What Is a Pennant Pattern?

One of the most popular chart patterns for trading, particularly among crypto, stock, and forex traders, is the pennant, also known as the pennant pattern. Prices can be displayed on a trading chart in one of three ways: rising, dropping, in a range, or moving sideways. A sizable group of traders is buying or selling behind every chart, and their actions may be observed by the upward and downward trends on the chart.

Prices on the crypto market are the outcome of a competition between buyers and sellers; whoever wins the struggle ultimately seizes control of the price. The pattern formed by these ups and downs on the trading chart is recurring, and by analyzing these patterns, it is possible to forecast the market direction.

The pennant pattern is one of the most popular continuation patterns which pauses in the middle of a move. Pennants indicate that the market is taking a pause before it continues breaking out because they are preceded by sudden price rises or falls. This article explores what a pennant pattern is and how it works.

What Is a Pennant Pattern? A Trend Continuation Pattern

The term “pennant” describes the features of a thin flag that are used for a variety of purposes on land and at sea. When it comes to crypto trading, the pennant pattern is a kind of trend continuation pattern that can appear during either a bullish or bearish trend.

There will typically be an established trend before the pennant’s formation, followed by a sideways trading range that narrows during the “pennant’s section” before a significant breakout occurs in the same direction as the prior trend.

The established trend that preceded the pennant formation is known as the flagpole by traders, and the overall pattern resembles a flag on a pole. A pennant pattern predicts whether the main price movement on a market chart will last for a long period or change direction swiftly.

What Is a Continuation Pattern?

In the financial markets, a continuation pattern is a sign that the price of a particular stock or any other asset will keep moving in the same direction long after it has been completed. Technical analysts employ a variety of continuation patterns as indicators that the price trend will continue. The likes of triangles, flags, pennants, and rectangles are examples of continuation patterns.

What Is a Pennant Pattern Composed of?

• A Flagpole: A pennant typically starts from a flagpole, setting it apart from similar patterns (like the evenly arranged triangles on a chart). A flagpole is the initial, strong movement that introduces the evenly spaced triangle.
• Breakout Levels: The flagpole will finish with one breakout, and the cycle will follow with the second, where the upward or downward trend will continue.
• The Actual Pennant: The pennant is the name for the triangle pattern that developed during market consolidation, which took place at the time of the breakout. The triangle, often known as the pennant, is created by the two trend lines combining.

How Does a Pennant Pattern Work?

Pennants are very similar to flags structurally. Both have convergent lines that, during their consolidation period, can last anywhere from one to three weeks. However, it’s important to consider the transaction volume in order to recognize a pennant pattern.

The initial transfer will involve a significant infusion of volume. Following this will be a period of volume decline, which is typical of the pennant formation. Another significant spike in volume indicates a breakout will occur.

After a period of consolidation, when the volume decreases, pennant formation is seen. Traders are waiting for a breakout period at this time. The higher trendline creates a kind of symmetrical triangle during that breakout time.

Bullish Pennant Pattern

Bullish pennants are extending candlestick patterns that occur during a strong upward movement. When the flagpole rises, there is a concentrated period before the rising post is prolonged until the breakout, and that is when the pennant formation occurs. Traders continue to search for interruption at the pennant’s peak so they may take advantage of the increased bullish power.

Source: Daytradetheworld

How to Identify a Bullish Pennant Pattern

A strong upsurge where the price of a given asset is rising and building a bullish pole is the first way to identify a bullish pennant. The price then starts to decline instead of continuing on its rising trajectory. The price decline normally doesn’t stay for long and resumes its upward trajectory. The price however falls once again and starts moving in a sideways trend as a result of this short and weak retracement.

Over time, the repeated retracements and breaks get smaller, which causes the support and resistance levels to merge. The sideways movement is a result of this mismatch between supply and demand. At the point where the levels merge, there is eventually a breakout and the price moves upward into an uptrend.

Bearish Pennant Pattern

Bullish and Bearish pennants are inversely related to one another. Bearish pennants are made by extending patterns that pop up in rigid downward trends. Bearish pennants always start from a flagpole: a price decline that is followed by a break in the downward direction.

The triangle that forms after this break is known as a pennant. The downward activity continues after a breakout. Traders maintain a close check on the gap below the pennant to obtain exact price drop deals.

Source: Daytradetheworld

How to Identify a Bearish Pennant Pattern

A bearish pennant starts with a sharp decline in price for an asset, creating a bearish pole. The price then stops moving downward and starts moving upward instead. The price gain typically does not really continue for very long before it starts to backtrack and decrease.

This pullback is weak, like the bullish pennant, and the price rises somewhat after it. The support and resistance levels collapse and merge, and a sideways trend develops once more. The price breaks out at the convergence point and moves into a stronger downturn.

How to Distinguish a Pennant Pattern from the Regular Triangle Pattern

• A strong rise or fall movement that includes a flagpole is intended to establish a pennant pattern. In the absence of a flagpole, the pattern is only a basic triangle.
• A pennant creates a brief retrace (generally, it is only about 38% of the flagpole). A triangle, on the other hand, displays a full retracing.
• A pennant is distinguished by a continuation of the falling or rising trend.
• A pennant is a compact pattern that often lasts a week or three. Triangle patterns require more time to construct.

Analytical Facts About the Pennant Pattern

• A pennant continues in the same direction in 75% of instances.
• A pennant attempts to continue in the same direction but pulls back in 15% of cases.
• A pennant keeps moving in the same direction and hits its target in 55% of instances.
• A pennant is stronger if there are no false breaks (false pattern exits).
• Pennants with a small base perform better.
• Pullbacks following a pennant exit are detrimental to the trade performance.

How to Trade a Bullish Pennant Pattern

At the top trendline, traders will often place a limit buy order. Thus, they will start by seeking an above-average activity to help validate a pennant pattern breakout at the top trendline. The break-out price plus the original flagpole height will then be used to determine the target price sell order. A stop loss would often be positioned right below the lower trendline in terms of risk control.

For instance, in a case where the first flagpole increases in price from $20 to $30, it consolidates into a pennant at $26 and separates from the pennant at $28. $28 would be the perfect entry price, and $38 ($28 + $10) would be the perfect exit price.

How to Trade a Bearish Pennant Pattern

At the downtrend line, traders usually set up a short order limit but first, they are initially inclined to seek above-average traffic to potentially establish a pennant pattern breakout in case the downtrend line breaks. The breakout price will be subtracted from the starting flagpole level to determine the cover price. A stop loss would typically be positioned immediately above the top trendline to avoid the risk of loss.

An example is when the price of the first flagpole drops from $70 to $60, consolidates into a pennant at $64, and then separates from the pennant at $62. The optimum cover price would be $52 ($62 - $10), while the short price would be $62.

Conclusion

A pennant is a type of continuation pattern in the trading market that develops when an asset experiences a significant movement followed by a period of consolidation with converging lines. In technical analysis, the initial stage is referred to as a flagpole. However, the time of consolidation that comes after a significant movement is what distinguishes a pennant from a flagpole.

Due to market volatility, traders should consistently consider prudent risk management methods. One major way to manage risks pertaining to trading is to never trade with a capital they cannot afford to lose. Traders can define their objective level by measuring the distance between the flagpole’s beginning and the pennant. They can then duplicate this gap against a rate breakout and pursue the pennant.