They’re formed when a market makes an extensive move higher, then pauses and consolidates between converging support and resistance lines. The essence of trading according to this strategy is to determine the target profit at the level of the figure’s flagpole height. Let’s take a closer look at trading the bullish pennant pattern according to this strategy using Tesla stock as an example.
A characteristic feature of the pennant is an impulse movement, after which the stage of price consolidation in a narrowing triangle begins. At the same time, there is a decline in trading volumes for the instrument. Upon reaching a narrow range, there is an intense price breakout in the trend direction with increasing volumes. Numerous price chart patterns in technical analysis can be used both in day trading and long-term trading.
Like most other patterns in trading, the Bullish pennant chart pattern signals to traders that changes are taking place in the market. The bullish pennant pattern in Forex means an uptrend continuation. In some cases, with a protracted downtrend, the pattern signals a bearish-to-bullish reversal. As with every chart pattern, we take it step-by-step in spotting the specific chart pattern. Second, the consolidation phase should take the form of a pennant, which brings us to the breakout – the third and final step before we potentially enter the market.
It depends on the direction of the trend, as the figure is a trend continuation pattern. In addition, a price gap up was formed during the breakout, which indicates the formation of a new intermediate support level. Therefore, it is necessary to open a long position after the close of the first candlestick formed above the pattern. With a bearish pennant, it is important to wait for the price to rise to the upper limit and open a short position. But here, there is a risk of erroneous pattern assessment since the market may behave irrationally under the news background.
How to Trade Bearish and Bullish Pennants
The bullish pennant pattern can occur over lots of different time frames. Day traders look for them on second or minute charts, while longer-term traders spot ones that arise over weeks or even months. We just looked at how the cup and handle pattern, which is an important component of candlestick analysis works. In this report, we will look at the bearish pennant pattern and how you can use it in the market.
In contrast, others take a more conservative approach and exit when prices reach previous support levels. By drawing 2 trend lines to connect the minor highs and lows of that consolidation period, you can see the bearish pennant formation on the chart above. A continuation pattern is usually a sign that a currency pair, stock, or any asset will continue moving in the original trend. Other examples of continuation patterns are ascending and descending triangles and bullish and bearish flags. After the formation of the flagpole, the asset began a correction in a narrowing triangle, forming the pennant itself. At the lowest point of the pennant, there was a breakout of the upper boundary on increased volumes.
Expanding Wedge – profitable Forex pattern
Normally, the volume is diminishing when the pennant is formed, and then increases sharply once the breakout happens. The breakouts perform better during strong downtrends with a taller flagpole and a wider triangle shape. My students tell me that there is a lot of confusion around this chart pattern, so I thought I’d put together a guide on how to identify a bearish pennant breakout. Having tested the level, the price subsequently reversed, thus forming a bear trap. However, the bears had the opportunity to open a short position at the point of a downside breakout and take profits. The pattern should continue when the price breaks out the lower boundary of the pennant.
- The price dropped by around 40% from $1.185 to $0.848, and then it consolidated in a tight trading range for about 5 days.
- This includes being aware of the potential for false breakouts, as well as the bearish pennant reversal probability.
- Some traders aim for a profit target equal to the height of the uptrend leading into the pennant formation.
- In a bearish pennant, strong negative sentiment causes a market to plummet lower (forming the pole).
In this case, a short position must be opened after the breakout of the pennant lower border. In addition, the price tested the lower border, where the bears went ahead. This is also emphasized by growing volumes, which is one of the criteria for determining the pattern.