Moving swiftly on from wedges, we must talk about trading pennant chart patterns.
They are virtually the same pattern; except they form after either a sharp move up or down.
Ideally, pennants form with smaller/exhausted body candlesticks that are narrowing as the session goes on.
Plus, unlike wedges, they are continuation patterns only in forex trading.
So, when you identify a pennant after a sharp move, it provides a fruitful opportunity to take advantage of the market move.
A quick note: if you think you have identified a pennant but the market reverses after – it is not a pennant.
How to identify a pennant pattern
The first key indicator is to look for a sharp move in either direction. This will give us the first clue of the chart formation, plus the direction to expect the breakout to occur in.
Secondly, we need to see the market stalling and narrowing.
Ideally, we want to see the forex market structure trade lower highs and higher lows between the initial sharp move
In the example above as you can see we had a sharp move upwards, in an upward trend, which consolidated over a few sessions to create the pennant formation.
What you must remember is that with all chart formations, nothing is going to 100% the exact same or there are no cookie-cutter patterns that must look exactly what is illustrated for the trade to work out.
There are hundreds, if not thousands, of slight variations of each chart pattern.
It is up to you and your ability to identify them and draw them accurately.
How to trade pennant chart patterns
Now you know how to identify the pattern, it’s time to make some money off of it.
Bullish Pennant
Step 1: Find a strong move upwards, followed by consolidation.
Ideally, we want the consolidation period to be between the previous largest buy candlestick.
Highlighted in this step we’ve demonstrated a large, volatile, move upwards as the initial kick start to the pattern. Now, this can be a series of candles (like pictured) or it can be 1 large candlestick.
Step 2: Highlight the chart pattern’s support and resistance levels to draw the pennant.
Simply switch to the line chart view and draw support and resistance levels as normal.
By drawing the lines as close to all the candlestick closes to generate accurate Resistance and Support levels.
When you switch back to the candlestick patterns chart you can see that price has tried to go higher several times but failed.
Step 3: Confirm pattern by waiting for the breakout to occur to the upside, add order level as per the perfect execution rules.
Step 4: Identify the Take Profit level (this can be done prior, but the pattern must be validated before we actually add a take profit level).
We use the optimised consolidation range to gauge how much the market can potentially breakout out.
In the example above, we have highlighted the optimised range in a yellow box. This covers a potential breakout of 42 pips. We then replicate the range to define our TP level, setting it 42 pips higher than our entry level.
As you can see, the market traded upwards as expected, we would have hit our take profit too.
Bearish Pennants
Step 1: Find a strong move downwards, followed by consolidation.
Ideally, we want the consolidation period to be between the previous largest sell candlestick.
Here we see in step 1 the large move downwards indicated a potential for a stall in the mark, which usually leads to a pennant formation. The large sell wick (last one) was swiftly followed by a small series of candlesticks and created a consolidation period
Step 2: Highlight the chart pattern’s support and resistance levels to draw the pennant.
Simply switch to the line chart view and draw support and resistance levels as normal.
By drawing the lines as close to all the closes, this will generate Resistance and Support levels with greater accuracy.
Note, for optimal chart drawing – we want to match the Open & Close of the last large sell candle – this gives us the range that the price must trade between and trade lower until we confirm a breakout.
When you switch back to the candlestick chart you can notice that price has attempted to move higher several times but failed.
Step 3: Confirm pattern by waiting for the breakout to occur to the downside, add order level as per the perfect execution rules.
Step 4: Identify the Take Profit level (this can be done prior, but the formation must be validated before we actually add a take profit level).
We use the optimised consolidation range to gauge how much the market can potentially breakout out.
In the example above, we have highlighted the optimised range in a yellow box. This covers a potential breakout of 39 pips. We then replicate the range to define our TP level, setting it 39 pips lower than our entry level.
As you can see, the market traded downwards as expected, we would have hit our take profit too.
We want to make sure we have this as the market has ALREADY informed us where it wants to go to and by how much. The market did go lower and we could have made more pips, but this is what separates the best from the best.
The best traders would ensure they lock in the maximum-minimum profit from the defined range (39 pips) and let the market move further down.
As discussed in our risk management section about trailing stop losses, we may have been able to predict with high accuracy the MINIMUM move expected from a breakout thanks to our analysis, but we do NOT know how far the markets could go. That is why active money management by trailing stop losses are important.
By going through this free forex trading course online, you will be ahead of many – if not the majority – of the paid to learn packages available online.
