Home/Blogs/Understanding Pennant Patterns A Simple Guide

Understanding Pennant Patterns A Simple Guide

Introduction:

Imagine you are a seasoned trader scanning the charts for patterns that spell out your next big win. You have seen them all, from head and shoulders to double tops and bottoms, but one pattern always catches your eye with its simplicity and reliability—the Pennant Pattern.

But what is this chart pattern, and how does it work? You can find out by reading this guide.

What is a pennant pattern?

A pennant pattern is a continuation pattern when a stock price moves in a strong trend, followed by a brief consolidation period, and then resumes the original trend. It is named after the triangular flag used to signal a ship’s direction in the sea.

A pennant pattern consists of two parts: the flagpole and the pennant. The flagpole is the initial sharp price movement that represents the dominant trend. The pennant is the small symmetrical triangle that forms as the price consolidates within a narrow range. The pennant can be either horizontal or slightly tilted against the trend.

Start Investing with Free Expert Advice!

There are two kinds of pennant patterns: bullish and bearish. A bullish pennant occurs when the flagpole points upwards and the pennant slopes downwards. It indicates that the buyers are taking a break before increasing the price. A bearish pennant occurs when the flagpole points downwards and the pennant slopes upwards. It indicates that the sellers are taking a break before driving the price lower.

How to trade with a pennant pattern?

A pennant pattern is a powerful signal that the existing trend is likely to continue. Therefore, you can use it to enter or exit your trading position in the direction of the trend. Here are some steps to follow when trading with a pennant pattern:

  • Identify the flagpole and the pennant on the price chart. Ensure the flagpole is long and steep and the pennant is short and narrow. The pennant should not last more than a few weeks. Otherwise, it may lose its validity.
  • Draw the two trend lines that connect the highs and lows of the pennant. These lines will act as the breakout levels for the pattern. A breakout arises when the price closes above or below the trend lines, depending on the pennant type.
  • Measure the price target for the trade by adding or subtracting the flagpole length to or from the breakout point. For example, if the flagpole is Rs 600 long and the breakout point is Rs 2,400, then the price target for a bullish pennant is Rs 3,000 (Rs 2,400 + Rs 600). Similarly, the price target for a bearish pennant is Rs 1,800 (Rs 2,400 - Rs 600).
  • Set a stop-loss level for the trade by placing it below or above the opposite trend line of the pennant. For example, place your stop-loss below the lower trend line if you buy a bullish pennant. If you sell a bearish pennant, place your stop-loss above the upper trend line. This way, you can protect yourself from a false breakout or a trend reversal.
  • Wait for a clear breakout of the pennant before entering the trade. Do not enter the trade too early or too late, as you may miss the opportunity or risk losing money. A strong price movement, a high volume, and a close outside the trend lines confirm a clear breakout.
  • Manage your risk-reward ratio by adjusting your position size and exit strategy according to your price target and stop-loss level. Ideally, you should aim for a risk-reward ratio of at least 1:2, meaning that you should make twice as much as you risk. For example, if your stop-loss is Rs 100 away from your entry point, your price target should be at least Rs 200 away from your entry point.

Conclusion

A pennant pattern is a simple and effective way to trade with the trend. It shows you when the price is pausing before resuming its direction. Following the steps above, you can identify, measure, and trade a pennant pattern confidently and accurately.

However, you should also be aware of the limitations and challenges of using a pennant pattern. Sometimes, the price may not reach the target or may reverse after the breakout. Therefore, you should always use other technical indicators, such as moving averages, oscillators, or candlestick patterns, to confirm the validity and strength of the pennant pattern. You should also monitor the market conditions and news events that may affect the price movement.

 

Related Articles: What Is Candlestick Wick Analysis | What Is On Neck Candlestick Pattern | Difference Between Margin Trading And Short Selling | What Does a Paper Umbrella Candlestick Indicate

 

Popular Stocks:  ICICI Bank Share Price | HDFC Bank Share Price | Britannia Share Price | Divislab Share Price | Tata Consumer Share Price

You may also like…

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C