Pennant pattern

A pennant pattern has two parts. The flagpole is a steep move of several large candles. The pennant is the pause that follows: each swing is smaller than the one before, so the highs get lower and the lows get higher until price is squeezed into a narrow point.

The logic is simple. After a fast move some traders take profit and others wait for a better price. Neither side pushes hard, the range shrinks, and the next strong candle shows which side has won. In most cases traders expect it to be the side that built the pole.

A bull pennant forms after a sharp rise. The pole points up, the triangle sits near the top of the pole, and the pattern is complete when a candle closes above the upper line. The pullback inside a bull pennant is shallow: price holds most of the gain while the range tightens.

A bear pennant is the mirror image. It forms after a sharp drop, the triangle sits near the bottom of the pole, and the pattern is complete when a candle closes below the lower line. The bounce inside a bear pennant is weak and stays well under the start of the drop.

• Start from the pole. A pennant needs a fast, almost vertical move that stands out from the candles before it, usually on high volume.
• The triangle is small. As a rule of thumb it gives back less than half of the pole.
• The lines converge. The upper line connects lower highs, the lower line connects higher lows, and each needs at least two touches.
• The pattern is short. On a daily chart a pennant usually lasts from a few days to about three weeks. A longer squeeze is a symmetrical triangle.
• Volume fades while the pennant forms and returns on the breakout.
• Draw the two lines with the trend line tool. Replay on Charts steps forward candle by candle and shows where the breakout and the stop would have been.

• Entry – on a candle that closes outside the pennant in the direction of the pole: above the upper line for a bull pennant, below the lower line for a bear pennant.
• Stop – on the other side of the pennant: below its lowest low for a long trade, above its highest high for a short trade.
• Target – the length of the pole measured from the breakout price. A rise from 51 to 82 is a pole of 31 points; a breakout near 77.5 gives a measured target of about 108.5. It is an estimate, not a level price has to reach.
• Position size – set it from the distance between the entry and the stop. See risk-reward ratio for the arithmetic.

Both patterns start with a pole and both are continuation patterns. The difference is the shape of the pause. A flag is a small channel: its two lines are parallel and slope against the pole. A pennant is a small triangle: its two lines converge and the pattern as a whole runs sideways. Entry, stop and target are set in the same way for both.

• Size – a pennant is small next to the move before it. A symmetrical triangle is a large pattern with wide swings.
• Duration – a pennant lasts days to a few weeks on a daily chart. A symmetrical triangle can take months.
• Pole – a pennant always follows a steep pole. A symmetrical triangle can form after any trend.
• Target – a pennant is measured by the pole, a triangle by the height of its widest part.

• Entering inside the pennant – until a candle closes outside, price can break either way.
• Seeing a pennant without a pole – a small triangle after a slow drift is ordinary consolidation.
• Trading a break against the pole as if nothing happened – a close through the wrong side means the pattern has failed.
• Taking a breakout that comes on thin volume near the tip of the triangle – such moves often fade.
• Placing the stop inside the pennant – normal noise takes it out before the move starts.