Trading in the stock market is based on recognisable patterns. By spotting and interpreting them, traders can get crucial information about market sentiment and potential trend reversals or continuations. Among several formations is the pennant pattern, which offers clear signals for entering and exiting positions. Let us understand its formation, indications, and some actionable trading tips.
What is a pennant pattern?
The pennant pattern is a key formation in technical analysis, often identified within a candlestick chart. It appears as a small symmetrical triangle formed by converging trend lines and typically emerges during periods of brief consolidation within a strong trend.
- Strong upward trends, or
- Strong downward trends
- Read the table below to understand better.
| In an uptrend | In a downtrend |
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What are some key characteristics of the pennant pattern?
To recognise and make sense of the formation, traders must understand the following important features:
- Flagpole
- It refers to the initial sharp move in price.
- This price movement usually precedes the formation of the pennant.
- The shape formed resembles the pole of a flag.
- Symmetrical triangle
- It represents the consolidation phase.
- During this phase, the price oscillates within converging trend lines.
- This results in the formation of a triangular shape.
- Volume
- It has been commonly observed that volume decreases during the formation of the pennant pattern.
- This happens due to:
- Indecision among market participants or
- Consolidation
- Breakout
- Confirmation of the pennant pattern often occurs through a price breakout.
- This breakout usually signals a continuation of the previous trend direction.
- The trend confirmation happens when it is accompanied by increasing volume.
What are the different types of pennant patterns?
There are two prominent types of pennant pattern formations:
- Bullish pennants, and
- Bearish pennants
Let us understand both individually:
What is a bullish pennant?
- A bullish pennant signifies a continuation of the prevailing market trend.
- It usually occurs within an uptrend.
- This pattern is characterised by:
- A sharp upward move in price (flagpole)
- Followed by a period of consolidation where the price forms a symmetrical triangle (the pennant)
- A bullish pennant represents:
- A strong buying pressure, or
- Market optimism
- The bullish pennant is confirmed by a breakout to the upside, where:
- The price resumes its upward movement and is
- Accompanied by an increase in volume
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What is a bearish pennant?
- A bearish pennant is a continuation pattern.
- It occurs within a downtrend.
- This pattern is characterised by:
- A sharp downward move in price (flagpole)
- Followed by a period of consolidation where the price forms a symmetrical triangle (the pennant)
- A bearish pennant represents:
- Strong selling pressure or
- Market pessimism
- The bearish pennant is confirmed by a breakout to the downside, where:
- The price resumes its downward movement and is
- Accompanied by an increase in volume
Why do traders use pennant pattern?
Traders commonly use the pennant pattern to predict future price movements. Let us look at some of its common uses:
- Trend continuation signal
- The primary use of the pennant pattern is as a continuation pattern.
- When a pennant forms within an existing trend, it suggests that the market is consolidating temporarily before resuming the trend.
- Traders use this pattern to:
- Anticipate the continuation of the trend and
- Adjust their positions accordingly
- For example,
- Say, a pennant forms during an uptrend
- In this case, traders look to buy when the price breaks out above the pennant
- This is because they are anticipating further upward movement
- Entry and exit points
- Pennant patterns offer clear entry and exit points for trades.
- Traders often enter positions when the price breaks out of the pennant pattern.
- Conversely, if the price fails to break out and instead moves against the trend, traders choose to exit their positions.
- Confirmation tool
- Pennant patterns serve as a confirmation tool.
- They help validate a trend when combined with other technical indicators or chart patterns.
- For example,
- Say a pennant forms near a key support or resistance level
- Its breakout can confirm the significance of that level
How to optimise pennant pattern trading?
Pennant chart pattern trading is challenging. It requires precise timing and confirmation of breakouts, which require patience and discipline. Identifying false signals amid market volatility adds complexity and requires a solid understanding of the pattern.
Read the tips below to optimise your pennant pattern trading:
| Tips | Execution | Benefit |
| Wait for confirmation | Wait for a confirmed breakout from the pennant pattern before entering a trade. | This confirmation reduces the risk of false signals and increases the probability of a successful trade. |
| Volume confirmation | Look for increased volume during the breakout. Higher volume confirms:
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This will help you:
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| Set clear entry and exit points | Determine clear entry and exit points based on the breakout direction. Post this, place entry orders slightly above or below the pennant's trendlines. | By doing so, you can manage risk effectively and limit potential losses. |
| Consider price targets | Estimate potential price targets using technical analysis techniques, such as measuring the height of the flagpole. | This helps in:
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| Combine with other indicators (confluence) | Enhance the signal's reliability by combining the pennant pattern with other technical indicators, such as:
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By practising confluence, you can:
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Conclusion
Pennant patterns are technical formations seen in market charts. They indicate temporary pauses in trends followed by continuations. Trading them effectively requires patience, confirming breakouts using volume, and managing risks smartly. Practising confluence by using other technical indicators can also improve your trading outcomes. You can learn bullish engulfing pattern and bearish engulfing pattern and validate your generated signals.
