Pennants, like rectangles, are continuation chart patterns that appear after large moves. After a large upward or downward move, buyers or sellers usually take a breather before continuing to move the pair in the same direction.
As a result, the price frequently consolidates and creates a little symmetrical triangle known as a pennant.
While the price is still consolidating, more buyers or sellers usually decide to take advantage of the powerful move, causing the price to break out of the pennant formation.
Bearish Pennants
During a sharp, almost vertical downtrend, a bearish pennant forms.
Following the steep decline in price, some sellers close their positions, while others decide to join the trend, causing the price to consolidate for a short period of time.
When there are enough sellers, the price breaks below the bottom of the pennant and continues to fall.
As can be seen, the loss persisted after the price produced a bottom breakout.
We’d place a short order at the bottom of the pennant with a stop loss above the pennant to trade this chart pattern. That way, if the breakdown was a forgery, we’d be out of the deal right away.
Pennants imply significantly stronger moves than other chart patterns, where the size of the next move is approximately the height of the formation.
The height of the previous move (also known as the mast) is typically used to determine the size of the breakout move.
Bullish Pennants
Bullish pennants, as the name implies, indicate that the bulls are about to re-charge.
This suggests that the strong rise in price will restart after the brief time of consolidation, when bulls gather enough energy to push the price higher once more.
In this case, the price climbed steeply before taking a pause. The bulls are stomping and warming up for another run!
After the breakout, the price made another significant move upwards, just as we predicted.
To avoid fakeouts, we’d place our long order above the pennant and our stop below the bottom of the pennant.
As previously stated, the size of the breakout motion is approximately the height of the mast (or the size of the earlier move).
Pennants, you see, may be little in size, but they can predict big price movements, so don’t dismiss them!
Next Lesson: Triangle Chart Patterns: How to Trade Them
