Pennant Pattern Forex Trading Strategy: PPG’s Winning Formula

The safest way to trade pennants is to wait for confirmation before you enter a long position. As a trader, you should fully understand the risks involved whenever you enter the market. Once you have identified the breakout, you can enter a trade by buying the stock. I prefer trading this on 30-minute time frames and up, but this can still work on 1- to 15-minute charts. The name “pennant” reflects the pattern’s resemblance to an actual triangular flag or pennant shape. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

What Is The Psychology Behind a Pennant Pattern?

Pennants have a triangular shape, whereas flag patterns have a rectangular shape. Here is no such thing as “the best pennant pattern forex strategy for everyone”. A successful strategy should be a combination of market approach and analysis, strict rules of risk and money management, and discipline. It’s crucial to differentiate pennant patterns from other price patterns such as rising and falling wedges, triangles, as well as flag patterns. An important indicator that the breakout is real and not fake is the rise in volume that occurs immediately after the breakout occurs. For extra proof that the breakout is real, traders can look for other technical signs.

Sure enough, Tesla’s price thrust higher out of that pennant pattern, allowing me to ride the momentum for a nice profit. With more conservative trading, before opening a position, you can wait for a retest of the broken-out level and then open a position. However, the retest does not always occur, and in some cases, the trader may miss a good entry point with such an approach. After a short accumulation period, the price broke through the lower boundary of the pennant with an impulse candlestick, which eventually reached the support level.

Establishing the profit target

Fibonacci Arc Definition Fibonacci arc is a technical analysis indicator used to provide hidden support and resistance levels for a security.
Conversely, a bearish pennant pattern forms during a downtrend and indicates the continuation of the downward movement.
This consolidation period creates a flag or pennant pattern on the chart, which can be used to identify potential trading opportunities.
The bearish pennant pattern entry point is when the market price drops below the pattern support area on rising seller volume.
The price action will be contained within this contracting structure, and we can expect a breakout to the downside as the price progresses towards the apex point.

For setting take-profit levels, a common approach is to project the length of the flagpole (the initial strong price movement) from the breakout point. This projection can provide an estimated price target for the continuation of the trend. For example, in a bullish pennant, traders might expect the price to rise by the same amount as the flagpole distance after the breakout.

Golden Cross Trading Pattern – What Is It & How Does It Work?

The pattern construction implied further price movement along the upper trend line after a short stage of asset consolidation in a narrowing range. Trading with this strategy means opening a position after the pattern breakout with a take profit at the level of 50% of the flagpole height. 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. The principle of trading the pennant pattern in Forex and other financial markets is quite simple. Having tested the level, the price subsequently reversed, thus forming a bear trap.

In terms of risk management, a stop loss would generally be placed just above the upper trendline. This entry is based on the premise that the increased volume signifies strong market participation in the bearish continuation, offering a higher probability of a successful trade. The subsequent consolidation phase, or the pennant, represents a brief pause in this downward momentum. At this point, the sellers have become exhausted and need to catch their breath. However, they feel the downtrend is still early and don’t want to close out their shorts. Some buyers may try to bottom-pick prices; some short sellers take profit, and the price consolidates sideways.

If the stock is breaking out of the pattern and is going in the direction of the cloud, then you have confirmation the trend will likely continue.
The stop-loss for each pattern is set near the top of the consolidation area for a bullish pattern and near the bottom of the consolidation area for a bearish pattern.
This ability could enhance their overall trading performance and give them the opportunity to capitalize on continuation patterns.
Our second and final target will be at the 100% projection of the flagpole as measured from the breakout point.
Enter the trade when the price moves decisively above the resistance line in a bullish pennant or below the support line in a bearish pennant.
Most of the time, traders take positions in the direction of the rise because they think the previous trend will continue.

Step One: Identify the Pattern Formation

Now with that said, we can see the strong bearish price move that occurred just before the consolidation phase of our potential pennant continuation pattern. Notice how there are a large percentage of red candles that make up the sharp move lower. A bearish pennant structure pennant trading strategy indicates selling pressure on the price following the breakout. The confirmation of a bearish pennant pattern comes after a breakout and close below the support line of the formation. When this happens, we would anticipate prices to move lower, with the target price that is the same as the distance traveled in the prior flagpole.

Types of Pennant Chart Patterns

Equities may tip their hand and show where they may be headed, but events out of the company’s control may oppose the expected price movement. This chart snapshot shows the daily chart of gold, where a bearish flag and a bearish pennant followed each other in sequence. Both take-profit (TP) and stop-loss (SL) levels are marked for the patterns. How can an FX trader combine all these elements to produce a tradable setup based on a flag or pennant chart pattern? The bullish pennant pattern is predictable and accurate, as it has a well-established structure and strategy for trading. However, unlike the flag, the pennant pattern is built with converging lines that have an intersection point.

Pennant and Flag Chart Patterns Explained in Technical Analysis

In the above example, you would want to short the break of the pennant trend line, with a stop above the middle of the upper trend line. The reason you should use the middle of the trend line, is due to the possibility of a quick fake out before resuming the direction of the breakout. In the above example, we have a flag pattern, which had an impulsive move higher. Then the stock began to trend sideways for a few hours on the 5-minute chart. As you can see, RUSS never broke the 23.6% retracement line, before screaming higher.

The price target for pennants is often established by applying the initial flagpole’s height to the point at which the price breaks out from the pennant. The bearish pennant pattern, as a rule, signals the continuation of the downtrend. The formation may sometimes indicate a bullish-to-bearish reversal after a long uptrend. Therefore, when trading with the bullish pennant chart pattern, you can take profits gradually, closing most of the positions with a gain upon reaching the first goal. Stop loss should be set below the support level according to risk management. Starting from the left side of the chart, we can see a sharp move lower that forms the flagpole.

The candle close to the Pennant provides an entry point with stop-losses set near the breakout candle’s low. Unlike the flag where the price action consolidates within the two parallel lines, the pennant uses two converging lines for consolidation until the breakout occurs. A pennant pattern can be both bullish and bearish, depending on the direction of the trend preceding the pennant pattern formation. An uptrend can favor a bullish pennant formation, while a downtrend can include a bearish pennant pattern. Furthermore, you would wait until you recognize a strong bullish candle that breaks above the resistance line of the pennant formation and closes above it. Most technical chart traders prefer to enter a long position at the beginning of the following candle following this breakout candle.

Meanwhile, triangles can form less dynamically within simple consolidation zones without a significant preceding trend spike. We were not able to develop a 100% quantified pennant pattern trading strategy. It’s pretty demanding to make a pennant trading strategy with strict trading rules and settings because of all the rules required.