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Earlier this week we reviewed the cup and handle trading pattern, which represents the continuation of an established bull trend or the reversal of a downtrend. In contrast, the pennant pattern merely depicts price consolidation before a lower or higher price breakout. However, it underscores a continuing price trend and is an important pattern to recognize.
What even is a pennant?
Similar to flag patterns, the pennant is a continuation chart pattern that forms after a strong price movement and merely signals a slight reprieve.
After a big upward or downward move, buyers or sellers usually pause to catch their breath before moving again in the same direction. Because of this, the price consolidates and forms a tiny symmetrical triangle called a pennant. As it does so, more buyers (or sellers) decide to jump in on the strong move. This bandwagon effect eventually forces the price to burst out of the pennant formation and resume in the same direction as the initial price movement.
The pennant’s trading volume follows a predictable pattern as well. Large volume accompanies the initial price move but significantly weakens during the pennant. However, another significant increase in volume occurs during the price breakout as traders jump on the bandwagon.
Here’s an example of what a pennant looks like:
In the image above, the flagpole represents the previous trend’s high, the period of consolidation forms a pennant pattern, and traders watch for a breakout from the upper trend line of the symmetrical triangle.
Trading Pennant Patterns
As stated earlier, pennant patterns are similar in appearance to flags except that they form from converging trend lines into a triangle.
Bullish and bearish pennant chart patterns work on the same principles as flag patterns. The bearish pennant pattern is identified by converging trendlines forming a pennant that is sloping upwards at the bottom end. This pattern is somewhat similar to a symmetrical triangle that forms within a smaller number of candles. However, it follows a sharp bearish drop. In contrast, bullish pennant patterns display an opposite pattern and are almost identical to a bullish flag pattern (the exception again being that they form a symmetrical triangle.from converging trendlines).
Many traders enter new long or short positions following a breakout from the pennant chart pattern. For example, a trader may see that a bullish pennant is forming and place a limit buy order just above the pennant’s upper trendline. When the coin or token breaks out, the trader may look for above average volume to confirm the pattern and hold the position until it reaches his price target.
Traders can ascertain the price target for a pennant by determining the initial flagpole’s height relative to the price breakout point. For instance, if a coin rises from $5.00 to $10.00 in a sharp rally, consolidates to around $8.50, and then breaks out from the pennant at $9.00, a trader might look for a $14.00 price target on the position ($5.00 plus $9.00). Traders typically set the stop-loss level at the lowest point of the pennant pattern, given that a.breakdown below that point would invalidate the pattern and possibly mark the start of a longer-term reversal.
Most traders use pennants in conjunction with other chart patterns or technical indicators to confirm their inclinations. Remember that fundamental and technical analysis is only a tool to help them make better trading decisions. It’s not a magic eight ball that can predict the future. So trade accordingly and always set suitable stop-losses to protect your investment.