What are pennants in forex trading?
At times, buyers and sellers need some breathing space. They pause before taking the pair furthermore in a similar direction after a sharp upward or downward move. This is why the price will most likely consolidate that forms a petite but symmetrical triangle that we can call the pennant. The pennant forms because many buyers and sellers want to be on that strong move; that is why the price has no choice but to bust out.
In forex trading, traders and analysts use technical analysis. And in technical analysis, they maximize the use of charts. In these charts, we can encounter a lot of shapes and figures, and these include pennants. If you are aware of rectangle charts, they are pretty similar. They both come in form after strong moves happen, and they are both continuation chart patterns. And when we say strong moves, we are talking about sharp upwards, or downwards moves. Here is more: they both have the same types. If we name them, they are bullish and bearish pennants that we will further discuss as this article progresses.
Let us start with the bearish pennants.
Bearish pennants show up when there is a downtrend with an extremely steep slope that almost looks vertical. After a sharp price drop, some sellers will eventually enter the trend so that the price becomes consolidated for a short time. After that, the price will break below the pennant’s bottom. Later on, it will continue to travel further down. If we observe a chart containing a pennant formation, we will see that the decline continues shortly after the price’s bottom breakout.
If we want to trade this chart pattern, we can place a short order at the pennant’s bottom and a stop loss above the pennant. If you wonder why: the simple answer is to avoid being in the trade if that breakdown turns out to be a fake-out. We want to get out of that trade quickly before the risk. The height of that previous move that other people refer to as “mast” is for breakout move estimation.
If there is a bearish pennant, indeed, there is a bullish pennant.
Bullish pennants show up when there is an uptrend. It is a signal that buyers are out to strike again. Sometimes, bulls or buyers have a short pause and take a break. We call this the consolidation period. After this time, that sharp price increase will begin to happen again. Buyers are once again ready to take the price higher.
For instance, the price can have a very sharp price climb that almost looks vertical before pausing. And later on, after the breakout, it can have another strong move going upwards as soon as the breakout ends. If we want to trade this, we can place a long order right above the pennant and a stop order below the pennant’s bottom if that breakout turns out to be a fake-out. Just like the bearish pennant, the breakout move’s size is similar to the mast or the previous move.
Do not underestimate pennants.
Yes, pennants are petite in size. However, we cannot look down on them since they can give us significant signals about massive price moves.