What is a pennant pattern and how to trade it?
What is a pennant pattern?
A pennant pattern is a technical chart formation, and a continuation pattern. It signals a potential continuation of the preceding market trend – whether bullish or bearish. Pennants can form after a sudden, significant price move – called the ‘flagpole’ – followed by a brief market consolidation.
Descending highs and ascending lows form two converging trendlines which act as resistance and support levels. As they converge, these lines create a small ‘pennant’ that reflects decreasing volatility as buyers and sellers pause before potentially resuming the prior trend.
Types of pennant patterns: Bull vs bear
Pennant patterns can appear in both bullish and bearish trends, with each type generally indicating a continuation in its respective direction. Here’s how they compare:
Bull pennant pattern
A bull pennant forms during a period of consolidation that follows an uptrend. It begins with a sharp, rapid upward move – known as the flagpole – followed by a brief period of consolidation where price moves within converging trendlines, creating a small pennant shape, resembling a small symmetrical triangle, but distinguished by the preceding flagpole. The temporary pause reflects a balance between buying and selling sentiment.
A breakout occurs when price breaks above the upper trendline. This is commonly – but not always – accompanied by increased trading volume, which may suggest a continuation of the existing bullish momentum. Higher volume could signal stronger buyer conviction, which can reinforce the bullish signal.
Bear pennant pattern
A bear pennant pattern forms during a period of market consolidation following a downtrend. It starts with a sharp downward move (flagpole), followed by a short-term consolidation period with converging trendlines that create the characteristic pennant shape. This indicates a pause or indecision in the prevailing downtrend.
A breakdown occurs when the price breaks below the lower trendline. A breakdown with higher volume can strengthen the bearish signal, suggesting sellers may be regaining control.
Learn more about technical analysis with our 12 more chart patterns for CFD traders article.
How to identify a pennant pattern on a chart
Looking for these features can help you to identify a pennant chart pattern:
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Flagpole – find a sharp, rapid price move, known as the flagpole. This initial momentum, either upward or downward, indicates the preceding market trend (but it doesn’t predict what will follow).
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Converging trendlines – after the flagpole, seek a consolidation phase and draw two converging trendlines, an upper and a lower, to form a narrowing pennant shape. Draw the upper trendline across declining highs, which acts as a resistance level, and the lower line across ascending lows to create a support.
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Reduced volatility – as the pennant forms, observe a gradual decrease in volatility and a tightening range. Price fluctuations narrow within this range as the market consolidates temporarily, before the price breaks above or below the pattern.
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Breakout/breakdown (second flagpole) – a decisive break above or below the pennant’s converging trendlines signals the next move. This typically occurs near the apex of the pattern and is often in the direction of the preceding flagpole (trend continuation). For example, a pennant following a downtrend might conclude with a break below the lower trendline, indicating a bearish continuation.
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Volume confirmation – monitor trading volume closely. Typically, volume contracts throughout the consolidation phase, indicating reduced trading activity. A substantial increase in volume at the point of breakout may support the validity of the move, but this isn’t always conclusive.
How to trade a pennant pattern
Get started on the road to trading pennant patterns and other technical formations by taking the following steps.
1. Choose a CFD brokerage platform
Start by selecting a regulated contracts for difference (CFD) broker – such as Capital.com – which lets you access to 4,500+ markets. You may be required to submit documents for verification.
2. Identify and confirm the breakout
Wait for the price to decisively break beyond the pennant’s converging trendlines.
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A bullish pennant typically signals a trade entry if price breaks above the upper trendline (resistance), ideally with rising volume if possible.
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A bearish pennant triggers when the price breaks below the lower trendline (support).
Heightened trading activity may strengthen the signal. However, breakouts can still occur without significant volume increase.
3. Decide on your entry strategy
Determine your potential entry points according to your trading strategy, risk tolerance, and individual preferences. Some common approaches include:
A. Entering immediately after a confirmed breakout candle closing outside the pennant formation, aiming to capture early price movement.
B. Waiting for a possible retest of the broken trendline, now acting as support or resistance.
Although retests could provide potential trading opportunities, they risk missing initial price momentum if the retest doesn't materialise. Similarly, entering a trade too soon after a perceived confirmation may increase the risk of a false signal.
4. Set appropriate stop-loss orders
Some traders manage risk by setting a stop-loss below the pennant’s recent swing low (in bullish scenarios) or above the recent swing high (in bearish scenarios). It should be noted that stop-loss orders are not guaranteed and may be subject to slippage in fast markets. Certain platforms offer guaranteed stop-loss (GSL) orders for a fee.
5. Determine realistic profit targets
A common method for setting a profit target is to measure the vertical height of the initial flagpole and project that distance from the breakout point. For example, if the flagpole represents a 150-pip move, that distance may be used as an estimated target. Previous support or resistance levels can also be considered as potential exit points. These targets are guidelines, not guarantees.
6. Monitor additional technical confirmations
Technical indicators such as moving averages or RSI can be used to support breakout observations. However, no combination of indicators can eliminate the risk of false signals; they can only help build a stronger analytical context.
7. Manage position size and ongoing risk
Adjust your position size to suit your risk appetite and current market conditions. Trailing stops may help protect gains if the price moves in your favour. Note that guaranteed stops (where available) incur a fee. Always consider market volatility and broader trend context.
Pennant pattern vs flag pattern
Both pennant and flag patterns can signal potential trading opportunities – but while they share similarities, each has subtle yet important differences.
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Pennant patterns feature two converging trendlines, forming a small triangle after a sudden price move (the ‘flagpole’). This indicates a brief consolidation period with decreasing volatility and typically contracting volume, reflecting temporary indecision between buyers and sellers. Traders typically look for a decisive breakout similar in trajectory to the initial price move (the ‘second flagpole’) as confirmation of trend continuation.
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Flag patterns appear as small rectangular channels, formed by parallel trendlines that may be horizontal or slope slightly against the prevailing trend. Flags represent short-term consolidation, usually characterised by slightly angled price retracements. Like pennants, flags are commonly viewed as continuation patterns, with traders often anticipating breakouts in line with the preceding trend.
A key difference lies in the formation’s shape: pennants have converging lines narrowing to a point, while flag patterns maintain parallel lines.
Common mistakes when trading pennant patterns
Even seasoned traders can make errors trading pennant patterns, resulting in missed opportunities or avoidable losses. Here are some common mistakes to avoid:
Confusing pennants with symmetrical triangles
Pennants are often mistaken for symmetrical triangles because both patterns feature converging trendlines that form a wedge-like shape.
Misidentifying these patterns can lead to inaccurate market expectations. Here’s how to tell them apart:
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Pennants follow a sharp, rapid price move (the flagpole) and signal a brief consolidation within an established trend.
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Symmetrical triangles, on the other hand, may develop within a trend even if there isn’t a sharp price move or obvious flagpole beforehand.
Trading before breakout confirmation
Another common pitfall is entering trades too early – anticipating a breakout instead of waiting for clear confirmation. A pennant pattern isn’t confirmed until the price breaks decisively above or below the converging trendlines, ideally with heightened trading volume. This can be relevant in volatile or sideways markets, where false breakouts are more frequent. Premature entries heighten the risk of false signals, potentially turning anticipated gains into unnecessary losses.
Ignoring volume contraction and expansion
Volume is an important and sometimes neglected resource in technical analysis. In a textbook scenario, a pennant formation is accompanied by declining volume during the consolidation phase, signaling reduced participation. This is followed by a noticeable increase at breakout, which may reflect renewed momentum. Paying attention to these volume dynamics can help confirm the pattern.
