A Pennant Pattern is a continuation pattern that marks the continuation for the prevailing trend, after a brief pause.  

How to spot a pennant pattern

The first thing that needs to be present for a pennant pattern to be formed is a sharp increase or decrease in price action leading up to the formation of the pennant pattern. Let’s take the example where there is a decrease in prices.  

As pictured below the sharp decrease in price from around 89 to 85.2 in the CAD/JPY forms the flag pole. At around 85.2 the decrease stabilises for a while and trendlines can be drawn around the price pattern following the formation of the flag pole. As you will notice, the trendlines converge to a point. This is the signature of the pennant pattern and is the key difference between the Flag pattern and the pennant pattern. The flag pattern the trendlines remain parallel.

How to trade a pennant pattern

If the prevailing trend is down, traders will generally short sell when the price pattern breaks below the lower part of the flag as pictured below (the opposite is true for an uptrend). This often coincides with the point of convergence between the trendlines, which is the case in the chart above. This generally marks the beginning if the continuation of the downtrend. It is important to wait for the price to break below the lower trendline as this is when the pennant pattern is confirmed. Patients is the key here, as often traders will jump in too early.

Tips on trading the pennant pattern

Often multiple pennants and flags are formed on a particular downtrend. Each can be traded on its own merit.

Published on 11th of May 2011
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