In every successful trader’s trading toolbox, there should be a well-proven strategy, education in abundance, a disciplined mindset, fundamental notations, an economic calendar, reliable indicators, and last but not least, technical analysis. Learning to identify a Pennant candlestick pattern is a form of technical analysis. Seeing chart patterns on a stock’s chart before prices begin to move is one of the most critical aspects of trading successfully.
What are Candlestick Patterns?
Candlestick patterns are made up of a collective group of candlesticks. Some are maybe only two to three candles; others chart patterns are numerous candles.
The candlesticks that make up the pattern are visual bars that contain price action on a stock’s price chart. They document price movement for a selected time period such as a daily, 4-hour, 5-minute, or 1-minute chart, for example.
Each bar displays the opening price, high, low, and closing price of a financial asset.
A combination of candles can illustrate a chart pattern or story, if you will, for some traders to consider trade entries and exits. These candlestick patterns are an important form of technical analysis and allow us to read the atmosphere of the market, predicting possible future price movement.
Candlestick formations and their patterns are relied on by all kinds of market participants trading various assets. Whether you’re trading the forex market, stocks, their options, bonds, futures, etc., candlestick patterns are a reliable technical tool recognized to be a strategic form of analysis when combined with trading strategies.
There are many candlestick chart patterns that traders use for confirmation of price movement, market reversals, and/or trend continuations. Today we are going to discuss one of the continuation patterns known as the pennant pattern.
What Is the Pennant Candlestick Pattern?
The Pennant candlestick pattern is a candlestick pattern that appears after a solid price trend up or down, followed by a consolidation period, and then a continuation or breakout occurs.
The shape will imitate an actual pennant like below. Upright if it’s a bullish Pennant candlestick pattern, upside down if it’s a bearish Pennant candlestick pattern.
Each Pennant candlestick pattern will have these characteristics:
The initial move is the flagpole. It will consist of several candlesticks going in the same direction. The flagpole should be very distinct and display a sharp move up if a bullish pattern and down if a bearish pattern. The pole should consist of buying volume if a bullish Pennant candlestick pattern and trend line continue upward. If the selling volume and trend line continue downward, a bearish Pennant candlestick pattern forms.
2) Consolidation Period
This is a cooling trend if you will. Price moves in “V” like patterns with a price range that is ever so shrinking. The period of consolidation creates triangular converging lines making up support and resistance. In the Pennant candlestick pattern phase, you will see lower highs and higher lows being created.
The breakout and continuation occur when the price breaks one of the converging trend lines. In a bullish Pennant candlestick pattern, it must break the upper trend line or resistance line. In bearish pennants, it must break the bottom trend line or support.
Important to Note
When trading the Pennant candlestick pattern, it is important to identify the three characteristics of the chart pattern. Do not confuse them with other chart patterns, such as a Triangle pattern.
The flagpole is extremely important. It must demonstrate large movement in one direction with volume and numerous candles. If the pole isn’t present, it cannot be recognized as a pennant chart pattern. This is one of the key differences between a Pennant candlestick pattern and the triangle pattern.
The consolidation period should be a shallow retracement in price movement. During this shrinking phase, the V-like price movement should be illustrating two converging trend lines. These trend lines supply support and resistance and create the shape of the pennant.
A Pennant candlestick pattern cool off should not be greater than about 38% of the flagpole size. Deep retracements beyond that invalidate the pattern, signal divergence, and a possible shift in price trend, even if only temporary.
Volume is also important to note when looking at the Pennant candlestick pattern. There should be a larger volume during the flagpole creation. Lower volume during the pennant phase as the market consolidates. And then an increase in volume during the breakout when the market moves and continues.
Trading Bearish and Bullish Pennants
Bullish and bearish Pennant candlestick patterns can be traded using various time frames, however, they are considered to be more of a short-term pattern. They are commonly used by individuals that day trade or swing trade to identify trends and when the market is taking a breather.
Once you have identified the existence of the flagpole, a trader must analyze the price action creating the two converging lines of the symmetrical triangle of the Pennant candlestick pattern. After that consolidation phase, a trader is looking for a breakout candle.
A trader may implement a trade on a bullish Pennant candlestick pattern once resistance has been broken and a candlestick closes above the pennant, providing the entry point. For a bearish Pennant candlestick pattern, the trade entry would be after support is broken, and the candlestick closes below the pennant.
Depending on risk appetite, stop loss can be placed on a bullish Pennant candlestick pattern at the low of the breakout candle or beneath the pennant to limit downside risk. The opposite would exist for the bearish pennant. No matter if a trader is more conservative or has a higher degree of risk tolerance, a stop-loss should exist in every trade plan. The trader should only invest the capital they can afford to lose.
Profit goals should be determined when a trade is executed. An example of a possible profit target using the pennant chart pattern is determining the price change that occurred in the flagpole and applying a percentage of that to the price point at which the price breaks out from the Pennant candlestick pattern.
Like any candlestick pattern, there is reliable information and a model for possible future price direction. Always be careful of fake breakouts, retracements, and areas of consolidation. Use the Pennant candlestick pattern as a tool, but also seek additional confirmation as a part of your risk management plan.
Summary: Pennant Candlestick Pattern
A Pennant candlestick pattern is a continuation pattern that every trader should have in their trading toolbox. Be certain it meets the criteria of having a distinct flagpole. This indicates a large market move in one direction, a v-like consolidation phase with depleted volume, and a breakout and continuation with higher market participation.
Trading involves significant risk, so take the time to practice identifying candlestick patterns and introducing them to your trading strategies. Get comfortable with the asset you desire to trade and see what patterns tend to work best for you. The strategy and/or technical indicators you have chosen to use and on what time frames they are most reliable must support your theory.
A great strategy to consider when using the Pennant candlestick pattern is supply and demand, which you can learn from the Maurice Kenny Day Trading Program.
Resources to Check Out
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, DAY TRADE LIKE A MILLIONAIRE.