Dear Traders,
The importance of technical analysis in financial trading is
well-known to almost everyone. Traders at every level, including beginners and
experienced traders, benefit from various tools in technical analysis. Among
these tools, the leadership of chart patterns is clearly evident. Therefore, I
have dedicated this article to one of these chart patterns, the Pennant
pattern.
What is the Pennant Pattern?
The Pennant is a chart pattern that indicates continuation
of the trend in which it forms. There are two types of Pennant patterns in
technical analysis. One is called the Bullish Pennant, while the other is known
as the Bearish Pennant. The Rising (Bullish) Pennant pattern is a chart pattern
that indicates a continuation of an upward trend. The Falling (Bearish) Pennant,
on the other hand, is a chart pattern that indicates a continuation of a
downward trend. Both are patterns in technical analysis that can signal the
continuation of the current price movement.
 |
| Pennant Chart Patterns |
In some cases, the Pennant pattern can be confused with the
Symmetrical Triangle pattern. However, there is a slight difference between
them. In the Pennant pattern, there is a pole (pennatpole or flagpole), while
in the Symmetrical Triangle pattern, there may not be a pole. Additionally, the
Symmetrical Triangle is a neutral chart pattern, meaning that it is not certain
whether prices will rise or fall.
Formation of the Pennant Pattern
A Pennant pattern usually represents a situation where the
price moves sideways for a period of time, exhibits a trend, and then resumes
its previous direction. The Bullish Pennant pattern is formed when prices enter
a period of consolidation following a previous uptrend. The Bearish Pennant
pattern is similar, but occurs when prices consolidate following a downtrend.
The structure of both types of Pennant patterns includes the following:
Pennant Pole: Bullish Pennant and Bearish Pennant patterns
both feature a long pole or pole-like candlestick that occurs as a result of
the previous trend. This pole, or flagpole, indicates the strength and
direction of the preceding trend.
Pennant Body: The price movements that occur during the
consolidation period following the pole form the body of a pennant. During this
time, prices move within a narrow range, forming a triangle formation. This
body is often defined as a pennant and represents a range in which prices are
compressed.
The structural elements mentioned above represent the
general characteristics of both types of Pennant patterns. When these elements
come together, it is widely known that a Bullish and Bearish Pennant pattern is
formed, and the next move of prices, i.e., whether the previous trend can
continue, is now widely known among a broad audience.
How to Trade with the Pennant Pattern?
It is impossible to deny that the Pennant pattern signals a
continuation of the trend. The critical point for us here is the breakout
(breakdown) point, as we place
our buy and sell orders accordingly. The breakout point indicates in which
direction the trend will continue. Prices break out of the consolidation range
with a sharp move in a specific direction. This point is called the breakout
(breakdown) point and is usually
more reliable for the continuation of the previous trend.
Trading with Bullish Pennant Pattern
The Bullish Pennant pattern usually appears during an
uptrend. In a Bullish Pennant pattern, the upper part of the symmetrical
triangle formed by prices is considered a resistance level. When the price
breaks above the top of the triangle, it is believed that the trend will
continue. So, in the Bullish Pennant pattern, a buy order can be placed when
the breakout occurs from the upper part of the pennant.
Entry (Buy): As the first preference, a buy order is placed
just above the breakout point from the upper part of the pennant. After the
breakout, there may be a pullback, and buying can be done when prices start
rising again after the pullback. This would be a safer entry choice.
Stop-Loss: The stop-loss level is normally placed slightly
below the bottom of the pennant or at a support level identified by technical
analysis tools.
Target: The target level is often measured by the size of
the pattern. The distance between the highest and lowest points of the Pennant
can be used for target setting. This distance is also referred to as the
pattern's height. The target price is determined by adding the height of the
pattern upwards from the breakout point. Some long-term traders set a target
price equal to the length of the Pennant pole. They calculate the target price
by adding the distance equal to the length of the Pennant pole upwards from the
breakout point.
In the following 4-hour chart of Spot Gold/US Dollar, a
perfect trading example is presented with a Bullish Pennant pattern. If you'd
like to examine it, here it is:
 |
| Bullish Pennant Pattern on XAU/USD chart. |
Trading with Bearish Pennant Pattern
The Bearish Pennant pattern is seen during a downtrend. The
lower part of the symmetrical triangle in the Bearish Pennant pattern is known
as the support level. When the price breaks below the bottom of the triangle,
it indicates a continuation of the trend downward. This can provide us with a
profitable selling opportunity. Therefore, in a Bearish Pennant pattern, we can
place a sell order when the breakdown occurs from
the lower part of the pennant.
Entry (Sell): When opening a sell position, it is done when
the breakdown occurs from the lower part of the pennant. For a safe entry, a
pullback is expected after the breakdown, and selling can be done when prices
start falling again after the pullback.
Stop-Loss: The stop-loss level can also be placed slightly
above the top of the pennant or at the nearest resistance level.
Target: The distance between the highest and lowest points
of the pennant (pattern height) can be used for target setting. This distance
is added downwards from the breakdown point to determine the target. Another
approach is to determine target levels using Fibonacci retracement levels or
risk-reward ratios.
The 4-hour chart of the Ethereum/Bitcoin cryptocurrency pair
clearly shows a Bearish Pennant pattern, as demonstrated by the following
example, which presents an excellent trading opportunity:
 |
| Bearish Pennant Pattern on ETH/BTC chart. |
Don't Forget: Chart patterns may not always provide accurate signals in financial trading. The Pennant pattern is no exception. Since each trading situation is different, combining technical analysis tools with fundamental analysis can lead to more reliable trades. Additionally, always prioritizing risk management is essential.