Chart Patterns - Pennant
Type: Continuation Pattern
Appearance: Price action bounded by converging trendlines. In most cases the price action inside the pennant is moving in the opposite direction of the trend, but this is not a requirement.
Typical Duration: up to 4 weeks (28 days).
Description: Pennants are one of the most common patterns you will come across when trading forex, and indeed when trading any financial instrument. They are characterized as “consolidation” or “continuation” patterns. They generally occur after a sharp move which determines the direction of the trend, and they usually mark the mid-point of the trend. If there is no strong move leading up to the pennant formation, the pattern is invalidated. A pennant’s success rate is directly proportional to the size of the strong move leading up to it, so the more violent the move, the more likely the pennant’s success. A high slope value is also a confirming factor.
Strengths: This pattern is very common, so even a slightly positive expectancy value can be turned into a decent profit over time.
Weaknesses: Pennant patterns are susceptible to “throwback”, which is a brief breakout from the patterns in the wrong direction, before price continues in the direction of the trend. This weakness can force traders to use wider stop losses or trigger stop losses more often. Either way, throwbacks have a detrimental effect on the method’s expectancy value. A good way to filter these out is often necessary.
How to Trade it:
- Measure the move – calculate the price difference between the start of the big move and the pennant low (if down trend) or the pennant high (if up trend). Price should move by roughly the same amount in the direction of trend if it breaks out of the pennant in that direction.
- Wait for the breakout – after you are sure price has moved outside of the pennant trendline in the direction of the trend, take the trade. Some traders wait for a daily candle to close outside the pennant for confirmation of the breakout, or to “filter out” false breakouts.
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