Bullish and bearish pennant patterns can be used to predict market movements that are about to take place. They refer to continuous chart patterns and work similarly to triangle patterns though with some core differences FX traders need to take into account.
In this article, we will discuss how to recognize bullish and bearish pennant. You will learn what each of them means and how to use them to perform profitable and effective trades. Also, we will describe the key difference between a triangle and bullish and bearish pennant patterns.
Before we start learning each pennant in detail, we need to clarify the basic meaning of the pennant pattern and how it works. It is a continuous pattern that makes it possible to identify the momentum at which an asset is about to perform a downward or upward movement. As a rule, the process is followed by a short consolidation before taking the same direction.
When it happens, traders can see a symmetrical triangle of a small size formed by a big number of candlesticks. Traders also call it Pennant. A bearish or bullish pattern is defined by the trend movement direction.
To recognize either a bearish or bullish pennant pattern, you need to know its core elements and characteristics. They include the following:
Now, let’s have a closer look at the bearish and bullish pennant pattern to understand how to use it when trading Forex.
A bullish pennant pattern takes place when the trend makes a strong upward movement. This is why an upward flagpole is the key characteristic of the bullish pennant. The flagpole is followed by the period of short market consolidation with the trend further moving upwards after the breakout. When the break takes place above the pennant, it is a single for traders to enter with a long position.
Oppositely, a bearish pennant pattern occurs when the trend makes a strong downward movement. Just as the previous continuous pattern, it consists of the downtrend flagpole that represents a rapid price drop followed by the consolidation, breakout, and further downtrend movement. When the break takes place below the pennant, it is a single for traders to enter with a short position.
The good news for beginner traders is the ability to use actually the same approach while using either bearish or bullish pennant. Bias is the only thing that makes trading these patterns a bit different. A bearish pennant comes with a short bias while a bullish pennant has a long bias.
As always, it is important to look for signal confirmation, especially when expecting a sudden and strong price movement after the breakout. A pennant makes it possible to identify the momentum of a sharp breakout followed by the continuation of the price movement in the initial direction.
Traditional risk-management strategies will let you prevent the risk of losing. A good idea is to place a stop-loss order at the bottom of the candle that refers to breakout. If you prefer more conservative trading strategies, you would rather place a stop loss below the pennant to minimise the risk of downside. Both will result in a solid level of protection for FX traders with different approaches and strategies.
Also, a good idea is to set target levels that start from the flagpole up to the triangle. Measure the distance and duplicate it considering the breakout of the next pennant.
When using bearish and bullish pennant patterns, always remember that markets never stop moving. What’s more, they mostly perform movements that are hard to predict or expect. This is why proper risk-management steps are vital for adoption to protect your capital.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
