Be it bullish or bearish, most pennant patterns are indicative of a future trend continuation. Pennant patterns occur during a long bullish or bearish rally. During the actual pennant pattern price action, investors could:
- Add to their positions
- Consolidate their positions
- Wait for a break in the trend
Pennant Patterns vs Flag Patterns
Pennants are closely related to flag patterns. Aside from their shapes, they both exemplify a consolidation period in between a bullish rally or bearish decline in a financial instrument’s price trend.
The below chart of the EUR|USD foreign currency trading pair displays the development of a pennant pattern during a bullish rally:
Backtesting Bullish Pennant Patterns
When backtesting day trading indicators, bullish pennant patterns can be identified by:
- A gradual rise in the financial instrument’s price
- A swift and large ‘flag pole’ development to the upside
- A descending ‘pennant’ pattern
- A swift and large ‘break’ from the pennant pattern to the upside
- A gradual continuation of the financial instrument’s uptrend in price
Between pennant development, formation and break, about 8 to 12 weeks usually elapses.
Trading Bullish Pennant Patterns
Some potential trading strategies during the formation of a pennant pattern are:
- During a bullish rally, once a strong break on high volume is established (flagpole formation), a potential trade can be made by ‘shorting’ or ‘fading’ the bullish break
- Once the pennant begins developing, you could trade it in a bearish channel formation by buying the rises, setting stops to lock in profits and selling the decreases until the break occurs
- Once the bullish break occurs on high volume, you could buy the financial instrument and set a trailing stop to lock in profits
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