A pennant pattern, referred to technical analysis, is a continuation pattern that is seen when a security experiences a large movement to the upside or downside, followed by a consolidation period, before subsequently moving in the same direction.
When looking at a pennant pattern, one will identify three distinct phases:
Phase 1 – First Flagpole
The first flagpole sets up the pennant pattern. The flagpole is an initial strong movement to the upside or downside.
Phase 2 – Pennant Pattern
The pennant pattern, which is the consolidation period between two converging trend lines, forms the shape of a pennant.
Phase 3 – Second Flagpole
The second flagpole is a breakout of the pennant pattern in the same direction as the first flagpole.
The volume at each stage is also important to the success of a pennant pattern. The first flagpole must be met with large volume, followed by weakening volume in the formation of the pennant, ending with large volume during the second flagpole.
A pennant pattern can be bullish or bearish depending on the direction of the first flagpole, shown below.
Trading a Bullish Pennant Pattern
Traders will typically set a limit buy order at the upper trendline. On a breakout of the upper trendline, traders will first look for above-average volume to help confirm a pennant pattern breakout.
The price target sell order will then be set at the initial flagpole’s height plus the break-out price. In terms of risk management, a stop loss would generally be placed just below the lower trendline.
For example, assume the first flagpole goes from a price of $10 to $20, forms a pennant through a consolidation around $16, and breaks out from the pennant at $18. The entry price would be $18, and the ideal exit price would be $28 ($18 + $10).
Trading a Bearish Pennant Pattern
Traders will typically set a limit short order at the lower trendline. On a breakout of the lower trendline, traders will first look for above-average volume to help confirm a pennant pattern breakout.
The cover price will then be set at the initial flagpole’s height minus the breakout price. In terms of risk management, a stop loss would generally be placed just above the upper trendline.
For example, assume the first flagpole goes from a price of $50 to $40, forms a pennant through a consolidation around $44, and breaks out from the pennant at $42. The short price would be $42, and the ideal cover price would be $32 ($42 – $10).
Time Frame for a Pennant Pattern
A pennant pattern is classified as a short-term pattern that generally forms over a period of days or weeks. It is not uncommon for traders to trade on pennant patterns that appear in longer time frames.
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