Mastering the Reverse Pennant Pattern: A Guide for Traders

The formation of a pennant pattern starts with the flagpole, which is the initial sharp price movement. The formation of a pennant pattern involves several key stages, each playing a critical role in shaping this continuation chart pattern. At the same time, the trading volume grows intensively, and the price breaks even higher to the level of the previous impulse movement height or to the level of the pennant height. In the above example, the stock creates a pennant when it breaks out, experiences a period of consolidation, and then breaks out higher. The upper trend line resistance trend line of the pennant also corresponds to reaction highs.

Moving average lines are very powerful in determining the direction of the trend. Antonio Di Giacomo studied at the Bessières School of Accounting in Paris, France, as well as at the Instituto Tecnológico Autónomo de México (ITAM). He has experience in technical analysis of financial markets, focusing on price action and fundamental analysis. After many years in the financial markets, he now prefers to share his knowledge with future traders and explain this excellent business to them.

The setup and the implications of the pennant pattern are the same as those of a flag pattern. The only difference is that the pennant pattern’s consolidation phase is marked by converging trend lines as opposed to parallel trend lines. A trader should look for consolidation between support and resistance after a major bearish price move called the pole to identify a bearish pennant. The support and resistance lines will form a roughly symmetrical triangle, showing that the market is in a conflict between positive and negative sentiment. The strong negative sentiment causes the market to plummet lower in a bearish pennant. The sellers that have pushed their price down then back off and take profit, while the bulls sense the potential for a bounce back.

The bullish pennant examples show the price rallying after breaking above the upper boundary of the pennant. The above is an example of the formation of the bull pennant in a daily EURUSD chart. Observe how after the initial rally the prices made a retracement of about 50% of the flagpole before breaking the upper trendline and moving further above.

This suggests a potential bearish reversal in an uptrend as buyers lose momentum. On the other hand, a falling wedge occurs during a downtrend when prices consolidate within downward-sloping lines. Unlike the bull pennant, which indicates a continuation, falling wedges often signal a bullish reversal. This implies that the uptrend could be reversed as buying pressure weakens. The core of the technical analysis is to use various tools like chart patterns, candlesticks, etc., to make sense of the price and volume movements.

Following the surge or decline, there is a consolidation period, forming a tiny symmetrical triangle, known as a pennant. During the consolidation phase price makes lower highs and higher lows, indicating a market pause, when prices gather enough momentum to resume the trend. Yes, the pennant pattern has the potential to be quite profitable if traded correctly. Its ability to identify consolidations within strong trends makes it a high probability continuation pattern. The pattern provides clearly defined entry, stop loss and take profit levels.

The Pennant Chart Pattern is a continuation pattern that typically appears, indicating a brief consolidation or pause before the price moves forward in the direction of the prior trend. The pennant, according to traders, is a time when the market is uncertain and buyers and sellers are temporarily balancing one another. The principle of determining the bearish pennant pattern in the price chart is the same as with the bullish pennant, only in the opposite direction. The pennant pattern belongs to trend continuation patterns, like other chart patterns, such as the flag or the ascending triangle.

Traders should use additional analysis tools and indicators to confirm and take a trend decision. A breakout happens when the price moves rapidly above or below the boundaries of the pennant pattern. The preceding trend was upward; a bullish breakout would involve the price breaking above the upper trendline of the pennant, indicating a continuation of the uptrend. A bearish breakout would occur when the price breaks below the lower trendline, showing a continuation of the trend if the preceding trend was downward. It is accompanied by an increase in trading volume when a breakout occurs, which confirms the validity of the breakout. Traders will enter positions in the direction of the breakout, anticipating further price movement in the same direction as the preceding trend.

The asset price usually starts to consolidate below the highs after the establishment of a short-term peak. Until the two converging lines connect the higher lows and the lower highs, they keep going. A bearish pennant is continuation patterns also, but it occurs within strong downtrends.

1. Once the price makes the breakout, the volume should increase significantly.
2. The only difference here is while bullish pennants will have a long bias, the Bearish Pennants tend to have a short bias.
3. Typically, trading volume decreases during the consolidation phase as the market retraces and traders await a potential breakout.
4. During this phase, trading volume decreases, showing reduced activity as traders wait for the next move.

Pennant Trading Strategy 1: Trading based on flagpole height

Understanding these variations helps in adapting the trading strategy to different market conditions. While the Reverse Pennant Pattern can indicate a continuation of a downtrend, it should always be used in conjunction with other analysis techniques to enhance reliability. By setting a stop-loss at this level, you ensure that your losses are limited to a manageable amount, maintaining your overall trading strategy’s integrity.

Volume

A bullish pennant pattern example is illustrated on the daily Netflix stock price chart above. The price consolidates and fluctuates between resistance and support levels. The market security price then breaks out and trends higher leading to pattern completion.

Distinguishing from Similar Patterns

This initial movement, commonly referred to as the flagpole, establishes an obvious orientation. The rally must be strong enough to attract the attention of traders and investors, resulting in increasing buying or selling activity and a high trading volume. Yes, Fibonacci retracements are used in combination with a pennant pattern pennant trading strategy to identify potential entry and exit points for trading. It is a technical analysis tool that helps identify support and resistance levels based on the Fibonacci sequence. This continuation is confirmed by a breakout from the pennant’s converging trendlines, either upwards in a bullish pennant or downwards in a bearish pennant.

1. Therefore, in a Bearish Pennant pattern, we canplace a sell order when the breakdown occurs fromthe lower part of the pennant.
2. Bearish pennant patterns occur after a downtrend and suggest a potential continuation of the downward movement.
3. Just like any other continuation pattern, the bullish pennant also helps the uptrend to reach higher.
4. The bear and bull pennant patterns are continuation patterns, with the key difference being their directional cues.
5. The stop loss is set just below the low of the pennant pattern outside the lower border of the pattern.

Our demo account is a suitable place for you to get an intimate understanding of how trading and investing work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged securities. An alternative is to wait for a throwback to the broken trendline and enter on this retest which offers a better risk-reward ratio. Sarah Abbas is an SEO content writer with close to two years of experience creating educational content on finance and trading. Sarah brings a unique approach by combining creativity with clarity, transforming complex concepts into content that’s easy to grasp. The pattern should continue after the break out of the upper border, either at the point of the contact of these lines or a little earlier.

Most often, pennant patterns are found in short-term time frames, for example, from a 15-minute to an hour timeframe. Another pitfall in pennant trading involves neglecting broader market context. Traders may focus only on the pennant pattern without considering external factors that could impact the trade. For example, think about broader economic events may impact more than just one security.