In Forex trading, there are certain patterns and formations which indicate when a trend is about to reverse. One of these patterns is called a pennant pattern. Forex traders watch for this formation and use it as an entry or exit signal for their trades.
The pennant pattern is one of the most popular chart patterns among Forex traders, both novices and veterans alike. Its sharp and clear upward or downward movement is often used as a reversal indicator.
This article will show you how to trade the bull and bear pennant chart pattern with the most accurate methods available.
What is a pennant?
In Forex, a pennant is a consolidation pattern believed to be the forerunner of either a continuation or reversal move. A bullish pennant forms when the price makes lower highs and higher lows, while a bearish pennant forms when the price makes higher highs and lower lows.
The shape of a pennant can vary greatly, but it will always have two slopes: one that runs down from the high to low and another that runs up from the low to high. The first slope is called the flagpole, while the second is called the tail.
Trading these patterns can be very profitable because they often form at significant levels on your chart.
For example, if you’re trading an hourly chart and see a bullish pennant form near a critical pivot point like a support or resistance level, then you know there’s strong buying pressure coming into play at that level—which means it’s likely going to break higher very soon. And if you see this happen close enough to your entry point for you to profit from it? Then congratulations—you have just found yourself another great trade setup!
Bear pennant chart pattern
The bear pennant chart pattern is a continuation pattern that forms during a downtrend. The bear pennant is a small, symmetrical triangle seen in the daily time frame, and it contains two lower highs and two higher lows.
The pattern is complete when prices break above the upper resistance line of the pennant, signaling a new trend direction. If the bear pennant breakout above the lower trendline, then it will signal an upward reversal in price movement, while if it occurs below, then it will signal a downward reversal in price movement.
How to trade a bear pennant chart pattern?
Trading a bear pennant chart pattern can be a profitable strategy if you understand what causes this type of chart pattern to form and how it behaves once it has been completed.
When trading a bear pennant chart pattern, it is essential to remember that this is not your typical continuation pattern because it does not always lead to higher prices. For example, if the stock has already dropped for several months and then forms a bear pennant chart pattern, it could indicate an exhaustion phase.
The bullish pennant
A bullish pennant is a trading pattern that implies that a strong upward price trend is about to continue. When a market makes a significant move upward, it pauses and consolidates between resistance lines and converging support, forming a triangle.
This is interpreted by technical traders as a hint that the initial ascending price trend will restart. As a result, the bullish pattern is in high demand, as it might provide an early forecast of considerable upward price movement.
The bullish pattern can appear in a variety of time ranges. Longer-term traders search for them on weekly or even monthly charts, while day traders look for them on a minute or second chart.
What happens in a bullish pennant?
Strong positive emotion causes a market to surge upward in a bullish pennant. Buyers who have pushed the market higher may now pull back and grab profits, while bears anticipate a correction. Because of the supply and demand parity, the product’s price is consolidated.
This parity, however, cannot last indefinitely. Positive emotion triumphs in a bullish pennant and traders waiting to buy the market take advantage of the opportunity and drive it stratospheric once more.
Final thoughts
Bullish and bearish pennant charts can be very useful to Forex traders, but they need to be handled with the right amount of care. A Pennant pattern indicates that at least two scenarios can play out in the upcoming days.
Naturally, the trader needs to understand which is more likely, to make sense of the stock’s possible movements in both cases. Additionally, pennants can be powerful and profitable moves in the foreign exchange market. When you can find them, trade them wisely and profit from the bullish movement that follows.
