Let me continue my series on chart patterns in the post. Last time I wrote on flag patterns and now I want to discuss about pennants. In the same fashion as flag, a pennant is a continuation pattern. It means that when a pattern is broken you will most often see a thrust in the direction of a previous move. While a flag is a rectangular in shape a pennant resembles a triangle. It should not be confused with triangle as its duration is much shorter and it actually is a short respite before current trend resumes itself. Triangles tend to be longer in duration before they are broken.
As it is a triangle in shape a pennant has two converging trendlines. This shows that prices are consolidating after a previous move and now the range inside the pennant is narrowing putting pressure for price to go out of the pattern and continue the trend. A pennant will have a pole that would end at the top or bottom of the pattern (depending whether the pattern bullish or bearish) and it marks the point of the first trendline that we expect to be broken. As the prices starts consolidating the second point is made that marks the point from which the second trendline is drawn that will probably not broken and hold counter trend moves.
Bullish pennants
Bullish pennants are bullish continuation patterns that break out in the upward direction when the consolidation of the pattern is over. A break of the upper trendline is a sign that current trend will resume itself after a short break. One should be ready to jump into a trade at the break of the upper trendline.
How to trade a bullish pennant
You can look at gbp/jpy chart above to see how the bullish pattern looks like and where you can enter your long trade. After a strong move upwards gbp/jpy started consolidating and formed a bullish pennant in a period of four days (from 27th of December 2012 till 31stof December 2012). The breakout point was marked by 139.28 level which the pair reached and retraced a little. So, you should have bought the pair at the break of the above mentioned level. Our stop level was a few pips below the retracement at 138.87. As you may see the pair broke the level and rallied around 350 pips before reversing and forming another pattern: bullish flag. You could exit your position in portions at even numbers (if you had two or three positions) or move your stop loss order by placing them below 4 hour candle clusters till your stop loss was closed when prices reversed.
Bearish pennants
Bearish pennants are bearish continuation patterns that break out in the downward direction when the consolidation of the pattern is over. A break of the lower trendline is a sign that current trend will resume itself after a short break. One should be ready to jump into a trade at the break of the lower trendline.
How to trade a bearish pennant
You can look at Gold chart above to see how the bearish pattern looks like and where you can enter your short trade. After a strong move down xau/usd started consolidating and formed a bearish pennant in a period of five days (from 15th of February 2013 till 20thof February 2013). The breakout point was marked by 1600.00 (per ounce) level which the security reached and retraced a little. So, you should have sold Gold at the break of the above mentioned level. Our stop level was ten bucks above the retracement at 1610.00. As you may see the pair broke the level and collapsed around 45 bucks before finding support. You could exit your position in portions at even numbers (if you had two or three positions) or move your stop loss order by placing them below 4 hour candles till your stop loss was closed when prices reversed. It may have been around 1563 area.
Conclusion
A pennant is a continuation pattern that might help you to enter extra positions in the direction of the trend or open your first one if you accidentally missed the initial move. The pattern indicates that the security is in a stage of rest (consolidation) and the prices will move pretty soon. In forex market pennants often last five days or even less and present you with great trading opportunities.
Ok, I will finish now. Be sure to read related articles to learn more on technical analysis. I promise to expand on this in my future posts.
I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day.
Vytas.
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Disclaimer
Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.
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