Let me continue my series on chart patterns in the
post. Last time I wrote on flags and now I want to discuss about
pennants. In the same fashion as flag, a pennant is a continuation technical structure. It
means that when the formation 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 start 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.
When you are through with the article, read my other posts on the topic and watch the video below:
When you are through with the article, read my other posts on the topic and watch the video below:
Watch a video on how you can trade this specific technical structure:
Bullish
pennants
Bullish pennants are bullish continuation patterns
that break out in the upward direction when the consolidation of the structure 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 it
You can look at gbp/jpy chart above to see how the
bullish formation 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 31st
of 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 formations
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 structure
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 20th
of 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.
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.