Bearish and Bullish Pennants and How to Trade Them

Pennants, like rectangles, are continuation chart patterns that form following big advances.

Buyers and sellers often take a breather after a large upward or negative move before continuing to move the pair in the same direction.

As a result, the price tends to consolidate and form a little symmetrical triangle called a pennant.

More buyers or sellers often opt to jump in on the powerful move while the price is still consolidating, leading the price to break out of the pennant formation.

Pennants that are bearish

During a sharp, almost vertical downtrend, a bearish pennant forms.

Some sellers close their positions after the steep decline in price, while others decide to join the trend, causing the price to consolidate for a while.

When enough sellers enter the market, the price falls below the bottom of the pennant and continues to fall.

As you can see, immediately the price made a breakout to the bottom, the decrease persisted.

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 ruse, we'd be out of the transaction right away.

Unlike other chart patterns, where the size of the next move is roughly equal to the formation's height, pennants designate significantly greater moves.

To determine the size of the breakout move, the height of the previous move (known as the mast) is usually employed.

Pennant Bullish

Bullish pennants, as the name implies, designate that bulls are preparing to roar again.

This suggests that after that small time of consolidation, when bulls have gathered enough energy to push the market higher, the steep rise in price will restart.

The price made a sharp vertical increase before taking a pause in this scenario. The bulls are stomping and heating up for another charge!

After the breakout, the price made another important run upwards, just as we predicted.

To avoid fakeouts, we would place our long order above the pennant and our stop order below the bottom of the pennant.

As earlier stated, the size of the breakout move is roughly equal to the mast's height (or the size of the earlier move).

Pennants may be little in size, but they can herald major price changes, so don't dismiss them!