A pennant is a long narrow flag… nope, we are not talking about those flags you see in high school sports teams or ships! Here, we are referring to the chart pattern, which, of course, resembles a pennant.
Traders have created peculiar names like shooting stars, head and shoulders and Doji stars for interesting formations they see in the markets. The pennant is no different. So, without further ado, let’s put a magnifying glass on this set-up and how to trade it.
What is the pennant chart pattern?
This is a continuation breakout pattern found across many CFDs like FX, crypto, metals, stocks, and options resembling a pennant with a flagpole. We have two types: the bullish and bearish pennant chart patterns.
The bullish version of the set-up is where we expect rising prices, while the bear pennant chart pattern is where we expect falling prices.
In either case, this occurs regularly in trends to signal a pause or consolidation, as traders take profits and decide the next direction.
The highs and lows begin converging into a vortex. Such a formation leaves the price no choice but to break out of the structure. This makes the pennant effective because the result is usually a fast, parabolic-like movement.
Identifying the pennant chart pattern
Before going deeper into the components of the chart pennant pattern, it’s common for traders to confuse it with other formations like the symmetrical triangle and wedge.
Let’s start with the triangle. A symmetrical triangle is quite similar to a pennant because it’s a continuation formation. However, the distinguishing factor is the ‘flagpole’ present in the latter but not in the former.
Here’s an image of a symmetrical triangle below (for comparison purposes).
Pennants also look strikingly like wedges. The main difference is that the triangle structure with the former is horizontal, while wedges have an ascending or descending triangle. Here is an image to demonstrate this.
With the confusion out of the way, let’s look at the main elements of the pennant chart pattern.
This formation consists of the following:
- Flagpole: This is the first leg of the movement before the consolidation.
- Breakout zone: This is where we expect the market to push out of the pennant forcefully.
- Pennant: This, of course, is the crux of the entire pattern. A pennant is triangular, consisting of two trend lines converging at about a 45° angle. These act as the support and resistance where the price bounces.
As a rule of thumb, the trend line should touch at least three swing highs/lows to be valid.
Now that you know how to identify this set-up, let’s look at the simple entry and profit-taking rules.
The basic way to enter the pattern is to place pending orders at the breakout zone. However, some traders prefer to use live execution once the price has confidently broken out.
Either way, it’s a conservative approach to enter once the breakout has occurred compared to another period.
Your stop loss should be at the most recent low of the support (for a bullish pennant) or the most recent high of the resistance (for a bearish pennant).
Finally, the profit target is generally the distance of the flagpole. Here is an image demonstrating all of these parameters in better detail.
Pennant pattern chart examples
Let’s go straight to real markets to see this set-up in action. Our first example shows the bullish candlestick pennant chart pattern on GBP/JPY. Here, we see two nice impulses before the formation of the flagpole.
This, of course, led to the pennant. We have labelled where your entry and stop loss would have been below. Additionally, the market travelled the height or distance of the flagpole.
Now let’s look at the candlestick pennant chart pattern on the CAD/CHF pair. The set-up begins with a downward impulse (the flagpole) before the price contracts. After the formation, the market moved even further down.
The pennant chart pattern is a rare formation. But it can be pretty effective once it appears, particularly in higher time-frames. As with other set-ups, you should always add more confirmation elements to your trading idea to increase the probability of success.
One thing to consider is that geometric set-ups like pennants generally need larger stops. Therefore, you may choose to enter at a different time than usual. Regardless, your reward must always be at least twice the risk.