How to Trade Bullish and Bearish Pennants in Forex

22 agosto 2024

The bullish pennant pattern risk management is set by placing a stop-loss order below the pattern’s uptrending support line. Use a stop market sell order or stop limit sell order when managing bullish pennant pattern risk. A bearish pennant pattern drawing begins with the flagpole component which is drawn from top to bottom and it marks the bear trend. Secondly, a downward sloping resistance line is drawn from left to right which connects the lower swing high peaks together. Thirdly, an upward sloping support line is drawn from left to right which connects the swing low troughs together.

Bearish Pennant

Ideally, the flag pole is long and strong, followed by a strong increase in selling volume to confirm the move down. Be sure to observe what the volume bars and how to trade bearish and bullish pennants other technical tools tell regarding what to expect the pattern to do next. Below are listed a few key elements to look for when trying to label a chart pattern as a pennant. A position is opened after the price breaks out the upper edge of the pattern.

Traders may choose to trade pennant formations because pennants align with the trader’s psychology. In either case, understanding the psychological factors behind pennant patterns can provide valuable insights for traders seeking to make informed decisions. A bear pennant is one of many bearish chart patterns technicians look for when doing technical analysis. It’s considered a continuation pattern, meaning the current selling pressure is expected to resume. The bear pennant is a continuation pattern that signals that the ongoing trend is likely to continue. It occurs during a bearish trend and indicates a possible extension of a downtrend.

Notice here that entry occurred quite a bit below the support level just one bar prior. In any case, this would have served as the entry trigger for the trade. Having tested the level, the price subsequently reversed, thus forming a bear trap. However, the bears had the opportunity to open a short position at the point of a downside breakout and take profits. The pattern should continue when the price breaks out the lower boundary of the pennant.

Descending Triangle in Technical Analysis

Successful trading relies on having good information about the market for a stock. Price information is often visualized through technical charts, but traders can also benefit from data about the outstanding orders for a stock. You can place it above the highs of the breakout candle, which will help you to avoid false breakouts. This will help you to protect your capital if prices move against you. Decide which you may be comfortable with or your own level, but good risk management should be a part of every trade.

Level 1 vs. Level 2 Market Data

This is when the price is expected to resume its prior trend with increased momentum. Traders should look to enter the trade on confirmation of the breakout after a sudden sharp move in price. Trading during the breakout offers the potential to capture a significant price move. Starting from the left side of the chart, we can see a sharp move lower that forms the flagpole. Notice how there is a large percentage of red bearish candles compared to green bullish candles.

The bullish pennant consists of three main elements – a flagpole, the pennant formation, and a breakout. The flag pole should have high volume, creating the flag pole to give more credence to the pattern’s strength. But like in its bullish counterpart, the price tends to trade beyond its S/R level. In the bearish pennant’s case, it will trade below the lower trendline (support level). Discover here how you can trade bullish and bearish pennants during market consolidation. Furthermore, I have plotted the 50% Fibonacci retracement of the flagpole.

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It is also important to avoid getting bogged down in the minutia of what a pattern is.
Yes, moving averages (MA)are used in conjunction with a pennant pattern to enhance the trading strategy.
This phase often represents a pause in the market where bulls and bears are temporarily in equilibrium.
When this happens in a chart pattern, it indicates a certain breakout.
Within this time, there is the possibility of reversals forming in the trend.

Pennant patterns have an overall favorable probability but entering the trade still carries uncertainty. Like we talked about before, the size of the breakout move is around the height of the mast (or the size of the earlier move). This means that the sharp price climb would resume after the bulls catch their breath and gather enough energy to push the price higher again. Usually, the height of the earlier move (aka the mast) is used to guess the size of the breakout move. Now let’s move on to trading tactics once we spot this bearish pattern… An alternative is to wait for a throwback to the broken trendline and enter on this retest which offers a better risk-reward ratio.

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. As always, it is important to look for signal confirmation, especially when expecting a sudden and strong price movement after the breakout.

What is a Pennant Chart Pattern in Technical Analysis?

Here are the key takeaways you need to consider when trading the bear pennant pattern.
As a continuation pattern, we would expect that the pennant formation should not retrace more than 50% of the previous price leg.
With some practice, beginners can learn to spot pennants and trade them profitably.
However, the breakout from the triangle usually happens quite quickly and can be used to signal a continuation of the downtrend.
Another misconception is expecting the breakout to always result in significant price moves.
Since the bearish pennant makes it easier to identify the trade stage, traders can easily trade the pennant.

The trendlines must converge in the middle at a similar speed – forming a pennant-shaped pattern. The pennant pattern is a popular chart pattern used by many technical analysts. It can be applied to any number of financial markets, and can be found at all degrees of trend from the very minor to the very long term. It’s a simple pattern to recognize on the price chart, however, there are some nuances in correctly labeling it. The first target was reached a short time after the entry, and represents the price that measures 50% the length of the flagpole measured from the breakout point.

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With a structured approach, even 60-70% probability pennants can yield solid returns over many trades. The fourth pennant pattern trading step is to place a stop-loss order to manage risk and downside protection. It’s tricky to distinguish in real-time before the breakout trigger confirms the direction and other chart shapes can resemble pennants temporarily before changing.

Impatience leading to pre-mature entries rather than waiting for the ideal trigger is another common pitfall. Partial rather than full profits are more likely with pennants as these trades require accepting smaller bite-sized gains. Have you ever seen a stock exhibiting normal trading behavior and then all of a sudden the stock price drastically drops out of nowhere? This type of price action could be related to the announcement of a shelf offering or the execution of an “at-the-market” sale from… Strike, founded in 2023, is an Indian stock market analytical tool. Strike offers a free trial along with a subscription to help traders and investors make better decisions in the stock market.

This impatience can lead to entering trades during the consolidation phase which increasing the risk of false signals. The entry point should be after a breakout from the pennant pattern. A breakout occurs when the price breaks above the upper trendline or below the lower trendline. This breakout should really be accompanied by increased volume, indicating strong buying or selling pressure. In the charts shown above, we have seen the pennant form, break resistance, and continue up.

Place a buy order slightly above the upper trend line of the pennant to catch the breakout as it happens. It’s essential to manage your risks by setting a stop loss order below the lowest point of the pennant to protect your position in case the breakout fails. The timeframe and duration of a bull pennant can vary but typically occur over a short to medium term. The initial uptrend may last several days to weeks, while the consolidation phase usually spans a few days to a couple of weeks. The breakout should happen relatively quickly after the consolidation phase, signaling the resumption of the uptrend.