It helps traders take advantage of a trend continuation.
• High Profit Potential: After the breakout, the price often moves significantly in the same direction as the initial trend, providing good profit opportunities.

Disadvantages

• False Breakouts: Sometimes, the price might break out in one direction but quickly reverse, leading to a false signal and possible loss.
• Requires Patience: The pennant pattern forms slowly, and traders need to wait for the breakout, which can sometimes take longer than expected.
• Less Reliable in Sideways Markets: The pattern doesn’t work as well when the market is moving sideways. It’s more effective when trends are strong.

Conclusion 

Pennant patterns are valuable tools for traders looking for potential market breakouts. By understanding the types, features, stages, and how to trade these patterns, you can better navigate the market. Whether you’re looking for bullish or bearish setups, recognising the key aspects of pennants will allow you to make more informed decisions. While there are advantages to using pennants, it’s essential to be cautious of false breakouts and ensure volume confirmation before acting. Additionally, understanding how pennants differ from flags will help you refine your trading strategies.